Cox Shifts Cable Mix In Battle Vs. Satellite
Friday December 6, 10:44 am ET
By Reinhardt Krause
Investor's Business Daily
Compared with other cable TV firms, Cox Communications Inc. (NYSE:COX - News) avoided the spotlight in 2002.
It didn't take part in a megamerger like Comcast Corp. and AT&T Broadband. Nor was Cox involved in an accounting scandal like Adelphia Communications. Questions over growing debt didn't dog Cox, unlike Charter Communications.
The fourth largest cable TV firm with 6.3 million customers, Cox quietly took care of business. Its revenue from cable modem, telephony and video services rose 15% the first nine months of 2002 vs. the year-earlier period to $3.27 billion.
Bundling new services is helping Cox compete with direct broadcast satellite, or DBS, rivals DirecTV and EchoStar Corp.
Jimmy Hayes, Cox's chief financial officer, talked about competition in a recent interview with IBD.
IBD: One issue in the industry has been basic subscriber growth, or lack thereof. How is Cox doing relative to other cable TV firms?
Hayes: One of the key differentiators about Cox's growth vs. the rest of the industry is how well we fare against DBS competition.
Over the last seven-eight years we've made a point of our commitment to customer service, to brand, and more recently to bundling products.
Those things reduce churn - result in fewer customers leaving us to go to competitors.
Cox's DBS penetration (homes getting satellite services where cable systems are available) is 9.7% vs. an industry average of 18%.
IBD: What factors will determine DBS or cable market share?
Hayes: You need to think about it in terms of building blocks.
Foremost, a cable system has to be upgraded. Second, you need quality customer service.
When it comes to pricing, DBS throughout most of this year has made aggressive offers. That's because they're in a state of change themselves as an industry. By and large, when you look at everything apples to apples there's not a big difference in pricing in DBS vs. the cable package.
I think the technology pendulum is swinging back in our favor. They've (DBS) been ahead of us in personal video recording capability. But we'll have that as an industry during the next year.
Then there's video on demand, which we're starting to ramp up as well as telephony.
We offer a lot of localism, such as (sports programming) in San Diego, that DBS can't touch. The reality is that we have a more compelling package in total.
IBD: Many analysts say cable TV firms need to do a better job marketing digital services, which offer more channels and pay per view. How is Cox doing?
Hayes: We're marketing digital exactly the way we want to offer it. Cox took a less aggressive posture throughout the second and third quarters this year.
A digital set-top box costs (Cox) about $230. The average home that gets digital service has 1.3 boxes. So you end up with $300 to $400 of capital tied up in a digital home. The incremental revenue is $16 to $18 (monthly). So it's a long-term return on the investment in the technology.
So we decided to be more aggressive in high-speed Internet and in telephony, because the return on capital was higher than for a digital box.
We have digital available to 9.5 million homes. If someone already takes analog video from us, we mostly don't try to market them into a digital product.
But if it's a high-end video consumer, with a lot of premium channels or pay per view, they're a perfect target for digital (conversion).
Some cable TV firms are going in the other direction. They're pushing digital in somewhat of a defensive posture against DBS.
In our case, we have a robust bundle of products, so we can choose to be a little more tactical in what we do. We want to be focused on where we deploy the digital box.
IBD: What about video on demand, which some cable executives claimed would remake the TV business?
Hayes: Digital will become more interesting with VOD, or entertainment on demand as we (Cox) call it, as well as with personal video recording. There will be more revenue streams out of a digital box.
As an industry, we've been spending 2002 getting some technical integration done with respect to VOD. Secondly, we're trying to decide on the right mix of products. It's clearly not just movies.
That's why we call it entertainment on demand. It may be a combination of movies, subscription video on demand - kind of the best of cable - and other content.
I don't think the prices for VOD are too high ($4 per movie). It's a product of convenience. But I wouldn't say VOD is going to be the industry's next high-speed Internet (type product). It's an important add-on product.
IBD: The cable industry's market value swooned in 2002. What could restore investor enthusiasm?
Hayes: There's a dichotomy within the industry right now. There are cable systems doing pretty well and cable systems that are struggling a bit. There's a delineation in investors' minds between companies they need to worry a lot about vs. those they don't.
I don't think we should anticipate the industry itself all rising to the same performance.
Those days are behind us. It's not a homogenous industry in performance, and therefore stock price.
IBD: How is Cox's balance sheet shaping up heading into next year?
Hayes: Our capital spending will be about $1.6 billion. That's down from around $2 billion in 2002. We will be free cash flow positive for all of next year. That doesn't mean we won't be a net borrower in an early quarter.
But for all of next year we'll be a net reducer of debt. That's pretty important |
