Drahi (center) surrounded by executives.

The billionaire owner of France’s largest cable operator has acquired St. Louis-based Suddenlink in a surprise $9.1 billion deal, and it is likely only the first move for the Altice Group in the U.S. cable business. But it may not be a welcome one for customers, employees, and suppliers of America’s seventh largest cable company about to be introduced to the notorious “Drahi Method” of conducting business that French newspaper La Parisien calls “brutal.”

The acquisition of Suddenlink represents a modest first step for a company that hopes to divide its business half in Europe and half in the United States. Incorporated in Luxembourg for tax-savings purposes, most of Altice’s interests in the cable business are in France and its overseas territories. Numericable is Altice’s cable brand in Luxembourg, France, and parts of Portugal and recently acquired SFR is Altice’s fiber broadband and mobile brand in French-speaking Europe.

Moroccan-born billionaire businessman Patrick Drahi sees investing in cable as a great opportunity to build needed cash flow from America’s pervasive broadband duopoly. Altice is heavily in debt, financing a whirlwind of acquisitions including Israeli cable and mobile providers, Portugal’s largest telecom company, a mobile carrier in the Dominican Republic, in addition to SFR, France’s second largest wireless company, all mostly paid for with debt and junk bonds. That’s a long way from Drahi’s early days in cable, when he sold service door to door for his small regional Internet and cable-TV company in France’s Alsace region.

Suddenlink’s national service area

His mentor is Dr. John Malone, America’s former cable magnate, who followed a similar pattern of buying up cable companies across the United States in the 1970s and 80s to create Tele-Communications, Inc. (TCI), then America’s largest cable company (it was later sold to Comcast). Drahi shares Malone’s philosophy for cash flow-generating acquisitions: “Always start with cable.” He has plenty of opportunities in the United States, which unlike Europe is largely a cable broadband duopoly in big cities and a monopoly everywhere else. While Drahi confronts revenue erosion from European telecom price wars among phone, broadband, and television companies, he has plenty of room to raise the rates on captive customers on the other side of the Atlantic.

The average Suddenlink customer lives in a small to medium-sized city in West Virginia, Texas, Arkansas, Louisiana or Arizona. Suddenlink is well-positioned to sell its 1.5 million customers broadband service, because the alternative is usually low-speed DSL from companies like Frontier, Windstream, CenturyLink or AT&T. Drahi will sell all the services Suddenlink traditionally has, but customers can expect to pay a higher price.

Drahi has decided to focus on his high-end customers and has stopped competing to win customer volume based on price. The customers that pay the most for service also get the best customer service. If lower-end customers feel ignored and decide to leave, that is increasingly an accepted fact of life by Altice management. As a result, Numericable-SFR continues to lose mobile and market share in Francophone markets because customers have found better deals elsewhere. But the company is still keeping its best customers well-pampered and they have stayed, so far.

Life will be anything but pampered for Suddenlink employees and suppliers, who will soon be targeted for Drahi’s traditional culling of the herd and vicious cost cutting. European capitalists look in awe at “the Drahi Method,” a program of ruthless cost controls, job cuts, and threats visited on every acquired company. The French press is buzzing about Drahi’s latest acquisition in the United States, and wonder if Drahi’s slash and burn management style was better suited to America’s greed era of the 1980s and not the Obama’s ‘we are better than that’ era of the 2010s. But they know the story of how Drahi takes over is always the same.

Suppliers complain Drahi’s companies don’t pay their bills.

After each acquisition is complete, Altice flies in a small team of executives who live to slash costs. It’s what Le Echos calls “helicopter management.” Many middle and upper management at the acquired companies are terminated instantly, replaced with relocated Drahi loyalists. Salary freezes are imposed on those remaining and are indefinite. Job cuts in customer service are frequently next and are sometimes severe. In fact, the company’s relationship with its employees is so bad, the French trade union CFDT has taken several actions against Altice-owned SFR-Numericable over pay freezes and terminations they call unjust for a company collecting a profit margin of more than 25%, even during a price war.

But the worst is reserved for the suppliers that provide everything from coaxial cable to paper for the office printer.

