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Newly Independent Cable One Plans Broadband Makeover With Speed Upgrades

cable oneNewly independent Cable One will reduce its emphasis on cable television and turn its time, attention, and capital towards improving broadband service for its 690,000 largely rural customers in 19 states.

Cable One was spun off from Graham Holdings on July 1 and is not likely to stay independent for long before it is acquired by another cable operator, most likely Patrick Drahi’s Altice, S.A. — which recently acquired Suddenlink. But in the meantime, Cable One is attempting to persuade investors it is remaking itself into a broadband company, de-emphasizing the traditional cable television package in favor of dedicating more bandwidth for faster broadband speeds.

“Our standard broadband offering for our residential customers since 2011 has been a download speed of 50Mbps, which is at the high-end of the range of standard residential offerings even today in our markets,” the company reported in a statement. “Our enhanced broadband offering for our residential customers is currently a download speed of 75Mbps, which we expect to raise to 100Mbps by the end of 2015.”

Cable One primarily serves small cities and towns in the central and northwestern United States.

Cable One primarily serves small cities and towns in the central and northwestern United States.

In several markets, 100Mbps speed is already available and regular pricing has been simplified to $1 per megabit of service: 50Mbps for $50, 75Mbps for $75, or 100Mbps for $100 a month.

To protect its broadband business model, which carries prices traditionally higher than larger operators, Cable One will stay focused on largely uncompetitive markets where it faces token DSL broadband competition from companies like Frontier Communications, CenturyLink, and Windstream. More than 75 percent of its customers are located in Mississippi, Idaho, Oklahoma, Texas and Arizona, many served by these three telephone companies.

Cable One signaled it will hold the line on cable programming costs as well. In April 2014, the company dropped 15 Viacom networks, including MTV, VH1, Comedy Central, Nickelodeon and others over contract renewal prices it claimed were too high. The cable TV package has continued without the Viacom networks for more than a year, resulting in the loss of more than 20% of its cable TV customers. More than 100,000 homes have dropped Cable One video service for another provider, but ironically that actually helped Cable One increase its cash flow by more than 11%, because it no longer has to pay programming fees on behalf of the lost customers.

On the bright side, Cable One executives discovered many of its former TV customers have stayed with Cable One for Internet service because the competition either does not offer broadband or generally provides DSL at speeds under 10Mbps. Company officials have emphasized this point to investors, suggesting broadband is a true money-maker and television can safely take second chair without sabotaging profits.

“We certainly have some sympathy for the notion that a broadband-only cable operator might be more profitable,” wrote analyst Craig Moffett in an investor note this month. “But there are some critical holes in the Cable One story. Does the company truly believe that all costs are variable such that cutting video will bring endless margin expansion? Are Cable One’s new shareholders really better off for having played hardball with Viacom?”

Moffett does not believe so because he is convinced Cable One’s independence will be short-lived.

“We all know the consensus opinion is that someone will buy Cable One,” Moffett wrote. “But the above questions still matter. Any potential acquirer would still place value on a video business, or pay less for the fact that Cable One has less of one.”

But as long as rural telephone companies barely compete for broadband customers, Cable One’s broadband performance will deliver them a de facto broadband monopoly in their largely rural service areas. That gives the cable company, or its next owner, plenty of room for rate hikes.

Sling TV CEO Fears Providers Will Jack Up Broadband Prices to Kill Online Video

DishLogo-RedIn the last three years, several Wall Street analysts have called on cable and telephone companies to raise the price of broadband service to make up for declining profits selling cable TV. As shareholders pressure executives to keep profits high and costs low, dramatic price changes may be coming for broadband and television service that will boost profits and likely eliminate one of their biggest potential competitors — Sling TV.

For more than 20 years, the most expensive part of the cable package has been television service. Cable One CEO Thomas Might acknowledged that in 2005, despite growing revenue from broadband, cable television still provided most the profits. That year, 64% of Cable One’s profits came from video. Three years from now, only 30% will come from selling cable TV.

