MSOs Put Space Between Them and Adelphia Mess

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With investors skittish about family-owned cable companies and complicated corporate structures in the wake of the Adelphia Communications Corp. scandal, three MSOs — Cablevision Systems Corp., Insight Communications Co. and Mediacom Communications Corp. — took the initiative last week to distance themselves from the mess in Coudersport, Pa.

On June 10, the day that Adelphia disclosed yet another series of accounting irregularities — including overcounting subscribers and artificially inflating cash flow — Cablevision sent out a press release basically telling investors, "We're not Adelphia."

In a two-page statement, Cablevision said it does not inflate subscriber counts or capital expenses, and does not have any undisclosed management-fee agreements.

The company also said it does not receive any "marketing support" from vendors of set-top boxes.

Insight Communications Co. followed suit on Wednesday, during a conference call with analysts. It said that unlike Adelphia, Insight does not count revenue from customers receiving free service promotions until it actually receives their money; has no off-balance sheet debt; and does not receive money from its set-top vendor for marketing services.

About 54,200 of its 1.4 million subscribers are bulk equivalents, such as college students and residents of multiple dwelling units, Insight said. About 10 percent of Insight's data subscribers do not take video services, but it does not include those customers in its basic video count, the MSO added.

Insight president Michael Willner stressed that Adelphia's situation was not common practice in the industry. But he added that cable might have to make some moves toward simplifying the way it releases data to regain investor confidence.

"In terms of clarification and ease of understanding the little differences between the way companies interpret certain numbers, we might be able to do a better job, as an industry, of trying to give you some macro numbers that we all report in a similar way," said Willner, who also is the National Cable & Telecommunications Association chairman. "I'll see if there is any way that we might be able to develop that plan."

On Thursday, Mediacom followed Insight with its own statement, stressing that it does not capitalize the costs associated with reconnecting subscribers; does not receive marketing support payments from equipment vendors; has appropriately written down any decline in value of its equity investments; has no off-balance sheet debt; and has no special relationships with insiders.

And Mediacom's total subscriber count is less than its actual number of customers, the company said, because it counts bulk subscribers by taking the total amount of revenue from bulk accounts and dividing it by the average price of limited and expanded basic service in that system.

Mediacom also said it does not count customers who take data service only as video customers, and it counts each customer with multiple set-top boxes in their homes as one subscriber.

REASONS TO WORRY

While this may be seen as overkill, the industry can use all the help it can get in distancing itself from Adelphia.

While no other MSO has been accused of any of the wrongdoing that has plagued their Coudersport, Pa., counterpart, cable-operator stocks appear to be suffering from guilt by association in the minds of investors.

Case in point: Cablevision. It has substantial family ownership (the Dolan family controls 75 percent of the voting stock, and has four seats on its 12-member board of directors), as well as a diverse number of holdings ranging from movie theaters to sports arenas and teams to retail electronics stores.

Cablevision stock has fallen 70.3 percent this year and is trading at four-year lows. The stock reached another 52-week low of $14.05 on June 11— its third in three days —before finishing the day at $14.15, down 24 cents. The stock closed at $14.25 on June 13.

Monday's press release didn't appear to make much of a difference in Cablevision's share price, but analysts applauded, anyway.

"I thought it was a good idea," SunTrust Robinson Humphrey cable analyst Gary Farber said. "Every time something goes wrong in this sector, these guys get the brunt of it."

Cablevision officials declined to comment.

Insight had more luck with its conference call. Its stock rose 12 percent, or $1.48 per share to $14.10 each on June 12. But the stock lost some of that ground the next day, closing at $13.55 per share, down 55 cents.

Insight chief operating officer Kim Kelly said she believed that if other MSOs clarified that Adelphia's accounting abnormalities were not an industry-wide issue, it "would help this industry."

Kelly said that she and other Insight managers decided to have the conference call in response to several calls from investors worried about possible accounting questions.

"I thought it would be much more efficient to speak to everyone at once," Kelly said on the conference call. "Michael [Willner] and I have always encouraged questions. We think the more you know about our business, the better it is for us, because we are very proud of our business and what we have been able to achieve."

SOME ARE RETICENT

But other MSOs have been reluctant to shine a brighter spotlight on their accounting. No other operators have been accused of Adelphia-like accounting problems, but some have said privately they fear a flurry of public denials on specific accounting practices could have the reverse effect on their stocks.

"It's like saying you don't beat your wife," said one MSO executive who asked not to be named.

Most other MSOs have opted to keep their comments simple and broad, with executives at Cox Communications Inc., Charter Communications Inc. and Comcast Corp. broadly stating they have no Adelphia-like accounting problems on quarterly analyst calls and at industry conferences.

According to company spokesmen, neither Charter nor Comcast have any immediate plans to issue statements similar to Cablevision, Insight and Mediacom.

Calls to Cox were not returned by press time.

WHERE'S CHARTER?

But some industry executives expressed some surprise that Charter — with a stock that's been one of the hardest hit by the Adelphia scandal — was not trying to vigorously distance itself from Adelphia, given its high debt and ownership structure.

"Everybody has his own style, but clearly the Street has not widely accepted the new management," said one financial executive who asked not to be named. "[Former Charter CEO] Jerry Kent used to take the time to go on CNBC and pump up the stock price. I haven't seen anybody from Charter do that."

Charter has also come under some scrutiny for its own set-top box marketing agreements with Motorola Inc. According to a report by Bear, Stearns & Co. analyst Ray Katz, Charter pays full price for its set-tops from Motorola, but also has a marketing agreement with the equipment vendor that provides for Motorola advertising its digital product on Charter systems. But Charter said it charges Motorola for avails, like any other advertiser.

"We believe there are no issues with how this is accounted for," Katz wrote in his report.

Analysts tried to stop the bleeding in the cable sector, with four issuing reports stressing that Adelphia's problems are not industry-wide ones.

Katz, Banc of America Securities LLC cable analyst Doug Shapiro, Goldman Sachs & Co. media analyst Richard Greenfield and Merrill Lynch & Co. media analyst Jessica Reif Cohen all put out reports last week, defending the accounting practices of MSOs aside from Adelphia.

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