News Articles

A Pause in Consolidation

11/09/2003 07:00:00 PM Eastern

For once, the big aren't getting bigger; they're actually getting a little smaller. For years, cable has been marked by massive consolidation as big MSOs grew by gobbling each other up. But the notable changes to BROADCASTING & CABLE's annual list of MSOs and DBS services have been big boys shedding systems, creating new players.

No. 1 Comcast, of course, is celebrating the one-year anniversary of its takeover of AT&T Broadband. But Time Warner Cable moved down the annual list when Advance/Newhouse split up a seven-year-old partnership. And Bresnan Communications entered the list by acquiring systems from Comcast. Another new MSO, American Broadband, will join next year's Top MSOs list after it completes the purchase of systems from Charter Communications. EchoStar's attempt to buy DirecTV failed, but News Corp.'s move to pick up the pieces won't change DirecTV's ranking.

One big reason for the pause in growth is the stock market. When cable stocks slid 30%-40% amid various financial scandals, MSOs didn't want to use their shares as currency. But sellers haven't dropped their expectations, remaining fixated on the days five years ago when Cox or Adelphia, for example, was paying 22-28 times annual cash flow. But cable stocks were trading at 15-18 times; today, the rate is more like 10 times annual cash flow. However, as cable stock prices have moved a little closer to their two-year highs, more deals may emerge.

Of course, what is changing DirecTV's and EchoStar's ranking is their strong subscriber growth. Each DBS service has annually added subscribers equal to the size of a top-15 MSO while cable operators continue to struggle to squeeze out even 1% gains. MSOs are steadily adding digital and high-speed data subs, but continual loss of market share to DBS companies (50% of it in Dallas, for example) is not a sign of health.

What's next? Charter has more systems for sale. Adelphia is likely to shed at least some systems when it emerges from Chapter 11 bankruptcy protection. A year ago, Cox and Time Warner were unsuccessfully bidding for AT&T, and they haven't yet done anything to sate their appetites.

Following is a list updating the status of the largest operators and some of the more interesting players further down the list of the Top 15 MSOs. We trimmed the list back from 25 because the consolidation of power in the top ranks is dramatically reducing the influence of operators even outside the top 10. The operators are ranked by basic subscribers, based on the most recently available data as of Nov. 4. Most subscriber and other data come from the company reports. Others are estimates from Paul Kagan Associates or from Wall Street analysts Morgan Stanley's Richard Bilotti, UBS Warburg's Aryeh Bourkoff and CSFB's Lara Warner.

B&C's Annual Ranking
MSO Basic subs
Source: Company reports
1 Comcast Cable Comm. 21.4M
2 DirecTV 11.9M
3 Time Warner Cable 9.4M
4 EchoStar Comm. 8.5M
5 Charter Comm. 6.4M
6 Cox Comm. 6.3M
7 Adelphia Comm. 5.5M
8 Cablevision Systems 3.0M
9 Advance/Newhouse 2.1M
10 Mediacom Comm. 1.6M
11 Insight Comm. 1.3M
12 Cable One 716k
13 RCN Corp. 430k
14 Classic Comm. 430k
15 Bresnan Comm. 314k

