MSO ROUNDTABLE

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The way that MSOs approach such pressing issues as rate increases, new-service
deployments and the decision to grow or sell out depends partly on their size and partly
on their owners' investment goals. For that reason, Multichannel News polled senior
executives at three different MSOs — one publicly owned, two private — on those
and other issues: Comcast Corp. senior vice president Stephen Burke, also president of
Comcast Cable Communications Inc., who oversees cable operations with 4.5 million
subscribers, growing to 5.5 million after Jones Intercable Inc. gets folded in; Charter
Communications Inc. CEO Jerald Kent, whose operations will grow to about 2.5 million
subscribers after Marcus Cable is integrated into Charter; and FrontierVision Partners
L.P. CEO James Vaughn, whose three-year-old MSO now has 700,000 subscribers. Each spoke
separately with finance editor Kent Gibbons. An edited transcript follows:


MCN: It sure looks like, at least for the big operators, the mantra of 5 percent average
basic-rate increases is taking hold.

Burke: Yes. There will be areas where our increase is less, but if you look at our
increases on average, and if you look at the overall view, the 5 percent number is pretty
close.


Kent: I can tell you that we are cognizant of the politics concerning rate increases.
Unfortunately, some of our programming friends, such as a lot of the sports providers, are
still hitting us with well into double-digit rate increases. They're trying to buy
out sports rights and subsidize them on our customers' backs.

We're trying to hold the line on those costs, and it may end up forcing us to make
some very tough decisions. But it does have an impact on the amount that we pass along to
our customers.

Generally, we are trying to hold the line on our rate increases, but where we are adding
programming, or where we are in the middle of a significant rebuild [during which] we add
significant programming, clearly holding the line at or near inflation doesn't make
sense. We look at it more as a value-added situation.


Vaughn: Well, 5 percent is probably appropriate for systems that are experiencing sort of
normal activity.

Our planned rate increases are not substantially higher than that, but [they are] higher
than that. But that is directly a result of the capital improvements that we are putting
into our various cable systems.

We have a substantial number of subscribers that are nearing the end of rebuild and
upgrade activity and, at the end of that activity, what typically takes place is that your
subscriber base is receiving the substantially larger channel lineup, new products and
availability of new services. So, typically, at the end of that rebuild activity, there is
more than a normal rate increase.

I would say that our rate increase, on average, is in the 6 percent to 7 percent range
across the company. Some of our systems that are in rebuild are getting slightly higher
than that, and the ones that are not in that activity are getting less than that.


MCN: Given that self-restraint on rate increases, combined with rising costs for
programming and for introducing new services, there's some concern on Wall Street
that 1999 will be a year of lackluster cash-flow increases.

Burke: The smart analysts look at a company's cash flow over a number of years, and
not just at one year. If you look out over the next five years, or 10 years, or 20 years,
the most important thing that we can do is get through March and become a deregulated
industry that then gets to operate with more flexibility.

That flexibility clearly justifies the restraint and the hit that could occur next year.
Don't forget that all of these companies are going to be cash-flow-positive, growing
concerns. This is something that might put a damper on growth rates for one year, but it
is not something that is going to [be a long-term problem]. Growth is still going to
exist. No one is going negative.


Vaughn: We will have double-digit cash-flow growth for 1999. Some of that will come from
rates, some of that will come from advertising and some of that will come from other
aggressive strategies that we are putting into our cable systems.

Another example is that we are aggressively launching digital programming in front of all
of our subscribers. During the last part of 1998, we prepared about 50 percent of our
subscriber base — 350,000 subscribers — for the launch of digital programming in
1999. We anticipate that we will not only make that available, but that we will market it
to a relatively good percentage of that subscriber base. We anticipate starting the year
with about 4,000 digital subscribers. We anticipate that we will end the year with
somewhere between 35,000 and 40,000 digital subscribers.

I'm putting the emphasis on putting new product in front of the subscriber, giving
them value for the dollars that they are spending with us and having a revenue-driven
business plan.


Kent: We have our own internal set of objectives, in terms of revenue and cash-flow
growth, and it is a balancing act. We are on a high wire between the political realities
and the business realities, and I just wish that our programming friends were more
cooperative.


MCN: Are you seeing across-the-board, double-digit programming increases?

Kent: Not counting [cases where we are] adding on significant additional programming to
our customers, we're seeing an annual increase in our programming costs probably in
the 13 percent to 15 percent range.


MCN: What about new-service-rollout costs? Won't those eat into cash flow next year?

Vaughn: Yes, and, like everybody else, we face the same programming-cost increases. From
my perspective, the most significant cost increase that we are looking at is that we
anticipate spending substantially more marketing dollars during 1999 than we have during
previous years.

There are obviously additional costs associated with the rollout of all of these new
opportunities, but they are incremental in nature, and they match the revenue and actually
become pretty significant cash-flow contributors when you get to the end of the process.

While we've made the capital expenditures for digital programming in 1998, next year,
we'll be focusing on cable modems, so cable modems won't be as profitable for us
in 1999 as they will be in the year 2000.