While broadband prices remained generally stable from the late 1990’s into the early 2000’s, cable companies were still raising cable television prices once, sometimes twice annually to support very healthy profit margins on a service found in most American homes no matter its cost. Despite customer complaints about rate hikes, as long as they stayed connected, few providers cared to listen. With little competition, pricing power was tightly held in the industry’s hands. The only significant challenge to that power came from programmers demanding (and consistently winning) a bigger share of cable’s profit pie.

The retransmission consent wars had begun. Local broadcast stations, popular cable networks, and even the major networks all had hands out for increased subscriber fees.

Rogers

Rogers

In the past, cable companies simply passed those costs along, blaming “increased programming costs” in rate hike notifications without mentioning the amount was also designed to keep their healthy margins intact. Only the arrival of The Great Recession changed that. New housing numbers headed downwards as children delayed leaving to rent their own apartment or buy a house. Many income-challenged families decided their budgets no longer allowed for the luxury of cable television and TV service was dropped. Even companies that managed to hang on to subscribers recognized there was now a limit on the amount customers would tolerate and the pace of cable TV rate hikes has slowed.

For a company like Cable One, the impact of de facto profit-sharing on cable television service was easy to see. Ten years ago, only about $30 of a $70 video subscription was handed over to programmers. This year, a record $45.85 of each $81 cable TV subscription is paid to programmers. The $35.50 or so remaining does not count as profit. Cable One reported only $10.61 was left after indirect costs per customer were managed, and after paying for system upgrades and other expenses, it got to keep just $0.96 a month in profit.

To combat the attack on the traditional video subscription model, Cable One raised prices in lesser amounts and began playing hardball with programmers. It permanently dropped Viacom-owned cable networks to show programmers it meant business. Subscribers were livid. More than 103,000 of Cable One’s customers across the country canceled TV service, leaving the cable company with just over 421,000 video customers nationwide.

Some on Wall Street believe conducting a war to preserve video profits need not be fought.

Prices already rising even before "re-pricing" broadband.

U.S. broadband providers already deliver some of the world’s most expensive Internet access.

Analysts told cable companies that the era of fat profits selling bloated TV packages is over, but the days of selling overpriced broadband service to customers that will not cancel regardless of the price are just beginning.

Cablevision CEO James Dolan admitted the real money was already in broadband, telling investors Cablevision’s broadband profit margins now exceed its video margins by at least seven to one.

The time to raise broadband prices even higher has apparently arrived.

new street research“Our work suggests that cable companies have room to take up broadband pricing significantly and we believe regulators should not oppose the re-pricing (it is good for competition & investment),” wrote New Street Research’s Jonathan Chaplin in a recent note to investors. The Wall Street firm sells its advice to telecom companies. “The companies will undoubtedly have to take pay-TV pricing down to help ‘fund’ the price increase for broadband, but this is a good thing for the business. Post re-pricing, [online video] competition would cease to be a threat and the companies would grow revenue and free cash flow at a far faster rate than they would otherwise.”

If you are already a triple play cable television, broadband, and phone customer, you may not notice much change if this comes to pass, at least not at first. To combat cord-cutting and other threats to video revenue, some advisers are calling on cable companies like Comcast, Time Warner Cable and Charter to re-price the components of their package. Under one scenario, the cost of cable television would be cut up to $30 a month while the price of Internet access would increase by $30 or more a month above current prices. Only customers who subscribe to one service or the other, but not both, would see a major change. A cable TV-only subscriber would happily welcome a $50 monthly bill. A broadband-only customer charged $80, 90, or even 100 for basic broadband service would not.

broadband pricesNeither would Sling CEO Roger Lynch, who has a package of 23 cable channels to sell broadband-only customers for $20 a month.

“They have their dominant — in many cases monopolies — in their market for broadband, especially high-speed broadband,” Sling CEO Roger Lynch told Business Insider in an interview, adding that some cable companies already make it cheaper for people to subscribe to TV and broadband from a cable company than just subscribe to broadband.

