The Little Cabler That Could

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Mention Mediacom Communications Corp., and what comes to mind?

If you’re at all familiar with the cable industry and its resident personalities, it’s probably Rocco Commisso, the firm’s colorful founder, chairman and CEO — three titles he holds dear.

<p>Mediacom at a Glance</p><p>(Dollar amounts in thousands) 12/31/03</p>

Homes Passed

2,755,000

Basic Customers

1,543,000

Digital Customers

383,000

Data Customers

280,000

Revenue

$1,004,889

Total Assets

$3,654,959

Total Debt

$3,051,493

Stockholder Equity

$285,114

Operating Income

$132,390

When his former employer, Cablevision Industries (which was based near this community some 70 miles northwest of New York City) sold out to Time Warner Inc. in 1995, Commisso bought back in quickly, snapping up an 11,000-customer system in Ridgecrest, Calif., the next year.

Through other acquisitions — peaking with the purchase of 800,000 customers from AT&T Broadband in 2001 — he’s swelled his customer base north of 1.5 million, good enough for eighth-place overall in today’s top-heavy cable pantheon.

Being a relatively small and independent provider — lacking either the sheer customer bulk or key media-ownership connections to earn him volume discounts on equipment and programming — he’s been outspoken about the rising cost of sports networks and other programming, something that’s helped him earn influence, or at least a voice, beyond Mediacom’s size.

If you know the business a little more, you might know Mediacom’s customer base is diffused among 23 states. Where it’s concentrated, its biggest markets are places like Des Moines and Cedar Rapids, Iowa, not the largest or fastest-growing metropolitan areas.

That’s meant Mediacom customers were relatively ripe picking for nationwide direct-broadcast satellite providers DirecTV Inc. and Dish Network, especially in places where the pair can retransmit local TV stations.

So Mediacom’s basic-customer base shrunk by about 3% last year. Projections hold that the base will shrink another 2% to 2.5% this year.

You might also know that the notoriously frugal Commisso is proud of buying what he could for as little as possible: “We have an investment, if you look at our total assets, as a proxy for the investment in the business, of about $2,300 per sub,” he said in a recent interview. “Nobody else has that.”

Mediacom has about $3 billion in debt, about 7.5 times higher than annualized earnings before interest, taxes, depreciation and amortization (EBITDA), which analysts call a relatively high ratio.

But that’s down from an 8.8 ratio in 2001. And with capital expenses on the decline and “unlevered free cash flow” (operating income before depreciation and amortization and after capital expenses) on the rise, Commisso has said he’s committed to reduce leverage through internal cash generation. Roughly translated: he’s not prowling for more big acquisitions.

Dig deeper and the story gets more compelling.

Now that he’s finished rebuilds of his rural and small-market systems with up-to-date technology and slashed operating costs through interconnections with bigger hubs — while maintaining and even adding to a 3,900-employee base — Commisso’s systems now offer a relatively rich package of basic channels and digitally compressed video channels, video-on-demand services and, crucially, high-speed Internet to a big part of his universe.

“My average channel lineup in a Mediacom system, analog-wise, is probably richer than some of the bigger guys,” Italia Commisso Weinand, the founder’s sister and senior vice president of programming and human resources, said with some pride. “And our digital offering is very rich.”

VOD is available to about half of Mediacom’s digital customers, rising to 65% at the end of 2004; digital video recorders are being introduced, and should be available to 70% of digital customers this year; and HDTV has a 70% reach, rising to 82%.

Late this year, Mediacom also plans to introduce local phone service that would ride atop the Internet platform — a big potential moneymaker that, by the MSO’s estimates, would require relatively low levels of capital expenses (about $10 million this year).

Officials said they’re still working out key details, such as whether or not to work with a big telecommunications partner (as Time Warner Cable has done with MCI Communications Corp. and Sprint Corp.) or go it alone with key vendor support. Commisso did suggest in a recent interview that “there’s a natural fit potentially with long-distance companies to be able to do something together, in the very short term.”

Mediacom recently performed a technical trial of voice over Internet Protocol, or VoIP, phone service in Des Moines, North Central Division vice president of operations Charles King said.

“We were able to confirm that the plant works very well — very, very reliable,” he said.

The cable-modem high-speed Internet platform that VoIP will exploit already is a Mediacom mainstay. Revenue in the fourth quarter alone was 58% ahead of the year-ago figure, and plans are afoot to expand sales on both the less-expensive and more-expensive ends of the pricing scale, regardless of what promotional pricing digital-subscriber-line providers might be planning.

