The Quiet Man

Cable World,  April 28, 2003  

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Byline: K. C. NEEL

When was the last time a cable operator announced it wasn't taking a yearly rate increase? Or that it was giving away digital service free to customers for a year? How about capping analog services at 40? Or get this: holding off delivering video-on-demand services until a better economic model presents itself.

Cable One has done all these things. And parent Washington Post Co. wouldn't have it any other way.

"We're very proud of [Cable One CEO] Tom Might and his team," says Don Graham, Washington Post Co.'s CEO. "Tom has thought out very carefully what it takes for Cable One to be successful. We are different in that we chose early on to focus on small markets. And you can't adopt the same philosophies as the company that serves New York City."

Its nearly 720,000 basic customers make Cable One the nation's ninth-largest MSO. It may have lost 34,700 basic customers last year, but cash flow was up an impressive 25%. Last week the company reported first-quarter 2003 results, and cash flow was up another 19%.

Phoenix-based Cable One was nearly the last MSO to introduce digital and high-speed data services. But it made up for its turtle-like start by reaching a digital penetration of 32% in just one year's time. HSD services, which provide the company with its best margins, are growing at a rate of 10% a year.

Might admits to rarely following the pack. "We can do that by choice because of the markets we're in," he explains. "We consciously chose to stay out of urban markets. The smaller markets are less demanding, and that gives us time to perfect a technology or business model before we launch a new product."

Six years ago, Might, 52, surprised a lot of people when he standardized Cable One's channel lineups in virtually every market. He also capped the number of analog channels in the MSO's basic package to leave room for a more robust digital tier. Never mind that digital service wasn't available anywhere at the time - or that Cable One wouldn't launch it for four more years.

The idea was controversial at a time when more channels were preferred over less. Most cable operators were packing their analog tiers with as much content as they could get their hands on, or that their bandwidth allowed. Cable One's corporate team picked 35 standardized channels; local system managers picked the other five according to local tastes.

But that wasn't the only time Cable One would swim upstream like a salmon in a river of trout. The company decided not to raise rates for its basic service this year. Although it could take a hit in cash flow and revenue as a result (programming costs are rising 15% this year, which amounts to about $17 a subscriber or $12 million), Might believes it was the right thing to do.

"We decided to do this in January after everyone's budgets had been set," he says. "But what with the war and the economy, we just didn't think raising rates would be a good thing to do. We think we can make up the revenue with new customers and additional service subscriptions."

The news was a surprise not only to observers, but to consumers as well. Subscribers were told of the company's decision to keep rates in check in a quarterly newsletter. Some didn't believe it and called their local system to make sure they'd read it right. The announcement also generated quite a bit of local news coverage in all 54 of its markets in 19 states. It made the front page of the West Side Journal section of the Albuquerque Journal.

Still, Might isn't happy with the state of programming fees. "What happened with YES in New York will happen in other places with other networks," he says. "We certainly don't want regulators in our business. But the sports programming model is broken. And if things don't change, we may see the government weigh in on its own."

Although Cable One was late to the digital video party (only Cablevision launched digital services later), its penetration rate skyrocketed when it offered its digital tier free to customers for a year, reaching 32% by the end of 2001. The free period has been over for more than a year now, and digital penetration still stands at about 30%.

The exercise cost Cable One $70 million in 2001. But costs are being recouped now that customers are paying for the service, Might says. As of March 31, Cable One served 210,500 digital customers. Might figures digital service will grow only moderately over the next few years, especially since the company isn't yet offering uber-sexy products such as VOD.

"Offering digital free for a year was a gamble," says VP of marketing Jerry McKenna. "But our systems were good at explaining the advantages of the product. We wanted to get digital out to as many customers as possible, and it worked. And not a lot of customers disconnected when the offer was over."

Cable One is trying to come up with a business model that makes economic sense before it offers VOD. So far, that model has eluded Might and his team.