A typical Sling customers would be confronted with paying up to $100 a month just for broadband service before paying Sling its $20 a month. Coincidentally, that customer’s broadband provider is likely already selling cable TV and will target promotions at Sling’s customers offering ten times the number of channels for as little as a few dollars more a month on top of what they currently pay for Internet access.

Such a pricing change would damage, if not destroy, Sling TV’s business model. Lynch is convinced providers are seriously contemplating it to use “their dominant position to try to thwart over the top services.”

At least 75% of the country would be held captive by any cable re-pricing tactic, because those Americans have just one choice in providers capable of meeting the FCC’s minimum definition of broadband.

Even more worrying, FCC chairman Thomas Wheeler may be responsible for leading the industry to the re-pricing road map by repeatedly reassuring providers the FCC will have nothing to do with price regulation, which opens the door to broadband pricing abuses that cannot be easily countered by market forces.

Lynch has called on the FCC to “protect consumers” and “make sure there’s innovation and competition in video.”

Unfortunately, Wheeler may have something else to prove to his critics who argued Net Neutrality and Title II oversight of broadband would lead to rampant price regulation. Wheeler has hinted repeatedly he is waiting to prove what he says — an allusion to hoping for a formal rate complaint to arrive at the FCC just so he can shoot it down.

Drahi Readies His Next Move: “If I Buy Five Smaller Cable Companies, I Am as Big as Time Warner Cable”

Drahi

Drahi

Patrick Drahi, the billionaire ruthless cost-cutting owner of Altice SA told a French parliamentary hearing he didn’t go ahead with a serious bid for Time Warner Cable because he lacked enough management talent to run a huge cable company in a country he only recently entered.

“I didn’t follow up on the exchanges we had on Time Warner Cable that were mentioned in the media because we were not ready,” Drahi told a French parliamentary hearing on Wednesday.

Drahi testified French-owned banks were ready to help finance a deal that would have stolen Time Warner Cable away from Charter Communications. Instead, Drahi has decided to spend a little time digesting his acquisition of Suddenlink to gain experience in the U.S. cable market before he moves on other cable operators. Drahi believes he will be the only buyer left to cut major cable consolidation deals.

“Time is on our side” for the U.S. expansion,” Drahi said. “The two leaders Comcast and Charter will not be able to buy anything else because of their size so we will have an open boulevard ahead of us. If I buy five small operators, I can be as big as Time Warner Cable.”

The five most-likely cable operators Drahi will pursue, according to a business editor at RFI, the French overseas broadcaster: Cablevision, Cox, Mediacom, WOW!, and Cable One. Cox and Mediacom are privately held and Cablevision is tightly controlled by its founding Dolan family, so Drahi will likely have to sweeten deals to convince all three to sell.

Reuters reports Drahi is especially interested in the smaller, less profitable operators because they are ripe for his brand of cost management and consolidation-related savings.

“Even better, that means we will have room to improve them,” Drahi said.

Drahi remained enthusiastic about Cablevision, despite the fact it serves one of the most competitive markets blanketed by Verizon FiOS in the United States.

“It’s good actually since it means they know how to compete,” Drahi said.

Drahi’s reputation is well-known in Europe based on his earlier acquisitions. Altice favors telecom and cable companies seen as poorly managed or undervalued which Drahi targets for massive cost-slashing to improve profitability. The investments he does make are largely to benefit high-end customers he values the most.

“The French Slasher” Patrick Drahi/Altice Likely to Target Cablevision, Cox, Mediacom Next for Quick Buyouts

THE FRENCH SLASHER: Patrick Drahi's cost-cutting methods are legendary in Europe. He could soon be bringing his style of cost management to America.

THE FRENCH SLASHER: Patrick Drahi’s cost-cutting methods are legendary in Europe. He could soon be bringing his style of cost management to America.

Patrick Drahi and his Luxembourg-based Altice SA appears to be out of the running to buy Time Warner Cable, but are likely to quickly turn their attention to acquiring several of America’s remaining medium-sized cable companies: Cablevision, Cox, and Mediacom.

