For Mediacom Communications chairman and CEO Rocco Commisso, the cable industry has been so much like the game of soccer that the onetime Olympic hopeful once excelled at: The good ones are fast on their feet, but the great ones can see down the field.
Commisso’s talent for seeing things others don’t has permeated his business life. He bought his first cable system — a small property in Ridgecrest, Calif. — on March 12, 1996, just as others were jumping out. He was an early critic of rising programming costs, sports rights and retransmission-consent fees. And he’s relied on a strong financial prowess to ground the risks he’s taken to build the company from scratch.
Today, Mediacom is the eighth-largest cable operator, serving 855,000 video subscribers.
Commisso’s story is right out of a movie: a tale of a young immigrant, brought here by his family from Calabria, Italy, at the tender age of 12, who one day takes the business world by storm. Commisso credits his father with seeing something in his son.
He recounted a story about his second day in the U.S., in 1962, when his father took him to school and told the teachers about his smart son, who was then promoted on the spot from fifth grade to seventh without knowing a word of English. Three months later, he was promoted to the eighth grade.
“Three years in three months. That was the biggest break of my life,” Commisso said in a recent interview.
Commisso went on to graduate from Mount Saint Michael Academy in the Bronx, N.Y., and then Columbia University with a bachelor’s degree in industrial engineering and an MBA. He joined the cable business first through banking — at Chase Manhattan Bank and later Royal Bank of Canada — lending to the-still nascent industry. In 1986, he was named chief financial officer of CableVision Industries and for almost a decade, he helped founder and CEO Alan Gerry grow that company into one of the top 10 operators in the business.
Commisso left CVI in 1995, the year Gerry sold the operation to Time Warner Inc., to start Mediacom. By March of the next year, Commisso had purchased the Ridgecrest system.
It was a risky move. The passage of the Cable Act of 1992 meant that real rate regulation was being implemented on the industry for the first time, forcing many cable entrepreneurs to sell out. For Commisso, it was the absolute right time to buy.
“He’s one of the last of the true entrepreneurs,” Moffett Nathanson principal and senior analyst Craig Moffett, a longtime Commisso watcher, said. “He’s left a really remarkable legacy. And like every good entrepreneur, he did it the hard way, by betting on cable at exactly the time when everyone else was nervous.”
Mediacom went on an acquisitions tear soon after, buying Cablevision Systems’s US Cable operations with 265,000 customers in 1997 and doubling in size with the purchase of 358,000 customers from Triax Midwest Associates and Zylstra Communications in 1999 for $760 million.
Mediacom doubled in size again in 2001 with its biggest buy of them all, the $2.1 billion deal to acquire 840,000 subscribers in Georgia, Illinois, Iowa and Missouri from AT&T Broadband. The deal made Commisso the defacto king of Iowa cable — about 500,000 of those subscribers were based in the state — with systems in Des Moines, Cedar Rapids and Waterloo, among other localities.
While Commisso could have continued to ride the acquisitions wave toward greater scale, he instead focused on repaying debt, taking Mediacom’s leverage ratio down from 8.9 times cash _ ow at the time of the AT&T deal to about 4.3 times today.
Mediacom went public in 2000, raising about $380 million, and went private in 2011 in a series of deals that have helped Commisso and Mediacom create more wealth than practically anyone else in the cable business.
Commisso and Mediacom achieved that by focusing on fundamentals. Mediacom has grown revenue every quarter and every year since its inception, and has grown cash _ ow every year except one, 2005, when it declined 1% in the wake of three hurricanes — Dennis, Ivan and Katrina — that devastated the cable company’s southern markets.
“The recipe for getting rich in any business has been the same as the days of Ancient Greece — buy low and sell high,” Moffett said. “Rocco has demonstrated a remarkable ability to focus on the true value of the business.”
Commisso and Mediacom senior vice president of government and public relations Thomas Larsen met with Multichannel News, B&C and Next TV editorial director Mark Robichaux and Multichannel News senior finance editor Mike Farrell at the aptly named Rocco’s Steakhouse in New York earlier this month to talk about Mediacom’s past, present and future and the state of the cable business. Here are edited highlights of that conversation.
MCN:It’s hard to believe it’s been 20 years.
Rocco Commisso: I was supposed to get out in five, seven years. Remember those days? I think the reason why we’re still around is my penchant for retaining control and always raising capital. I’m never going to permit anyone to decide when I should stay in and when I should get out.
MCN:What’s been your secret to the business?
RC: There is an acquisition strategy, there is an operating strategy and there is a financing strategy. And I think it’s absolutely critical to the way that I look at the world.
We bought extremely well. When [others] were going out and buying [systems] at $4,300 per subscriber, my biggest deals were the US Cable assets that I bought from Cablevision [Systems] at $1,100 per subscriber. Before that we had the lower Delaware system that we bought from Tele-Communications Inc. at $1,400 per sub, in terms of critical assets that we bought.