1. Comcast Cable Communications

AT&T executives must wince every time Comcast posts quarterly earnings. In less than six months after Comcast completed its $58 billion takeover of AT&T Broadband, Comcast CEO Brian Roberts began generating dramatically better results. The AT&T systems' steep subscriber losses have been reversed in Comcast's care. The AT&T properties' woeful 25% or so cash-flow margins have jumped almost 10 points closer to the industry's 40% average. The turnaround is months ahead of expectations.
The question is, can Comcast executives keep the game going. While Comcast's operating cash flow is surging, revenues are not. The AT&T properties' sales increased just 5% in the most recent quarter. Revenue growth in Comcast's old properties is fine, but the properties are losing subscribers. Comcast continues to increase the number of subscribers adding digital cable services, but the pace of growth is slowing dramatically (25%-33% slower than last year).
Unfortunately for some cable networks, one path to improved cash flow is squeezing license fees for networks. First, Comcast cherrypicked the best rates from among its own and AT&T's deals, particularly whacking AT&T's expensive deal with Starz Encore. Now the MSO's goal is to restrain the 10%-20% annual rate hikes programmers have been accustomed to, keeping growth down to 3%-4%.
Basic subscribers:
21.4 million (+0.3% from 2002)
2002 ranking:
1
Top Exec:
Brian Roberts
Basic penetration:
53.9%
Digital subs/penetration:
7.3 million/34%
High-speed subs/penetration:
4.9 million/14.5%
Revenue per sub:
$53.29/month
2002 revenue:
$16 billion
2002 EBITDA (pro forma):
$4.5 billion
Est. 2003 revenue:
$17.5 billion
Est. 2003 EBITDA:
$6.4 billion
Major systems:
Chicago; Washington; San Francisco; Miami; Philadelphia; Atlanta; Seattle; Portland, Ore.

2. DirecTV

It has been almost three years since DirecTV parent Hughes Electronics started openly working to unload the DBS service, first to Rupert Murdoch's News Corp, then to DBS rival Charlie Ergen, then again to Murdoch. All the confusion doesn't seem to have distracted DirecTV's workers too badly: They're cranking out far better numbers than expected, taking subscribers right out of cable's hide.
DirecTV is expecting to add 800,000 subscribers this year, a 7% gain to 12.2 million. That includes a troubled 1.6 million-subscriber rural DBS sales operation largely controlled by Pegasus Communications. By comparison, cable operators get excited these days if they increase subscriber counts by just 1%.
The big question is what will DirecTV be like in Murdoch's hands, assuming that his $6.6 billion deal to buy a controlling stake is approved. DirecTV has already left cable in the dust when it comes to pushing HDTV and digital video recorders, and Murdoch is expected to accelerate that push. More threatening to cable operators and programmers, is his use of DBS distribution to leverage Fox's stations and networks (including channels he could now create). One potentially hot issue: giving Fox operations benefits not shared by Hughes' public shareholders, who will own 66% of the Hughes stock.
Basic subscribers:
11.9 million (+68% from 2002)
2002 ranking:
3
Top Exec:
Eddy Hartenstein
Owner:
Hughes Electronics Corp.
Basic penetration:
11.5%
Revenue per sub:
$63.23/month
2002 revenue:
$6.5 billion
2002 EBITDA:
$620 million
Est. 2003 revenue:
$7.6 billion
Est. 2003 EBITDA:
$1 billion
Major systems:
Continental U.S.

3. Time Warner Cable

Time Warner Cable isn't just smaller than it used to be; it's also no longer much of a major-market MSO. Time Warner Cable shrunk when Advance Newhouse decided to essentially split up their eight-year-old system partnership. The Newhouse brothers took control of some of Time Warner's biggest properties, including Orlando and Tampa Bay, Fla. While the company blankets Manhattan and most of the rest of New York City, it now has only two of the 25 largest U.S. systems (New York and Houston). The bulk of its operations is in middle and small markets like Raleigh, N.C., and Upstate New York.
The shrinkage hasn't crimped its growth. The MSO continues to crank out strong financials, with earnings and revenues expected to be up 12% for 2003 and revenue per subscriber a strong $68 monthly.
Time Warner is working to control programming costs but is trying to tread more quietly than Comcast or Cox. It's looking to create sports tiers, isolating the highest-cost product in packages of channels that sports fans can buy without burdening the basic bills of non-sports fans. So far, the New York Yankees YES Network has sued to block its placement on a tier. But Time Warner hasn't yet taken on the biggest-ticket programmer, ESPN, and a tense spat with Fox Sports in Florida didn't create dramatic changes.
Basic subscribers:
9.4 million (-13% million from 2002; split up venture with Advance Newhouse)
2002 ranking:
2
Top Exec:
Glen Britt
Digital subs/penetration:
3.6 million/38.6%
High-speed subs/penetration: 2.7 million/22.7%
Revenue per sub:
$68.70/month
2002 revenue:
$7.035 billion
2002 EBITDA:
$2.766 billion
Est. 2003 revenue:
$7.7 billion
Est. 2003 EBITDA:
$3.03 billion
Major systems:
New York; Houston; Raleigh, N.C.