“While it is still possible that Altice counters on TWC, we do not believe that it can match Charter [and backer John Malone’s] funding firepower and will ultimately lose out,” wrote Macquarie Capital’s Kevin Smithen. “In our opinion, Altice is more likely to turn its attention to Cablevision or privately held Cox or Mediacom, in an effort to gain more fixed-line scale in order to compete against Charter and Comcast.”

Last week, cable analysts were surprised when Drahi swooped in to acquire Suddenlink, one of America’s medium-sized cable operators.

“Altice’s decision to buy Suddenlink (at an unsupportably high price) creates even more uncertainty in an industry where virtually every element of the story is now in flux,” said MoffettNathanson analyst Craig Moffett.

Cablevision recently seemed to signal it was willing to talk a merger deal with Time Warner Cable, but that now seems unlikely with the Charter acquisition heading to regulator review. Drahi met last week with Time Warner Cable CEO Robert Marcus about a possible deal with the second largest cable company in the U.S., which seems to indicate he is serious about his plans to enter the U.S. cable market.

“On paper, Cablevision was already overvalued,” Moffett said. “And Altice’s acquisition of Suddenlink, which has no overlap with Verizon FiOS, would suggest that they are quite cognizant of the appeal of a carrier without excessive fiber competition. The spike in Cablevision’s shares only makes that overvaluation worse. Then again, if Altice is willing to overpay for one investment, might they not be willing to overpay for another?”

Drahi has been topic number one for the French telecom press for months after his aggressive acquisition and cost-cutting strategies left a long trail of unpaid vendors and suppliers, as well as employees forced to bring their own toilet tissue to work. Customers have also started leaving his French cable company after service suffered as a result of his investment cuts.

As a new wave of cable consolidation is now on the minds of cable executives, several Wall Street analysts have begun to call on the cable industry to consolidate the wireless space as well, buying out one or more wireless companies like Sprint or T-Mobile to combine wired and wireless broadband.

“Unlike Europe, we continue to believe that the U.S. is not yet a ‘converged’ market for wireless and wireline broadband services but that this trend is inevitable in the U.S. due to increasing need for small cells, fiber backhaul and mobile video content caching closer to the end user. In our view, Altice believes in convergence and so mobile will be a strategic objective in the long-term,” Smithen wrote.

Other Wall Street analyst/helpers have pointed out there are other cable targets ripe for acquisition: WideOpenWest Holding Cos (a/k/a WOW!) and Cable One have a combined 1.92 million video subscribers.

Cable One Spinning Away From Graham Family In Likely Move Towards Eventual Sale

Phillip Dampier November 18, 2014 Cable One, Competition, Consumer News, Rural Broadband Comments Off on Cable One Spinning Away From Graham Family In Likely Move Towards Eventual Sale

cableoneCable One’s history as a former part of the Washington Post and its publishers — the Graham family — will come to an end next year as it is spun off to shareholders, positioned for a quick sale as the march towards consolidation of the cable industry continues.

The board of directors of Graham Holdings authorized company management to spin-off the cable company in a tax-free transaction. Many industry analysts believe that is a prelude to maximizing shareholder value by selling the cable operator to a larger cable operator, most likely Charter Communications.

Cable One serves just under 500,000 customers in rural markets in 19 states. The company struggled in 2014 with high-profile battles over programming costs, notably with Viacom, that has led to channel blackouts running nearly seven months. Cable One’s small footprint has put the cable company at a disadvantage, unable to qualify for deep volume discounts for cable programming. Frequent competitor AT&T U-verse has taken a toll on the cable company’s video subscribers, down 15% since the fall of 2013. Cable One spent much of 2014 investing in network upgrades, particularly to improve its newly prioritized broadband service.

The news boosted shares of Graham Holdings stock, increasing in value as much as 12% to $886.05 per share late last week. Shareholders are positioned to benefit the most from a sale of the company, which could fetch as much as $2.5 billion in a sale. The most likely buyer is Charter Communications, which serves similar-sized communities in the central and southern United States and is ready to grow larger with acquisitions of smaller companies like Cable One.

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