Steering Through The Storm


To the outside observer, there seems to be little to cheer about at Charter Communications Inc. these days. The MSO continues to lose customers to the competition. There has been persistent turnover in the executive suite in recent months, even after a major overhaul of the talent pool in 2003. Last but not least, a heavy debt load threatens to topple the company's fiscal stability.

But CEO Carl Vogel and his lieutenants insist Charter is on the right track. Plans are in place, they say, to improve customer retention, the balance sheet and employee morale and consistency. While Vogel doesn't like losing any customers, he says most of the losses during the third quarter were basic-only customers. Charter is expected to formally announce a loss of 55,000 to 60,000 subscribers when it posts its third-quarter results Nov. 4.

Though Charter's stock didn't fall dramatically on the news, some analysts used the information to reiterate their displeasure with the MSO's performance. Citigroup Smith Barney analyst Niraj Gupta, who has been encouraging investors to sell their Charter stock for some time, says the preliminary results have only reinforced his concerns about the company's future.

“The significant loss of year-over-year basic subscribers (2.6%) indicates that Charter continues to lose subscribers to satellite,” Gupta wrote in an Oct. 7 analysis of Charter's preliminary third-quarter results. “We continue to view Charter as the most expensive stock in the cable industry, and believe better value is to be found elsewhere.”

Vogel says his job isn't to convince Wall Street analysts to like Charter's stock. Rather, he says, it's to make sure investors get the best value for their investment long term while giving customers the best service and product mix.

“Wall Street puts a lot of pressure on us,” says interim chief financial officer Derek Chang. “But that doesn't mean we always do what Wall Street says. We have to be concerned about creating the long-term value of the company.”

But that can be difficult if an operator's subscriber base continues to erode, says Adi Kishore, an analyst with Boston-based Yankee Group. “Your subscriber base is your gold mine,” Kishore says, “If you don't have any customers to upsell your products to, there is no business to run. It's not a big deal to lose some customers in the second quarter. But you shouldn't be losing customers in the third quarter.”

“I don't think Charter is losing more customers than other operators,” Vogel says. “I don't like losing customers, but we are not collecting units for unit's sake. Our ARPU [average revenue per unit] is up, and our margins are in line with our peers. Last year we did well by deep discounting some products, and we took some heat for that. We didn't do that this year. And although we lost some customers, we still managed to move revenues up 7.5%.”

Massive Change

Those advances came despite significant changes in the MSO's senior management team. When executive vice president and chief operating officer Margaret Bellville resigned last month, she was the fourth senior executive to leave the company in a three-month period.

Charter has made great strides in shoring up its financials, improving service and integrating its diverse operations, Vogel insists. The company refinanced a whopping $8 billion in debt earlier this year, which gave it the flexibility to market its goods more aggressively and launch more new products. It has also taken steps to consolidate its billing operations, complete rebuilds and create a unified corporate culture.

The MSO is focusing more heavily on employee training than before, says executive vice president of operations and customer care Mike Lovett.

“When we have talked to customers who have had a bad experience with the company, they have said time and again how nice our people are,” Lovett says. “But their experience was less than satisfactory, because the employees lacked the skill sets or tools necessary to do the job correctly. We want to change that. We have launched Charter University in the last six months, which has helped tremendously.”

The training program has been expanded to include government relations, says senior vice president of communications Dave Andersen. Charter currently has 4,179 franchises in 37 states, and it had to renew 684 of them this year. Another 700 must be handled next year, Andersen says. Not only does Charter have its hands full renewing franchises, the MSO has been put in the unenviable position of trying to change some of the provisions put in place by the previous management.

“You have to remember, Charter was a roll-up company,” Andersen says. “They made 14 acquisitions in 18 months, and the previous management agreed to some city demands just to get the deals done. Now we're trying to renegotiate more reasonable contracts, and that's not always easy to do.”

Andersen is trying to convince cities to let Charter deliver local programming — including city council meetings and high school sporting events — on demand. But he admits it forces customers to take a digital set-top box, and that's a sticky negotiating point. “We're not trying to force people to migrate to digital,” he says. “We're just trying to use our plant more effectively.”