“Suppliers are fifth wheel,” complained one French company that considered itself extorted to hand over a 40% discount just to get their past due invoices paid. One told Le Monde the best a supplier can hope for from an Altice-run company is to barely survive. Many more die than live.

Sometimes, the hardball tactics against suppliers and vendors seem to backfire on the company. Les Echos shares the embarrassing story of the major SFR-owned mobile store that had a big problem. This past January, the demonstration display where customers can sample the latest tablets and smartphones was curiously empty, except for a few employees milling around a coffee machine placed there to take up some of the empty space. Where were the phones and tablets to show off to make the sale? The distributor who supplies SFR had not been paid. No payment, no phones.

Drahi’s company even stiffed Cisco, which sent this warning note suspending shipments pending payment.

Just a few months before announcing his deal to acquire Suddenlink, a large group of French suppliers went to French authorities to seek a broad-based mediation to stop Drahi’s promises of payment in return for future discounts.

Les Echos reports Drahi spared no one from the cut.

“Cleaning companies, network equipment manufacturers, call centers, manufacturers of smartphones, TV, everybody goes,” it reported. Drahi’s managers even dared to challenge the local power company, Dalkia, threatening to cancel their energy services contract unless the company was granted an immediate 80 percent discount. Le Figaro reported the company ignored the contracts it had already signed with the energy company.

An empty bag: No phones at the SFR store.

“It’s vicious,” one supplier told Les Echo. “For them, everything can be renegotiated, even contracts already signed and running.”

An IT company also accused Drahi’s company of refusing to pay for past work unless it received a 30% discount. The firm said no and threatened to sue. It is now facing bankruptcy because its business overwhelmingly depends on Numericable and SFR.

The cuts can also seem petty.

Last December, office workers in Saint-Denis found themselves without paper for the office printers. Numericable SFR management had not bothered to pay its office suppliers and they cut the company off. This year, employees report they often have to bring their own toilet paper to work as the company has stopped stocking employee restrooms, apparently part of another cost-cutting measure.

The problem of unpaid invoices has grown so bad the cable operator is increasingly responsible for suppliers clogging the only Commercial Court in Paris with cases large and small, including those from Pace – the company that provides set-top boxes for Drahi’s cable companies, M6 – a television channel not paid for its programming, STS – a major software company, Orange – a major telecom operator, and even the workers who solicit customers to buy cable service going door to door, who say they have not been paid either. In fact, Numericable-SFR has been hauled into court with stunning regularity, losing almost every case, and forced to pay costs, including court fees and interest. The company has already been convicted 12 times for unpaid bills and in several other cases, it only agreed to settle minutes before a trial began.

Altice’s willingness to put itself deeply in debt just to make more acquisitions was enough for Moody’s to throw a caution flag in February, warning investors the company was under review for a credit downgrade.

“Today’s rating action is prompted by significant uncertainties about the funding of the envisaged €1.95 billion share repurchase program and its impact on Numericable-SFR’s liquidity, leverage and operational flexibility. Moody’s views the potential transaction as aggressive given that the company closed the large acquisition of SFR only recently and is still in the early stage of integrating the acquired asset,” the ratings agency said.

One might forgive Drahi’s desire to economize, considering his recent acquisition of SFR left Altice in debt for more than $12 billion and owing $55 million in interest payments a month. But Drahi continues his acquisitions unabated by those economic realities.

Another problem is Drahi’s crackdown on who is authorized to pay suppliers and other vendors. Under SFR’s old owner, about fifty employees were authorized to sign checks over €100,000 across all of France. Today, any check over €10,000 must be signed by at least one of just three employees. Silicon reports the crackdown became even more severe last winter.

“Since December, any investment must be approved by the investment committee,” a source told Silicon. “All projects are blocked, all expenses must be justified, even 50 Euros. It is set to ‘stop and go’.“

The inherent delays and austerity measures eventually also reach customers, according to ex-employees who say getting a replacement box or new cable strung can be a major problem when suppliers stop shipping and the company stops buying. It can also annoy customers that discover calling customer service no longer means talking to an employee in France. Drahi found call centers in Tunisia and Morocco that would do the same work for a fraction of the price.