To wit: Mediacom Online’s flagship HSI service — recently upgraded to download speeds of 3 Megabits per second from 1.5 Mbps — costs $45.95 (with a $3 modem rental). Of late, Mediacom has introduced a slower-speed $22.95 service targeted to “the price-sensitive household,” executive vice president of operations John Pascarelli said.

It has the “always-on” attribute and “at least twice if not three times the speed that they can get through their phone line,” he said. “And for us, it now gives us an opportunity to have a modem in the home to sell them voice-over-IP.”

“And then the new thing we’re doing — we’re going to be launching an extreme service, which is going to be a 5-Megabit service for the high-end user in the household. We think, if anything, there’s greater demand for greater bandwidth than there is on the pricing side — particularly with the heavier users.” For the 5 Mbps extreme service, expect a price bump of $25 or $30, he said.

Citigroup Smith Barney analyst Niraj Gupta also has highlighted the potential of data services to “large-pipe” commercial customers, which could add up to $5 million in high-margin Mediacom revenue this year.

Jim Carey, the Gulf Breeze, Fla.-based operations senior vice president for Mediacom’s Southern and Midwest divisions, said commercial sales “looks like it’s going to be a tremendous market. Especially in the panhandle of Florida down here, where we have an interconnect that essentially links Tallahassee with New Orleans. Our fiber runs the whole length of the panhandle and up through Georgia and up through Alabama and Mississippi.”

While it hasn’t gone out and bought or created regional sports networks or entertainment programming, the way some bigger cable companies have, Mediacom is a true believer in the power of local programming as an edge over national satellite services. To that end, it’s building an innovative local-programming channel that has won accolades for such efforts as broadcasting Iowa State University tournament-level men’s basketball games that otherwise wouldn’t have been on TV at all — and couldn’t be seen on satellite dishes. (See related story on this page.)

“Localism, in my opinion, is what’s going to win the war,” Carey said, echoing a mantra heard throughout Mediacom. That’s embodied in the local channel and is preached to front-line supervisors. “Be a part of the community. Those people are part of the community. They’re looking at our customers every day,” Carey said. “That is a big, big advantage over the satellite providers.”

Key operating executives say Mediacom is feeling the impact of finishing the temporarily disruptive rebuilds; absorbing the local price increases that accompany growth in the basic-channel packages; weathering the introduction of local channels on satellite platforms that heavily promote their arrival; and adding new “sticky” services like high-speed Internet that keep customers on board.

While there’s still that projection of continued basic-customer losses overall, many Mediacom markets are holding steady and, partly through “dish buy-back” programs, are getting back some former customers.

“Everything is really very upbeat here, and we’re just looking to continue to roll out new services to our customers and continue to retrieve them from their temporary hiatus with satellite,” said King, whose division comprises about one-third of the overall customer base. “We do intend to turn this thing around and take our customers back.”

Mediacom customers also are buying more and spending more. Monthly revenue per basic customer has grown to $56 in the fourth quarter of 2003 from $35 in 1999. Where 1999 revenue was 98% derived from video services, the more recent figure is only 82% video, augmented by HSI (13%) and ad sales (5%).

Mediacom projects the basic-customer number rising to $80 in 2007 — with only 67% of that from video, backed by HSI (18%) and telephone (10%) revenue, plus ad sales (5%).

Mark Stephan, Mediacom’s executive vice president and chief financial officer, said the IP platform that’ll bear voice services could be capable of “a lot more coming down the pike.”

“So we’ve got a great, great story,” he said. “A great platform where we can drive penetration in these new services and grow our revenues.

On the fundamental level, through such improvements as “virtual contact centers” that help ensure phone calls from customers are answered promptly, overall customer-satisfaction levels are rising — a key component in persuading customers to remain customers, executives said.

Just under 90% of all calls now are answered within 30 seconds, which was the company’s target, according to senior vice president of customer operations Charles Bartolotta.

Crucially, a key index of customers who say they’re satisfied or very satisfied went up 7 percentage points, or 16%, versus a group surveyed a year earlier. “We’re very proud of that movement, and we think the changes we’ve made are directly correlated to that.”

Local programming. A cornucopia of data services. Telephone service coming soon. Rising satisfaction levels.

Those aren’t necessarily the things most people associate with Mediacom. But as long as their customers get it, Commisso and company will be satisfied.

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