MSO Stock Performance Jan.-Nov. 2004

Charter president and CEO Carl Vogel had to be prepared for the worst when he got ready for his company’s third-quarter earnings call in November. It wasn’t just the loss of video subscribers (58,600 low-end subs churning in the quarter). And it wasn’t just Charter’s balance sheet, which showed $229 million in negative free cash flow from January through September. The problem was Charter’s track record since the departure of its former president and CEO Jerry Kent in the fall of 2001: Since then Charter has been defined by accounting irregularities, FBI investigations, crushing debt levels and a revolving door of executives, from EVP COO Maggie Bellville to CFO Michael Huseby to CFO Kent Kalkwarf. Even though Vogel had a good story to tell last month (earnings hit guidance and high-speed data subs increased by 30%), Wall Street continued to focus on the negative, culminating in Fulcrum Global Partners analyst Rich Greenfield’s incendiary report: "Mayday, Mayday: Calling Paul Allen—CHTR Needs Your Help." (Of course, some say Wall St.’s need for instant gratification is the real problem.) Greenfield’s report, in part, caused Charter’s stock, which has been dropping since Vogel took over three years ago (an 82% drop since October 2001), to decline another 13% during the month after the Nov. 4 earnings call. For the year, Charter’s share price dropped 43% in the first 11 months of 2004—more than any publicly traded MSO. While Vogel has had to take a lot of flak as Charter’s public face, the real focus of investor ire has been Charter’s main investor, Paul Allen, who is not investing money into Charter at a rate that makes anybody happy. Without Allen’s money, Vogel and his management team have to operate with debt for equity swaps amid rumors of pending asset sales…not to mention new "consultants" hired by, guess who?, every quarter looking over management’s shoulders. "There’s nothing wrong with Charter that can’t be solved by what’s right at Charter," said one programming executive, referring to Allen’s lack of financial involvement in the MSO. Going Forward The biggest non-Allen problem Vogel has to deal with concerns basic sub losses. This issue is particularly galling for Vogel since he formerly was EchoStar’s president tasked with swiping cable’s basic subs. In the past year, Vogel has seen about 160,000 of his video subs leave, most heading to DBS. Vogel maintains the situation is not as bleak as the headlines that describe it. That’s because Charter typically is losing low-paying, low-end subscribers, while gaining high-margin data subscribers at a record pace. During the past year, for example, the MSO gained 130,000 data-only additions. "The profitability of that customer on a data-only basis is considerably greater than a basic video loss," he says. "I’m not trying to rationalize the video loss because we don’t like it any more than anybody else. We’re working on ways to try and improve that." For Vogel, the most effective way to improve that is to mimic EchoStar’s strategy: Emphasize price and product. "EchoStar’s marketing message hasn’t changed since I was the president: It’s cheaper, better, faster." That means diving into promotional pricing on occasion and emphasizing VOD, digital music and on-screen guides that allow cable to compete better with DBS. "That’s what [the industry is] doing," Vogel says. "We’re managing our business to consider all the product lines that we have available. We’re managing our business to maximize topline revenue growth. That’s going to be our approach. And it has been our approach." Vogel complains that Wall Street analysts don’t appreciate that aspect of Charter’s business. He points to Charter’s sequential revenue growth from the third quarter to the second quarter, which was better than Comcast and Time Warner Cable. "We’re not that far off the mark, when you consider the diversity of our footprint and some of the capital constraints we’ve had over the past couple of years," Vogel says, pointing to the quarter’s 8% revenue growth on a 39% margin. For Sale? While Charter is not in the market for Adelphia’s assets, Vogel says the MSO is looking at selling systems and swapping others to help get better scale. Such a move will help ease debt and should jump-start the MSO’s share price. "We’re in 37 states. I’m not so sure that we need to be in 37 states for the long term," he says. "We may be better off swapping and trading and getting more critical mass in places where we’ve got scale so that we can maximize the assets we already have." Vogel plans to maximize those assets by slowly following the all-digital strategy first used in Charter’s Long Beach, Calif., system (see story, this issue). Vogel’s management team will choose the next system to go all-digital in the next several weeks, basing its decision on places where Charter has good digital penetration. Bill Goodwyn, president of affiliate sales and marketing at Discovery, credits Vogel for taking a lead in cable’s increasingly digital arena. "In spite of the challenges Carl Vogel has faced, he’s done a fantastic job developing and implementing a strategy going forward," says Goodwyn. "He has well-positioned Charter for future growth in the new digital world and the digitization of Long Beach is one example of his leadership." MSOs are studying Charter’s digital strategy in Long Beach, looking for ways to take their systems all-digital. For some of Charter’s program partners, that transition will be much easier due to Charter’s experiences in Long Beach. "Other cable companies going down this road have Charter to thank," says Lindsay Gardner, Fox Cable’s EVP, affiliate sales. "Every cable system that pursues this strategy will have an easier time now." Charter’s smaller systems will be among the last to go all-digital—that is if they aren’t sold off first. Charter has experienced problems rolling out advanced services in smaller markets that don’t have attractive economies of scale. For example, Charter still hasn’t rolled out hi-def services to 22% of its plant. Smaller systems also are near the bottom of Charter’s list in terms of rolling out VoIP services, Vogel says. "If you look at the mix of our systems, we have a fair number of systems that do extremely well, and we have a fair number of systems that are challenged because of the size and demographics of the market, and the spread-out nature of our operations," Vogel says. "In some cases, we may look to divest in some of those markets." Central Decisions, Local Actions For the most part, Charter’s main decision-makers reside in the corporate offices, in either Denver or St. Louis. Corporate generally dictates strategy and then relies on system-level execs to manage it for their local markets. With the all-digital strategy, for example, corporate developed programming, pricing and packaging strategies. Charter Long Beach execs carried them out. "We had a centralized marketing approach when we came back into the market a year ago," Vogel says. "As we went through the past four quarters, we pushed more of that activity back out to the division and the Key Market Area [KMA] leadership." Charter’s HD rollout provides good evidence of this. The technical aspect of the rollout is developed centrally and executed locally. The programming strategy is negotiated at corporate. Marketing and promotional offers mainly are done at the local levels. Under president/CEO Carl Vogel’s leadership, expect Charter to focus more on high-speed data, HDTV and PVRs rather than VOD and VoIP next year. That’s because Vogel sees a quicker return on investment for HSD, HDTV and PVRs. "We’ve determined where we’re going to spend our money based on how fast we can get a return and what impact it’s going to have on the operating side of the business," he says. —High-speed data has proved to be the most critical. "That’s certainly top of mind and has been our revenue engine all year long," he says. —HD and PVRs are considered competitive necessities. "You’ve got to be in the game," Vogel says. "We’re going as fast as we can." —VOD is rolled out to half of Charter’s digital base. But it has proved to be tougher to deliver because of added billing system and head-end integration mixed with more content acquisition. "We were out of the gate quick with video on demand, but now we’re being more rational and making sure we’ve got the right operational elements in place before we go any further," Vogel says. —Charter will continue to pursue voice over IP slowly because it requires modifications to CMTS and new billing platforms. By the end of the year, Charter expects to have 1 million of its 12 million homes enabled with VoIP. "Those kinds of things take a little more time and require a little bit more investment," he says. "We will go to the extent we can given the availability of product we have and the ability for us to execute locally." —John P. Ourand Source: CableFAX Daily data