Burke: The new services are coming at the perfect time. In places where we launched
digital this past summer, when we look at 1999, digital alone can add two points of
cash-flow growth.

[But] it depends on the new service. Digital is immediately cash-flow-positive.
[High-speed-data service] @Home [Network] is not. @Home requires an investment. We are
investing in @Home in 1998, and we will be investing in @Home in 1999. Another way of
expressing it is that our [@Home] loss in 1999 will be roughly the same as our loss in
1998.

We're not in the telephony business on our own. Jones has a telephony business in
Washington [D.C.], so we'll be in through them, but we're not in the telephony
business ourselves. To the degree that something happens with AT&T [Corp.], or someone
else, and we get into the telephony business, we would anticipate that this would be a
positive, and not a near-term cash drain.


MCN: On the telephony front, do you think that most of the cable industry is going to end
up affiliating with AT&T for telephony service?

Kent: I really don't know. Frankly, AT&T has not approached us, so we're
having to go out and tackle it ourselves.


Burke: It is hard to say. The advantage of being affiliated with AT&T [is that]
you've got a great brand. You've got a company that really understands the
telephone business and, to the degree that they can build on their acquisition of TCI
[Tele-Communications Inc.], they are clearly the most logical partners.

With that having been said, it depends on the deal. If the deal is better than what we can
do, either by doing it ourselves or doing it with somebody else, we would end up with
AT&T.


Vaughn: A couple of larger players will probably affiliate with AT&T. My personal
opinion is that the AT&T approach being represented at this point in time is not
overly appealing to the cable industry.

And [AT&T chairman C. Michael] Armstrong's recent remarks verged on a threat to
the cable industry. It seems to me that he would be much better served to take the high
road with the cable industry. He is dealing with a group of people who have made their
living being giant-slayers.

As far as other telephony activities, we are focused on the ISP [Internet-service
provider] side of the business, with Internet access and cable modems, and we are
investigating competitive local-exchange carrier and competitive-access provider
opportunities where we are well-clustered. Our emphasis will be on the commercial side of
the business early on, and not on the residential side of the business, and then
we'll see what develops over the course of time.


MCN: Can you say in general what you would be looking for in a deal with AT&T?

Burke: No.


MCN: Would you go into telephony alone if you don't partner with AT&T?

Burke: Yes, going it alone is a viable alternative, and that is an alternative that we
always have. With that having been said, there are real synergies in doing it with someone
for whom [telephony represents] their core business. [AT&T has] such a great brand,
and they pay such great attention to detail in terms of service.


MCN: Is Charter looking to get into the telephone business?

Kent: We are not big proponents of circuit-switched service. We believe that
Internet-protocol telephony will be an effective product over the next 18 to 24 months,
and that it will be field-ready. We're focused more on that technology, as opposed to
putting in our own switches.


MCN: Look out at the MSO landscape. Over the next several years, do you think that the
industry will consolidate into three to five MSOs controlling 90 percent of subscribers,
or do you see a growing “middle class” of midsized operators?

Burke: Most recently, I was in the television and radio business. And, particularly in
radio, I saw what happens when an industry consolidates and the consolidation starts to
get an accelerated momentum of its own.

Our feeling is that cable will continue to consolidate, and that consolidation may
accelerate, and you could imagine a world in which there were three or four companies that
had more than 10 million subscribers [each]. You've already got TCI and Time Warner
[Cable at that level]. So the real question is: Who else gets to that level?

We certainly would like to be a buyer. It all depends on what the prices are. We'll
be a buyer, but we'll be a disciplined buyer, and we'll be a smart buyer.


Vaughn: I hope that there is room for us. There is no question that the consolidation of
the industry continues, and that there are going to be five or six mega-players in this
business. Then, underneath those five or six, there is room for a significant second tier
of cable players that — because of their size, their asset quality, or the management
of the company — can become real players in this industry.

Maybe a fourth criteria that would determine who winds up in that second group of players
[would be] an affiliation with one of the big five or six.


MCN: Jerry, with Charter coming under new owner Paul Allen, what can you say about how big
you guys think you need to be at this point, or how big you want to be, assuming that you
make the right deals come together?

Kent: I'm glad you've distinguished between need and want. At this point, I
don't feel that we need to go out and complete acquisitions to grow in order to
survive.

We've obviously got a very long-term, patient investor backing us, and we can be very
patient in how we continue to grow the company. That being said, we do want to continue to
grow in order to gain critical mass, which helps to amortize the cost of developing
content and advanced applications for what we see in the advanced set-top box.

So, yes, we want to continue to grow. We don't want to stop here. We are actively
looking, but we aren't going to pay unrealistic prices in order to grow.


MCN: What about the basic-cable business, which is still humming along with 1.5 percent to
2 percent annual subscriber growth as competition is kept in check. Do you see anything on
the horizon to alter that balance? The telcos, once AT&T attacks the local phone
market? Or direct-broadcast satellite, when News Corp. chairman Rupert Murdoch's
high-power DBS capacity comes into play?

