Allegiance Communications has about 70,000 basic subscribers. But it aspires to become a lot bigger. Understand that to Allegiance "bigger" means having 150,000 to 200,000 subs, CEO Bill Haggarty says. His largest system serves 11,000 customers in Shawnee, Okla. The typical profile of an Allegiance system is one where 1,000 households are passed and half take basic.

Haggarty and his operation hit the 70,000-subscriber plateau quickly and in relative obscurity. Allegiance launched in early 2004 as a unit of The Wicks Group, one of New York’s most media-inclined private equity firms. It quietly acquired small systems in Arkansas, Kansas, Missouri, Oklahoma and Texas.

A departure from this pattern came last September, when Allegiance acquired 29,000 subscribers from Charter Communications, all in states where Allegiance did business already. There was even a press release issued.

While Haggarty anticipates deploying triple-play bundles this year for $99 and pushing Allegiance’s subscriber growth, he freely admits that only 70% of his sub base will get the triple play. Allegiance launched telephone in two systems in November and by mid-December had 100 customers. Among his biggest challenges is handling demand for services in the many tiny systems (200 to 500 subs) he oversees. An edited transcript follows:

What’s your company’s top priority this year?

Bill Haggarty: Continue deployment of technology into our systems, consolidate our head-ends and introduce new services to our customers across the board.

Which services?

BH: It varies. I’ve got systems just getting digital at the start of 2007. Systems with digital already will get high-speed Internet access and telephony in 2007. In between, we’ll get HD and DVRs across our entire base. About 70% of our customer base can get digital and high-speed, and there we have 15,000 digital customers and about 15,000 high-speed customers.

It is fair to say you want most or all of your systems to offer the triple-play by year’s end?

BH: I’d love to say all of our systems, but it won’t happen. Yet across 70% of our sub base, we’ll get triple play deployed in 2007. That will cover about 55% of our head-ends. In the remaining head-ends, the biggest challenge is finding a good technology solution for the systems serving 500 customers or fewer. We’ve got a few systems covering 200 customers.

Are there special challenges handling many small systems?

BH: The hardest thing is finding the right kind of technology to deploy into those markets. But the technology divide is rapidly disappearing. The customer in rural, Midwest America is just as exposed to new technologies as any customer elsewhere. That customer has expectations this year, with all the local stores selling HD sets. Customers hear about HD and our competitors are offering HD and advanced services. We need to find a way to bring those services to those markets, too.

Do you expect new basic customers when telephony is launched in more places, similar to what’s happening with the big MSOs?

BH: Yes. For us, the results are phenomenal. In places where we have a triple-play package, for every phone unit we add, we add another revenue-generating unit, whether it’s basic, digital or high-speed. It’s a perfect situation. We’re seeing customers who want great value come back to us.

What about your strategy long-term for bandwidth?

BH: I’m grateful every day that the technology leaders out there, like Comcast, Cox, Time Warner and CableLabs, are developing solutions. A company our size doesn’t have the resources to lead on this front. What we must do is learn everything we can from our brethren in the business. We also must ask as we invest in cable plant, are we doing so in a manner that leaves that plant capable of providing the next round of services?

So what can you do today?

BH: I can’t upgrade a cable system today to what it takes to operate the cable system in New York City. But I can take it to a level that allows me to put everything I need today, and leaves me some upside in the bandwidth. That upside buys me time for the next evolution of cable. We’ve got to get through our current integration of systems, so we’re about six months away from looking at what the next steps are for us.

What have you done with the 29,000 Charter subs you picked up in September? Have you upgraded, added services or introduced your corporate culture?

BH: We’ve been having a ton of fun. This is a case where the systems were secondary to Charter, not in its long-term strategic plan. All of a sudden, to us, they become incredibly important. We’re with them every day; we spend a lot of time, so the integration process has become very enjoyable. You have people anxious to get back into business and deploy new technologies. We brought in HD and DVR services almost instantly, with telephone coming soon. The employees are excited; the communities are excited to see what we’re doing.

Charter ran excellent cable systems, and had in most of these places upgraded the plant to 450 MHz and up. These systems operate wonderfully, so the focus is now on utilizing that bandwidth and consolidating operations to pick up more efficiency.

Verizon’s FiOS TV and AT&T’s U-verse are in Texas. Is competition breathing down your neck?

BH: That level of competition is not our primary concern yet. In most of our markets, the competition continues to be the satellite providers. The size of many of these places isn’t going to be highly targeted by who you mentioned. At the same time, that’s why we’re looking very hard to find the right technology to deploy in these markets, in a cost-effective way. When Verizon and AT&T do get there, if they do, we’re much better prepared to offer our customers the products that they want.

Why focus on systems in the Midwest?

BH: Our chief focus is a number of these communities. We believe we can consolidate them, purchase them at the right price and bring in the right technology to become an important, critical telecommunications provider. These are the communities that really need our services. They need competitive telephone service, for example. As we find ways to bring those triple-play options in, we do a great service in those communities.

What about VOD and ITV?

BH: Not yet. We’re still on the edge of [VOD] being a product a company our size can afford to deploy. The cost is changing on that, and [we] hope to offer VOD in 2008.

Any plans to enter the business service marketplace?

BH: That’s a very specialized space. Services catering to medium- and large-size businesses require a skill set we don’t have in our organization. It’s a revenue opportunity for the long-term, especially when telephone happens and we grow the size of our core business.

Are there HR challenges specific to running small systems?

BH: We are a small business and we face challenges any other small business in the U.S., regardless of industry, faces. Health care costs are just terrible and continue to get worse. And yet we want to provide excellent benefits to our employees. Other costs covering insurance and workers’ compensation are incredibly high. It’s also tough to find qualified job applicants. Operating in small towns, there’s not a pool of qualified cable TV people or broadband technicians ready to jump in. That means we spend more time recruiting, more time developing our employees and coaching their skills.

Allegiance Communications by the Numbers

HEADQUARTERS: SHAWNEE, OKLA.

CABLE SYSTEMS: 142

EMPLOYEES: 165

HOMES PASSED: 195,000

MILES OF PLANT: 4,050

BASIC SUBSCRIBERS: 70,500

BASIC PENETRATION: 36%

DIGITAL SUBSCRIBERS: 19,000

DIGITAL PENETRATION: 29%

HIGH-SPEED ACCESS SUBSCRIBERS: 14,000

HIGH-SPEED ACCESS PENETRATION: 10%

DIGITAL PHONE SUBSCRIBERS: 190 (LAUNCHED 12/20/06)

HDTV CUSTOMERS: 150

SOURCE: ALLEGIANCE COMMUNICATIONS

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