Drahi said his Suddenlink acquisition is only the start. He has reportedly also shown an interest in acquiring Time Warner Cable, and shares of Cablevision stock were also increasing this afternoon suspecting that company could also be a target.

Suddenlink customers are unhappy with the cable company’s usage caps that go with “free speed upgrades.”

Suddenlink subscribers promised “free” speed upgrades are calling them Suddenlink’s Trojan Horse because they are accompanied by dramatically higher cable programming surcharges and usage caps.

St. Augustine, Tex. subscribers got a smaller bite in the mail than some other communities:

Effective with the March 2015 billing cycle, Suddenlink customers will experience no change to the price of telephone service and no change to the price of Basic TV service. There will also be no change to the price of Expanded Basic TV service; however, a $3.00 sports programming surcharge will be added to the bills of customers subscribing to this service to cover a portion of the skyrocketing cost of dedicated sports channels and general entertainment networks with sports programming. The broadcast station surcharge will increase $2.88 per month to cover the escalating fees charged by broadcast TV station owners. Optional tiers of digital TV channels will increase $1.25 per month per tier. High-speed Internet services will increase $3.00 per month.

Over in Chandler, Tex., fees went even higher, with one customer reporting his broadcast station surcharge now exceeded $8 a month. Another customer counting up all the extra fees added to his bill found them coming close to an extra $25 a month.

But the state that gets the worst from broadband providers remains West Virginia, where Suddenlink faces only token DSL competition from Frontier Communications. Suddenlink retention representatives dealing with customers threatening to cancel service in West Virginia are well aware customers have nowhere else to go and don’t break a sweat trying to rescue business.

“We are a business and our goal is to make a profit,” one retention representative told a Suddenlink customer dropping service in favor of DirecTV.

Customers tell Stop the Cap! they were first excited Suddenlink was dramatically boosting Internet speeds — good news for the small and medium-sized cities Suddenlink favors over larger cable operators. The bad news is Suddenlink is bringing back strict enforcement of usage caps, temporarily suspended when its usage measurement tool was proven inaccurate.

Suddenlink has been upgrading its cable systems since 2014 and has gradually rolled out new speeds. Most customers can now choose speed tiers of 50, 75, 100, or 150Mbps, but some larger systems are getting more robust upgrades:

• Current speed 15Mbps increases to 50Mbps (250GB usage cap)
• Current speed 30Mbps increases to 50Mbps (250GB usage cap)
• Current speed 50Mbps increases to 75Mbps (350GB usage cap)
• Current speed 100Mbps increases to 300Mbps (500GB usage cap)

Suddenlink’s sales website makes no reference to the company’s broadband usage caps.

Suddenlink is also enforcing usage caps again, which most customers only learn about after signing up for service. Suddenlink makes no references to usage allowances on their sales or general support pages and information is difficult to find unless a customer uses a search engine to find specific information.

Suddenlink’s explanation for its usage caps is among the most cryptic we have ever seen from an ISP:

Consistent with our Acceptable Use Policy and Residential Services Agreement, Suddenlink has applied monthly usage allowances to residential Internet accounts in most of its service areas. To determine if there is a monthly allowance associated with your account – and what that allowance is – please set up or log in to an existing online account. See the related instructions under question #8.

While existing residential customers will quickly learn their usage allowance and find a usage measurement tool on Suddenlink’s website, that is not much help to a new or prospective customer. The overlimit fee, also difficult to find, is $10 for each allotment of 50GB.

Some customers have found a way around the usage cap by signing up for Suddenlink’s business broadband service, typically 50/8Mbps for around $75 a month. Business accounts are exempt from Suddenlink’s caps.

Most of the same telecom companies that want to create Internet paid fast lanes, drag their feet on delivering 21st century broadband speeds, refuse t0 wire rural areas for broadband without government compensation, and have cut investment in broadband expansion are warning that any attempt by the FCC to enact strong Net Neutrality policies will “threaten new investment in broadband infrastructure and jeopardize the spread of broadband technology across America, holding back Internet speeds and ultimately deepening the digital divide.”