4. EchoStar Communications

If you believe Charlie Ergen, EchoStar and a DirecTV could be a warm, sometimes collaborative relationship once News Corp. takes control of the EchoStar CEO's DBS rival. "The loser will be the incumbent," said Ergen of News Corp,'s takeover, referring to cable operators.
Doubtful. Ergen began the year with the collapse of his takeover of DirecTV, a failure in part engineered by News Corp. CEO Murdoch's intensive lobbying against the deal. And, of course, a 1998 DBS partnership between Ergen and Murdoch angrily splintered.
Another reason they are likely to fight is that the easy cable targets are getting stronger. Financial disarray at Adelphia and Charter has made those companies easy targets, evidenced by their steep subscriber declines. As those companies recover, though, EchoStar and DirecTV will increasingly face off against each other.
Financially, EchoStar is prepared. With a manageable debt load and $2.4 billion cash on the books, Ergen has resources to engage in an escalated war. He recently allied with telco SBC, which will bundle Dish Network with local phone and DSL Internet service. Such partnerships, though, have fizzled in the past.
Basic subscribers:
8.5 million (+18.6% from 2002)
2002 ranking:
5
Top Exec:
Charlie Ergen
Basic penetration:
8.3%
Revenue per sub:
$58.79/month
2002 revenue:
$4.8 billion
2002 EBITDA:
$806 million
Est. 2003 revenue:
$4.7 billion
Est. 2003 EBITDA:
$1.2 billion
Major systems:
Continental U.S.

5. Charter Communications

Charter ranks second behind Adelphia Communications as the Top 15's most financially troubled cable operator. The Paul Allen-controlled MSO is saddled with $18 billion in debt, around 10 times annualized operating cash flow (anything over six times is considered heavy for cable operators). The sale of systems serving about 300,000 subscribers is only marginally helpful. A major debt restructuring is clearly in Charter's future.
The company stopped losing basic subscribers during the third quarter but only by heavily discounting prices. The good news is that revenues and cash flow are growing a healthy 10% this year. President Carl Vogel is getting operating costs under control (though partly by slashing marketing spending on new products that drive growth). Charter's stock price has quadrupled, though from $1 a share to $4. That's better news for one mogul—Mark Cuban, who started actively buying Charter stock when it was in the basement—than for Microsoft co-founder Allen, who has sunk $7 billion into the operation at about $22 per share.
Basic subscribers:
6.4 million (-5.6% from 2002, partly from system sales but also from internal bleeding)
2002 ranking:
4
Top Exec:
Carl Vogel
Basic penetration:
53.2%
Digital subs/penetration:
2.6/41%
High-speed subs/penetration:
1.5 million/13.5%
Revenue per sub:
$64.32/month
2002 revenue:
$4.6 billion
2002 EBITDA:
$1.8 billion
Est. 2003 revenue:
$4.7 billion
Est. 2003 EBITDA:
$1.9 billion
Major systems:
St. Louis; Greenville-Spartanburg, N.C.; Madison, Wis.

