With cable stocks at their lowest point in five years and capital markets shriveling up, MSOs are best off keeping their heads down and sticking to plans to grow advanced services, according to panelists participating in a pair of discussions last week.
Each operator who spoke at last week's Kagan Broadband Summit here had the same message: Keep rolling out new services while reigning in costs, and the markets will eventually catch on.
That may be a little hard to swallow for investors, as cable stocks are down about 60 percent this year. But with most MSOs nearing the end of their rebuilds and free cash flow (earnings after interest payments and capital expenditures are made) coming much closer to reality, it may be the only way to go.
Though operators have touted the value of the bundle of voice, video and data, only a handful of companies actually offer all three products. But those that have are seeing some significant early success.
GCI success story
The triple play has been a major success for General Communications Inc., a small operator in Alaska, said president and CEO Ron Duncan.
Last year, the bundled offering helped drive cash flow up 40 percent and revenue up 20 percent, according to Duncan. This year the trend is continuing, with revenue up 14 percent and 8 percent in the first and second quarters, respectively.
"We're the poster child for what happens when you have the full bundle," Duncan said.
GCI has about 110,000 subscribers in Alaska, but it has a virtual lock on the Internet-service provider market (a 62 percent market share), a substantial chunk of local telephone service (43 percent) and a 47 percent share of the long distance market.
Couple that with its 70 percent cable-penetration rate, and Duncan believes that ultimately, 85 percent to 90 percent of GCI's customers will take the full three-product bundle.
That translates into some impressive revenue-per-subscriber numbers, too. Duncan said that GCI averages about $62 per month per subscriber.
But when data is added to the mix, GCI's revenue per customer grows to $108. Add local and long-distance telephony, and the number rises to $184 per month.
Duncan said that GCI is now free cash flow positive. He expects revenue per subscriber to climb to between $200 and $400 per month within four years, he said.
That sounds like the heady days of just a few years ago, when at another Kagan conference, Cablevision Systems Corp. CEO James Dolan predicted
ARPUs of $500 to $600 would be achievable in a few years.
Commisso sees $70
While no larger cable operator ever came close to that number — or expects to in the near future — some are expecting ARPU growth of as much as 40 percent in the next three years.
Mediacom Communications Corp. chairman Rocco Commisso said his business model estimates growing ARPU from its current level of $50 per month to $70 per month, assuming basic subscribers don't rise in the next three years.
Commisso's model assumes that pay-per-view revenue remains flat at $1 per subscriber per month, digital revenue grows from $6.50 to $10, data revenue grows from $4.50 to $10, advertising revenue rises from $1.50 to $3 and telephony — which the company does not currently provide — brings in $3.50 per subscriber.
Add that to the current video ARPU of $42.50 per month, and Mediacom gets to the $70 figure.
Commisso also estimated that Mediacom would generate free cash flow in 2004, as annual cash flow per subscriber approaches $300 and capital expenditures fall to about $115 per subscriber. That would generate about $180 in free cash flow per subscriber for the year.
With those kind of numbers — and a 20 times multiple — Commisso estimated the company should be valued at about $3,600 per subscriber, not the current $2,300 per customer.
"What a bargain you're getting if you buy my stock," Commisso said.
Mediacom will generate those results by doing what it has been doing all along — pushing new services to customers. For instance, Commisso said he expects to make digital and data service available to nearly all of his customers in Iowa by year-end.
"I've been a Time Warner Cable customer where I live for 15 years and I don't have digital or high-speed data," Commisso said. "But in these little markets in Iowa, whether it's a town like Des Moines or a town with 300 subscribers, I am proud to tell you that by the end of the year we're going to deliver digital, high-speed data and a fully upgraded plant to 98 percent of our subscriber base."
No blips on data
The proliferation of high-speed data is a bit of a surprise, given that operators were scrambling to transfer customers to their own networks after the demise of Excite@Home Corp. last year.
But while that was a scary few months for operators, Insight Communications Co. CEO Michael Willner said it was a blessing in disguise.
"The service got better and the customers got happier," as a result of the transition, Willner said.
For Charter Communications Inc., which has the industry's highest digital-penetration rate at 38 percent, the focus is on directing capital toward products that have the best return on investment, said chief operating officer David Barford during a separate panel.
Barford said that means that high-speed data, with margins in excess of 50 percent, will receive the most focus, while digital will receive less attention.
While Charter will likely slow down its efforts to market digiteal, Barford said, the main focus will be on reducing digital churn, currently at between 5 percent and 6 percent per month — about double the industry average.
"Digital continues to grow and it has been growing at a fast pace," Barford said. "But we want to make sure we have good sustainable growth. Five to 6 percent monthly churn has a significant cost. We're trying to bring that down to a reasonable level."
Barford said the best way to do that is to push the bundle of video and data service.
But one product that will be missing from the bundle, at least for the time being, is voice service.
VOIP: Not yet
Charter does offer cable telephony in parts of St. Louis — which it inherited when it purchased AT&T Broadband's operations there — and the MSO is conducting voice-over-Internet protocol trials in Wisconsin. But Barford does not see the company offering a widespread VoIP service in the near future.
"As you look at what investments we're going to be making going forward, we're certainly very focused on capital expenditures, we also feel we need to drive great product growth and revenue and cash flow are obviously very important. But then, what's the capital expenditure to go behind that?" Barford said. "I think where we have made some of the cuts we're potentially looking at is saying, 'Do we really want to invest in telephony?' "
Barford said that while telephony does have high ARPU and helps reduce churn, the cost may be too high at this point.
"Even in a voice-over-IP situation, it may not be the best expenditure for our capital," Barford said.
UBS Warburg LLC cable analyst Christopher Dixon said with the bulk of network upgrades done, one of the biggest opportunities for MSOs to gain market share on the high-speed data front is through deals with multiple ISPs.
While high-speed-data penetration is high, it is still well below the 30 percent threshold, Dixon added. That's the inflection point for widespread adoption of the service. And the quickest way to get there is through co-branding arrangements with multiple ISPs, particularly AOL Time Warner Inc.'s America Online service.
"The issue is simple," Dixon said. "If one out of three of your customers are AOL customers, why not use that relationship?"