Twenty-eight CEOs of some of the same cable and phone companies that have fueled the fight for Net Neutrality protections by their actions signed a letter published on the website of the industry-funded astroturf group Broadband for America.

“An open Internet is central to how America’s broadband providers operate their networks, and the undersigned broadband providers remain fully committed to openness going forward,” says the letter. “We are equally committed to working with the Commission to find a sustainable path to a lawful regulatory framework for protecting the open Internet during the course of the rulemaking you are launching this week.”

Ironically, some of the same companies signing the letter earlier successfully sued the Federal Communications Commission to overturn Net Neutrality policies the agency attempted to enact under a lighter regulatory framework.

The industry now fears the FCC will reclassify broadband as a “telecommunications service,” which makes the service subject to oversight far less likely to successfully be overturned in the courts.

That has caused a panic in the boardrooms of some of America’s largest phone and cable companies.

“In recent days, we have witnessed a concerted publicity campaign by some advocacy groups seeking sweeping government regulation that conflates the need for an open Internet with the purported need to reclassify broadband Internet access services as Title II telecommunications services subject to common carrier regulation,” the letter says.

The companies warn that any attempt to rein in the largely unregulated broadband industry would be a major disaster for the U.S. economy and further broadband expansion:

Broadband investment is falling even without Net Neutrality.

Not only is it questionable that the Commission could defensibly reclassify broadband service under Title II, but also such an action would greatly distort the future development of, and investment in, tomorrow’s broadband networks and services. America’s economic future, as envisioned by President Obama and congressional leaders on both sides of the aisle, critically depends on continued investment and innovation in our broadband infrastructure and app economy to drive improvements in health care, education and energy. Under Title II, new service offerings, options, and features would be delayed or altogether foregone. Consumers would face less choice, and a less adaptive and responsive Internet. An era of differentiation, innovation, and experimentation would be replaced with a series of ―Government may I? requests from American entrepreneurs. That cannot be, and must not become, the U.S. Internet of tomorrow.

Net Neutrality advocates point out that even without Net Neutrality, broadband investment has fallen in the United States for several years, a point conceded by some cable operators.

In 2010, Suddenlink CEO Jerry Kent explained cable companies are now taking profits now that they don’t have to spend as much on upgrades.

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

“We should seek out a path forward together,” suggests the CEOs. “All affected stakeholders need and want certainty and an end to a decade of legal and political wrangling.”

It may prove difficult for observers to take the CEOs seriously considering the litigation record on broadband oversight and regulation. The largest cable and phone companies have repeatedly sued to overturn policies that do not meet with their full approval, something likely to happen again if these giant providers don’t get exactly what they want.

Phillip “Spending $6k per cable customer is obviously a much better deal than paying half that to build a fiber to the home network” Dampier

Math was never my strong subject, but even I can calculate the groupthink of American cable and telephone companies and their friends on Wall Street just doesn’t add up.

This week, we learned that cable companies like Bright House Networks, Suddenlink, and Charter Communications are already lining up for a chance to acquire three million cable customers Comcast intends to sell if it wins approval of its merger with Time Warner Cable. Wall Street has already predicted Comcast will fetch as much as $18 billion for those customers and pegged the value of each at approximately $6,000.

But for less than half that price any company could build a brand new fiber to the home system capable of delivering 1,000Mbps broadband and state-of-the-art phone and television service and start banking profits long before paying off the debt from buying an inferior coaxial cable system. Yet we are told time and time again that the economics of fiber to the home service simply don’t make any sense and deploying the technology is a waste of money.

Let’s review:

Google Fiber was called a boondoggle by many of its competitors. The folks at Bernstein Research, routinely friendly to the cable business model, seemed appalled at the economics of Google’s fiber project in Kansas City. Bernstein’s Carlos Kirjner and Ram Parameswaran said Google would throw $84 million into the first phase of its fiber network, connecting 149,000 homes at a cost between $500-674 per home. The Wall Street analyst firm warned investors of the costs Google would incur reaching 20 million customers nationwide — $11 billion.