Burke: DBS is real competition. DBS has 7 million or 8 million subscribers, and they came
from somewhere.

There is a portion of those people who would otherwise be cable subscribers, and there is
a portion of those people who would otherwise be Comcast subscribers, so that is something
that we take seriously, even though our business is continuing to grow. We would like it
to grow even more than it is, so we take that seriously.

In terms of the other kinds of competition, we are seeing competition now, and we believe
that this is a fact of life in the future, so we take it all seriously. But once you get a
digital set-top box in someone's home, and you then continually upgrade that with
future waves of boxes, that is about as good as you can get in terms of immunization
against the competitive threat.


Kent: Clearly, DBS and, in some markets, MMDS [wireless cable] are viable competitors. But
in particular, DBS, with its product offering and its picture quality, is certainly a
competitor that merits watching.

That being said, we obviously have some advantages ourselves. We are the incumbent and,
frankly, we've enjoyed one of our best years ever. In 1996, we had 3.5 percent
internal subscriber growth. We had the same 3.5 percent in 1997. And we will be well over
4.5 percent in 1998, in terms of internal subscriber growth. What the competition has done
is make us better. We've had to focus on customer service. We have to be better at
serving the customer. We have to brand our name in our customers' minds, in order to
continue to fend off competition. And we've made great strides.


Vaughn: Honestly, I don't see that landscape changing in a negative perspective.

What DBS is turning into, in my mind, is somewhat of a niche-market play. It is real,
though. It is competitive, and it continues to inhibit cable's basic-subscriber
growth.

Our historical numbers [are] relatively short as far as FrontierVision is concerned, but,
on average, we lose about one-half of 1 percent of our subscriber base to DBS. That number
has been relatively consistent in the last three years.


MCN: What about DBS-related downgrades to lifeline basic or away from premium services?
Are they on the rise?

Burke: No, I'm not seeing an increase. But it is certainly not going down. If you
look at the total subscriber base, it has less than a 1 percent effect on us. That having
been said, every tenth of a percent counts.


Kent: We have had some downgrades. But, again, it is not a significant enough percentage
of our subscriber base to be overly concerned. On the pay side, once again we have had an
outstanding year. We've gained another 100,000 pay units this year, and we've
created some innovative packaging that actually lowers the price for high-end customers,
which also helps us to fend off competition.


Vaughn: It has been constant for the three years that we have monitored it. It is seasonal
in nature, and [DBS operators] do much better at Christmas than they do at other parts of
the year. During [marketing] campaigning, you might see some increased activity, but once
the campaign is over, they seem to diminish immediately.


MCN: Steve, Comcast has reported rapid acceleration of your digital-TV service, which is
up to 70,000 subscribers now in a short period of time. What marketing approaches are you
finding to be successful?

Burke: First of all, it is an extremely appealing product. People want more channels.

If you can go to people and say, 'With your existing cable hookup, with your existing
television set, without having to buy a dish, for roughly $10 per month, you can go from
60 to 70 channels up to 170' — we find that this is a very appealing prospect.
So whether it is direct mail or telemarketing, we are finding response rates that are much
higher than we normally get for any other kind of offer.

We have no digital-basic channels in our lineup, [so] we are really selling it on the
strength of lots of movie multiplexes, the channel guide, digital quality and 40 channels
of music.


MCN: Jerry, is there anything else that you want to get off your chest?

Kent: I'd say the thing that worries me the most is continued escalation of
programming costs.

Unfortunately, our main lobbying arm, the NCTA [National Cable Television Association], is
somewhat conflicted in its ability to beat the drum about runaway programming costs,
because so many programmers and so many cable operators that own programming interests are
represented at the NCTA.

So we need to find a voice — and maybe it's me, as the lone voice in the
wilderness — that gets our message across to Congress that escalating programming
costs, and particularly the ridiculous prices that are being forced down our
customers' throats for sports programming, are the real culprit of cable pricing. And
until that changes, we will continue to have problems in Congress with respect to cable
pricing.

Maybe we do need to look at taking certain programming a la carte in order to help combat
the runaway pricing. That, in the end, may be something that Congress has to step in for.

But I'm tired of the cable operator being the lightning rod for cable prices. When we
had the oil crisis, the service stations weren't blamed. It was the oil companies.
[This] is a similar situation. The wholesaler is our problem.


MCN: Jim, with system prices the way they are now, are your investors giving any thought
to selling out?

Vaughn: Our company was put together by a group of investors three years ago, so we are
three years into a seven-year business. I believe that we still have time to continue to
grow and to determine what kind of strategy or financial event will occur in the future.

The question for us is whether the marketplace is going to give us the opportunity to
continue to grow. We have had a very disciplined approach to our acquisition strategy. We
exist primarily in three different areas — northern New England, Ohio and Kentucky.
We have been very successful in our acquisitions, and we have managed to cluster
substantial subscribers within the geography that we are interested in. It is difficult to
continue to find acquisitions in areas where you have already been a successful
consolidator.

We are still aggressively looking. We are a group of people who believe in the future of
cable. We believe in the core business, and we believe in the future of cable.

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