Despite rate hikes and the rollout of high-priced digital cable, growth at Cablevision Systems' video operations ground nearly to a halt during the first quarter.
Part of the problem was subscriber losses due to the MSO's dispute over carriage of the Yankees Entertainment and Sports (YES) Network. That dispute wasn't resolved until the end of the quarter, so baseball fans were still canceling service. Basic subscribers dropped 11,500 from December and 51,000 from first quarter 2002.
But another problem is that some customers are buying fewer services. Morgan Stanley media analyst Richard Bilotti estimates that 50,000 additional customers downgraded from high tiers to cheaper broadcast basic service, keeping access to all broadcast channels but likely switching over the DirecTV for basic cable and pay channels. That means subscribers cut their monthly bills from around $52 to abount $11. Further, Bilotti estimates that Cablevision lost another 166,000 units to subscribers dropping pay channels.
Cable division President Tom Rutledge blamed the video slowdown on a huge channel shuffle within its metro New York market to unify the network lineup and channel positions among system clusters. Now CNN, for example, is on ch. 25 in many systems, and Fox News is one channel up at 26.
"We reduced the total number of channel lineups in the cable system from 52 to eight," Rutledge said. "And we changed the security of our service and put ourselves in a position so that we could market more effectively across our platform. It was a very disruptive process."
This is despite a surge in digital cable sales. Cablevision was late to the digital game, rolling out service only last year. During the first quarter the company added 185,000 units, reaching 401,000, or 14% of basic subscribers. That's much better than some analysts had expected.
High-speed-data sales were also strong, increasing by 83,000 units to 853,000, or 22% penetration of homes marketed (29% of basic subscribers).
Still, that didn't increase revenue growth much, with total cable unit sales growing a weak 6% to $594 million. Operating cash flow was better, up 10% to $231.5 million.
Rutledge noted other causes for the slow revenue growth. The company charges subscribers less for MSG Network because it lost rights to New York Yankees and New Jersey Nets games; altogether, that cost Cablevision $5 million. Also, the cable division no longer sells cable modems directly, shifting $6.5 million of revenue out of the unit.
Rainbow Programming's revenues increased 16% to $176.6 million, while cash flow quintupled to $38 million. Cablevision likes to separate what it calls its core networks—which made $58 million—lumping the weak or losing units into a "Developing Programming/Other" line. That includes not only startups like VOD service Mag Rack but also longtime operations like MuchMusic USA (soon to be Fuse), News 12 and Rainbow Advertising Sales Corp.
Companywide revenues rose 8% to $982.2 million and cash flow rose a big 35% to $299.2 million.