“We remain skeptical that Google will find a scalable and economically feasible model to extend its build out to a large portion of the U.S., as costs would be substantial, regulatory and competitive barriers material, and in the end the effort would have limited impact on the global trajectory of the business,” Bernstein wrote to its investor clients.

So Google spending $11 billion to reach 20 million new homes is business malpractice while spending $18 billion for three million Time Warner Cable customers is confirmation of the cable industry’s robust health and valuation?

Bernstein’s firm never thought highly of Verizon FiOS either.

“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” Craig Moffett from Bernstein said back in 2008. “My problem would be whether I could earn a decent return doing it.”

Back then, Moffett estimated the average cost to Verizon per FiOS home passed was $3,897, a figure based on wiring up every neighborhood, but not getting every homeowner to buy the service. Costs for fiber have dropped dramatically since 2008. Dave Burstein from DSL Prime reported by the summer of 2012 Verizon told shareholders costs fell below $700/home passed and headed to $600. The total cost of running fiber, installing it in a customer’s home and providing equipment meant Verizon had to spend about $1,500 per customer when all was said and done.

Moffett concluded Verizon was throwing money away spending that much on improving service. He wasn’t impressed by AT&T U-verse either, which only ran fiber into the neighborhood, not to each home. Moffett predicted AT&T was spending $2,200 per home on U-verse back in 2008, although those costs have dropped dramatically as well.

Moffett

Moffett’s solution for both Verizon and AT&T? Do nothing to upgrade, because the price wasn’t worth the amount of revenue returns either company could expect in the short-term.

It was a much different story if Comcast wanted to spend $45 billion to acquire Time Warner Cable however, a deal Moffett called “transformational.”

“What we’re talking about is an industry that is becoming more capital intensive,” Todd Mitchell, an analyst at Brean Capital LLC in New York told Bloomberg News. “What happens to mature, capital-intensive companies — they consolidate. So, yes, I think the cable industry is ripe for consolidation.”

Other investors agreed.

“This is definitely a bet on a positive future for high-speed access, cable and other services in an economic recovery,” said Bill Smead, chief investment officer at Smead Capital Management, whose fund owns Comcast shares.

But Forbes’ Peter Cohan called Google’s much less investment into fiber broadband a colossal waste of money.

“Larry Page should nip this bad idea in the bud,” Cohan wrote.

Cohan warned investors should throw water on the enthusiasm for fiber before serious money got spent.

“FTTH authority, Neal Lachman, wrote in SeekingAlpha, that it would cost as much as $500 billion and could take a decade to connect all the houses and commercial buildings in the U.S. to fiber,” Cohan added.

Cohan was concerned Google’s initial investment would take much too long to be recovered, which apparently is not an issue for buyers willing to spend $18 billion for three million disaffected Time Warner Cable customers desperately seeking alternatives.

An investment for the future, not short term profits.

Municipal broadband providers have often chosen to deploy fiber to the home service because the technology offers plenty of capacity, ongoing maintenance costs are low and the networks can be upgraded at little cost indefinitely. But such broadband efforts, especially when they are owned by local government, represent a threat for cable and phone companies relying on a business model that sells less for more.

The American Legislative Exchange Council (ALEC), funded by Comcast, Time Warner, AT&T, Verizon, and other large telecom companies is at the forefront of helping friendly state legislators ban community fiber networks. Their excuse is that the fiber networks cost too much and, inexplicably, can reduce competition.

“A growing number of municipalities are […] building their own networks and offering broadband services to their citizens,” ALEC writes on its website. “ALEC disagrees with their answer due to the negative impacts it has on free markets and limited government.  In addition, such projects could erode consumer choice by making markets less attractive to competition because of the government’s expanded role as a service provider.”

The Fiber-to-the-Home Council obviously disagrees.

“Believe it or not, there are already more than a thousand telecom network operators and service providers across North America that have upgraded to fiber to the home,” says the Council. “The vast majority of these are local incumbent telephone companies that are looking to transform themselves from voice and DSL providers into 21st century broadband companies that can deliver ultra high-speed Internet and robust video services, as well as be able to deliver other high-bandwidth digital applications and services to homes and businesses in the years ahead.”