6. Cox Communications

No cable operator is performing better than Cox right now. The company's investment in plant quality, customer service and telephone services is generating fat 15%-20% revenue and earnings gains. That's well ahead of the cable pack and would be admirable even if the cable sector were booming. DBS penetration in Cox markets is about 40% less than the industry average, a sign that cable customers are happy and well-fed with channels. Installation of cable modems is growing at a record pace even though Cox's most direct telco competitor, SBC, is slashing DSL prices.
But what has industry executives fixated on Cox is President Jim Robbins's fight with ESPN and Fox Sports over programming costs. The escalation of cable networks' license fees has Robbins on a jihad, and, since sports nets are the most expensive, they're his big target. He wants to put expensive sports networks on tiers, letting sports fans pay if they want them but insulating non-sports fans. Disney Chairman Michael Eisner dismisses Robbins as a "whiner," but other operators privately cheer Robbins's goal, if not his public profile. Cox must notify subscribers by Nov. 30 whether it expects Fox Sports to go dark on its systems at year-end. Cox's ESPN deal is up next April.
Basic subscribers:
6.3 million (+0.7% from 2002)
2002 ranking:
6
Top Exec:
Jim Robbins
Basic penetration:
60.9%
Premium subs:
4.2 million
Digital subs/penetration:
2.1 million/32.7%
High-speed subs/penetration:
1.8 million/17.8%
Telephony subs/penetration:
911,735/8.8%
Revenue per sub:
$73.56/month
2002 revenue:
$5.039 billion
2002 EBITDA:
$1.358 billion
Est. 2003 revenue:
$5.8 billion
Est. 2003 EBITDA:
$2.1 billion
Major systems:
Phoenix; San Diego; Hampton Roads, Va.; Las Vegas; Orange County, Calif.

7. Adelphia Communications

Adelphia isn't expected to emerge from Chapter 11 bankruptcy protection until next spring. Its new executive team Bill Schleyer and Ron Cooper—the team hired to stabilize AT&T Broadband (with mixed results)—is wrestling with an operation that was capital-starved before a financial scandal dragged Adelphia into Bankruptcy Court. But the company now has full access to $1.5 billion from new loans to resume spending on such extravagances as, say, marketing (which had dried up) and upgrading systems that are bleeding subscribers to DBS competitors. As for the previous management, founder John Rigas and his family's trial on criminal fraud charges is set for January.
Basic subscribers:
5.5 million (-11% from 2002)
2002 ranking:
7
Top Exec:
Bill Schleyer
Owner:
In Chapter 11, so bondholders and banks will wind up with major stakes
Basic penetration:
52.%
Digital subs/penetration:
2 million/36.3%
High-speed subs/penetration:
936,000/8.7%
Revenue per sub:
$54.98
Est. 2003 Revenue:
$3,575.30
Est. 2003 EBITDA:
$925.20
Major systems:
Los Angeles; Buffalo, N.Y.; suburban Pittsburgh; all of Vermont; Palm Beach, Fla.

8. Cablevision

Will Chuck Dolan finally sell? That was the first question after the chairman and founder surprised investors by announcing that, when he spins off the much criticized Voom DBS startup, he'll spin himself off, too. While he won't turn down a great offer, he said, "people have been saying I was about to sell for 20 years. We're still here." Dolan's son, Jim (above), will be left running the company, coping with slow cash-flow growth despite moderate revenue rises. Financial growth is expected to recover, particularly because high-margin digital cable and high-speed data sign-ups are expected to remain steady.
Basic subscribers:
3 million (-0.5% from 2002)
2002 ranking:
8
Top Exec:
Jim Dolan
Basic penetration:
67.6%
Digital subs/penetration:
597,605/20.2%
High-speed subs/penetration:
921,100/23%
Revenue per sub:
$70.29
2002 revenue:
$3.7 billion
2002 EBITDA:
$1.1 billion
Est. 2003 revenue:
$4.0 to $4.1 billion
Est. 2003 EBITDA:
$1.29 to $1.31 billion
Major systems:
Long Island, N.Y.; Monmouth County, N.J.