The operator is also knee-deep rejiggering and renewing its myriad programming contracts. About two-thirds of the company's programming agreements were set to expire this year. Nearly one-third of those negotiations have been completed, according to Charter vice president of programming Sue Hamilton. In most cases, Charter is trying to secure rights for video on demand and HDTV, and it has managed to get most of those rights for free. The MSO hasn't endorsed a massive lineup of free-on-demand programming like Comcast Corp., but Charter is interested in expanding its FOD offerings, Hamilton says.

“We can't support a pure free VOD model,” she says. “But we do want to offer our customers a limited amount of FOD to get customers to adopt the technology. Then once they're comfortable, they'll feel better about paying for VOD product.”

Although Charter has more financial flexibility today, the company continues to focus on ways to reduce debt. The MSO sold some properties last year and more divestitures are likely.

Still, Vogel and Chang surprised analysts at the Oct. 7 Deutsche Bank 2004 Global High Yield Conference in Scottsdale, Ariz., when they indicated lucrative properties for sale at the right price. Among them is Charter's Los Angeles system, which serves 500,000 customers.

At other recent conferences, the executives also said they would seriously consider buying Adelphia Communications Corp.'s Los Angeles properties if they could bring in an equity partner. What it all means is that everything is in play as Charter continues to pare its debt and shore up its balance sheet.

“At this point the company has to consider what options are in front of it to help improve its position,” Chang told investors and analysts at the Deutsche Bank conference. “If there is a transaction — either through a sale or a joint venture or anything like that — that potentially helps put us in a better position, I think we have to evaluate it pretty seriously.”

In the meantime, Charter continues to launch new services, including VOD, HD, digital video recorders and voice-over-Internet protocol telephony. It's also renewing and refining the marketing of its product mix. And it's enriching customer satisfaction through a series of improvements, including more security against spam for high-speed data customers and a further consolidation of billing systems.

New Products Key

Rolling out new products is imperative for Charter's growth going forward, says Tom Cullen, executive vice president of advanced services and business development. The company has aggressively deployed new Motorola Inc. Moxi DVR set-top boxes, and is making VoIP a top priority.

Voice services provide some healthy growth prospects, and it's relatively inexpensive to deploy, he says. Charter estimates VoIP costs between $250 and $325 per subscriber to deploy making it a very cost effective add-on service.

VoIP will also help broaden Charter's commercial services business, which is growing at breakneck speeds. Pro forma second-quarter revenues for the commercial services business grew 26% over the year earlier period. Steve Santamaria, vice president of commercial services, expects to see the unit reach $250 million in revenues within the next couple of years as the company shifts its emphasis from serving small- to medium-sized businesses to large companies with extensive telecom needs.

Charter is taking advantage of its upgraded plant to service business customers, but it is also using wireless technology more regularly, which enables the company to add customers quickly and inexpensively. The MSO currently serves about 20 commercial customers using wireless technology and has plans to add another 40 by year's end.

“It would cost us $20,000 to service some of those customers using wired technology,” Santamaria says. “If we use wireless technology, that same hookup costs us $3,600, and it's as reliable as the wired plant. It also only takes us four hours to hook up a customer, versus the weeks it can take to extend plant to a commercial customer.”

Meanwhile, digital continues to be a focus for Charter, especially as the company tries to expand its simultrans digital network. Charter was the first MSO in the country to provide an all-digital network — in Long Beach, Calif.

“Short-term there is a better customer experience with the all-digital network, and it's an effective competitive response to all-digital networks that the [direct-broadcast satellite] providers have,” according to Charter chief technology officer Wayne Davis. “But it also has operational benefits. Not only is picture quality superior, it also makes the plant more reliable [during] truck rolls and service calls. We think it will also reduce churn because the customer experience is so strong.”

That's going to be important going forward. Charter's digital growth is slowing down. The MSO expects to report between 35,000 and 40,000 new digital subscribers in the third quarter, down from a gain of 58,500 in the same period a year ago. The result: Anything that can entice customers to move into a digital package is essential to the company's growth.

“[Charter chairman and chief investor] Paul Allen put the challenge of going all digital to us and we met it with flying colors,” Davis says. “We want our customers to want that digital box and all the things we're doing today are going to make that happen.”