Stephenson

In fact, a good many of those efforts are undertaken by member-owned co-ops and municipally owned providers that answer to local residents, not to shareholders looking for quick returns.

The only time large companies like AT&T move towards fiber to the home service is when a competitor threatens to do it themselves. That is precisely what happened in Austin. The day Google announced it was launching fiber service in Austin, AT&T suddenly announced its intention to do the same.

“In Austin we’re deploying fiber very aggressively,” said AT&T CEO Randall Stephenson. “The cost dynamics of deploying fiber have dramatically changed. The interfaces at the homes, the wiring requirements, how you get a wiring drop to a pole, and the way you splice it has totally changed the cost dynamics of deploying fiber.”

Prior to that announcement, AT&T justified its decision not to deploy fiber all the way to the home by saying it was unnecessary and too costly. With Google headed to town, that talking point is no longer operative.

Despite claims of improved customer service and better broadband, Comcast and Time Warner Cable’s customer satisfaction scores are in near-free fall in the latest Consumer Reports National Research Center’s survey of consumers about their experiences with television and Internet services.

Although never popular with customers, both cable operators plummeted in the 2014 Consumer Reports ratings — Time Warner Cable is now only marginally above the perennial consumer disaster that is Mediacom. Comcast performs only slightly better.

In the view of Consumers Union, this provides ample evidence that two wrongs never make a right.

“Both Comcast and Time Warner Cable rank very poorly with consumers when it comes to value for the money and have earned low ratings for customer support,” said Delara Derakhshani.  “A merger combining these two huge companies would give Comcast even greater control over the cable and broadband Internet markets, leading to higher prices, fewer choices, and worse customer service for consumers.”

These ratings reflect Internet service only.

Comcast ranked 15th among 17 television service providers included in the ratings and earned particularly low marks from consumers for value for the money and customer support.  Time Warner ranked 16th overall for television service with particularly low ratings for value, reliability, and phone/online customer support.

Another ratings collapse for Comcast and Time Warner Cable

Comcast and Time Warner Cable were mediocre on overall satisfaction with Internet service.  Both companies received especially poor marks for value and low ratings for phone/online customer support.

“In an industry with a terrible track record with consumers, these two companies are among the worst when it comes to providing good value for the money,” said Derakhshani.  “The FCC and Department of Justice should stand with consumers and oppose this merger.”

For as long as Stop the Cap! has published, Mediacom has always achieved bottom of the barrel ratings, with satellite fraudband provider HughesNet — the choice of the truly desperate — scoring dead last for Internet service. We’re accustomed to seeing the usual bottom-raters like Frontier (DSL), Windstream (DSL), and FairPoint (DSL) on the south end of the list. But now both Comcast and Time Warner Cable have moved into the same seedy neighborhood of expensive and lousy service. Comcast couldn’t even beat the ratings for Verizon’s DSL service, which is now barely marketed at all. Time Warner Cable scored lower than CenturyLink’s DSL.

Breathing an ever-so-slight sigh of relief this year is Charter Communications, which used to compete with Mediacom for customer raspberries. It ‘rocketed up’ to 18th place.

If you want top-notch broadband service, you need to remember only one word: fiber. It’s the magical optical cable phone and cable companies keep claiming they have but largely don’t (except for Verizon and Cincinnati Bell, among a select few). If you have fiber to the home broadband, you are very happy again this year. If you are served by an independent cable company that threw away the book on customer abuse, you are relieved. Topping the ratings again this year among all cable operators is WOW!, which has a legendary reputation for customer service. Wave/Astound is in second place. Verizon and Frontier FiOS customers stay pleased, and even those signed up with Bright House Networks and Suddenlink report improved service.

Ratings are based on responses from 81,848 Consumer Reports readers. Once again they plainly expose Americans are not happy with their telecom options. The average cost of home communications measured by the Mintel Group is now $154 a month — $1,848 a year. That’s more expensive than the average homeowner’s clothing, furniture or electricity budget. The same issues driving the bad ratings last year are still there in 2014: shoveling TV channels at customers they don’t want or need, imposing sneaky new fees along with broad-based rate increases every year, low value for money, and customer service departments staffed by the Don’t Care Bears.