9. Advance/Newhouse Communications

Advance/Newhouse is one of two new companies to the list. For seven years, President Bob Miron had tucked the company's cable systems under Time Warner Cable, figuring that the larger MSO's size, access to technology, and programming discounts would make the Newhouse family more money. He surprised the industry by deciding last year that Advance would essentially break up the partnership and get back into managing cable systems. In the Newhouse tradition, operating locally as Brighthouse, Miron's son, Steve, is COO, and daughter, Nomi Bergman, is executive vice president of strategy. Each had been a mid-level manager at Time Warner Cable. But Advance has largely kept Time Warner's old local and regional managers in place.
Basic subscribers: 2.1 million
2002 ranking: New company
Top Exec: Bob Miron
Owner: Time Warner Entertainment AdvanceNewhouse (but Advance manages the systems)
Basic penetration: 59%
Digital subs/penetration: 791,000/37.6%
High-speed subs/penetration: 601,000/16.4%
Major systems: Orlando, Fla.; Tampa Bay, Fla.

10. Mediacom Communications

Mediacom's focus on small-town and rural systems makes it particularly vulnerable to DBS. Even upgraded, they tend to have less channel capacity than suburban systems. CEO Rocco Commisso has worked hard to put resources and money into the portfolio. Now he faces greater competition as DBS services carry the signals of local broadcast stations in smaller markets, making it less painful for rural subscribers to switch to a dish.
Basic subscribers: 1.6 (-1% from 2002)
2002 ranking: 9
Top Exec: Rocco Commisso
Basic penetration: 57.1%
Digital subs/penetration: 385,000/25.1%
High-speed subs/penetration: 234,000/9.0%
Revenue per sub:
$53/month
2002 revenue:
$923 million
2002 EBITDA:
$376.6 million
Est. 2003 revenue:
$1.0 billion
Est. 2003 EBITDA:
$407 million
Major systems:
Des Moines, Iowa; 29 other states

11. Insight Communications

Basic subscribers:
1.3 million (-0.1% from 2002)
2002 ranking:
10
Top Exec:
Michael Wilner
Basic penetration:
55.9%
Digital subs/penetration:
383,700/31%
High-speed subs/penetration:
208,500/9.4%
Telephony subs/penetration:
49,300/6.9%
Revenue per sub:
$58.81
2002 revenue:
$807.9 million
2002 EBITDA:
$359.6 million
Est. 2003 revenue:
$893.3 million
Est. 2003 EBITDA:
$401 million
Major systems:
Louisville, Ky.; Peoria/Bloomington, Ill.; Springfield, Ill.

12. Cable One

Basic subscribers:
716,700 (-1% from 2002)
2002 ranking:
11
Top Exec:
Tom Might
Owner:
The Washington Post Co.
Basic penetration:
56.2%
Digital subs/penetration:
212,700/30%
High-speed subs/penetration:
121,700/11%
Revenue per sub:
$53.64/month
2002 revenue:
$428.5 million
2002 EBITDA:
$169.9 million
Est. 2003 revenue:
$453 million
Est. 2003 EBITDA:
$180 million
Major systems: Mostly small-town and rural properties in 20 states including Arizona, Idaho, Minnesota and New Mexico

13. RCN Corp.

Basic subscribers: 430,454 (+0.5% from 2002)
2002 ranking: 12
Top Exec: David McCourt
Basic penetration: 30%
Digital subs/penetration: 89,682/40%
High-speed subs/penetration:
184,265/13%
Telephony subs/penetration:
269,780/63%
Revenue per sub:
$87.38/month
2002 revenue:
$542 million
2002 EBITDA:
-$83 million
Major systems:
New York, Boston, Washington

14. Classic Communications

Basic subscribers:
430,000 (+8%)
2002 ranking:
13
Top Exec:
Jerry Kent
Owner:
Cequel III and Oaktree Capital Management
Major systems:
Tiny systems across nine states, including Kansas, Oklahoma and Texas

15. Bresnan Communications

Basic subscribers:
314,000
2002 ranking:
New company
Top Exec:
William J. Bresnan
Owner:
Bresnan and investors
Basic penetration:
54.6%
Digital subs/penetration:
101,665/32.4%
High-speed subs:
26,000
Major systems:
Montana, Nebraska

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