Then, right at the end of 1999, we made the Triax acquisition. I bought those assets at $2,100 per sub. Comcast was paying $5,000 per sub. And then the AT&T acquisition; while everybody was circling around I end up with the prize. We paid $2,700 per sub for the AT&T acquisition, which was higher than what I paid on anything else, but the market was trading cable assets at way, way higher.
So those are the three big [ones] on the acquisition front. The three or four major fundamental deals that took us to where we are. On the operating front, it’s amazing that our margins have been so consistent in the last five years.
MCN:How has Mediacom survived while most other smaller companies have sold out?
RC: Control in terms of longevity is one part of it. We have never had a year of no revenue growth. We had one year of a 1% decline in cash flow, the result of three hurricanes down south between 2004-2005.
MCN:You’ve borrowed quite a bit. Did being leveraged that much make you nervous?
RC: Yeah, it made me nervous. When we were doing the AT&T deal, AT&T forced me in four months to go out and raise $2.4 billion.
Look, it’s all relative. Some people that have $100,000 in debt are probably more nervous than me with $3 billion. But what reduced the nervousness, if you will, it all has to do with the financing side of the equation. Always, always — not today, not yesterday, but always — I overfinanced myself and put myself in a situation where I didn’t have to do the next deal to survive.
MCN:The mantra throughout the industry has been scale, scale, scale. Why haven’t you gone out and bought more cable systems?
RC: Because I didn’t have to. I did not ever say that I wanted to be the biggest guy in town. Never did, never will.
No. 2, we made a decision, and rightly so, that when my stock was trading at $5 to $7 [per share], beginning in 2002, we began buying the stock. We bought 24 million shares in the open markets from 2002 to 2008. In the same week that Lehman Bros. goes bankrupt, I commit to help [Morris Communications chief William Morris] and buy his 28 million shares.
[Commisso explained that left 68 million shares of Mediacom outstanding, of which he owned 28 million. The other 41 million was purchased in the going-private transaction in 2011 at a multiple of seven times cash flow.]
I could have quadrupled the size of the company and still not generated the kind of equity returns I generated in the last five years.
Thomas Larsen: There were deals that came to the market and he looked at them and they just didn’t make sense.
MCN:Because they were too expensive?
RC: Or the risk that I was willing to assume was not commensurate with the returns that I saw in the deal.
MCN:Let’s switch gears. How is the business today — voice, video, data? How are you doing?
RC: Video stinks still for us. But I can’t give up on video. The good part about what’s happened to us indirectly is that by having had all these losses, we are a more diversified company and we’re a better company in certain respects. Because video is only 50% of my business today, where it was 95% 15 years ago.
MCN:And that’s true of a lot of small operators.
MCN:So why be in video?
RC: You can’t let it go. It’s 50% of my revenue. I can’t get rid of 50% of my revenue and have the same company that I have. Unfortunately the government has forced me to charge prices on video that I would have never had, if it wasn’t for programming costs going up from $4.50 [per subscriber] back in 1992 to $50 [per subscriber] today. I would’ve never done that. We don’t do rate increases anymore; we just do pass-throughs. So I have to stay in business, I have to get a return on my investment and prices do go up for the consumer, which is unfortunate, and the government could have fixed that.
MCN:Are you losing subs?
RC: Yeah. We lost subs last year, we lost more subs the year before, and more subs the year before. I think there’s a little bit of a turnaround. We may be losing, but not where we used to lose.
MCN:What about data?
RC: If it wasn’t for data, we wouldn’t be around.
MCN:But the margins are so good on the broadband product.
RC: Well, let’s be careful how you describe margins. The margins are very good, but what is missing in the equation is the cost on the capex front that we spend in order to keep those margins.
MCN:And what is that?
RC: Well, it’s huge. I mean we spent $287 million last year.
Our price for our 50 [Mbps] service is the same today as our 1.5 [Mbps] service was 15 years ago. And why is that? Because we grow in units, we have great margins and we don’t have something called programming costs that causes the price of the other product to go up as much as it has.
On the broadband side I was able to retain the same price that I have for the 1.5 [Mbps] service from 15 years ago, even though the speed has gone up by 30 times.
MCN:Who is your biggest competitor in the market? The telcos, satellite?
RC: For video, for sure, it’s satellite. Then there is AT&T, a little bit of Verizon [Communications], municipal overbuilds and WOW [WideOpenWest].
TL: Then there is CenturyLink, Windstream, a little bit of Frontier [Communications].
MCN:What is the competitive outlook for Mediacom, particularly against the telcos?
TL: I think we’re winning. We’re definitely winning broadband share back.
RC: Look, the happiest result and surprise in many respects of our company performance is all related to the worst performance of our company, meaning on the video side. Just think about it. I lost 45% of our video customers in the last 15 years and I never had a down year of revenue; and, except for that hurricane season, I only had one year of down cash flow. That’s a pretty strong statement for anyone to be able to make.
MCN:Are you growing business customers?
RC: Big time. Like everybody else.
MCN:What keeps you up at night? What worries you most in the industry right now?
RC: The government.
MCN:You’ve had a particularly loud voice when it comes to speaking up for independent, smaller cable operators. What are the two or three biggest issues right now that concern you most about the government?
RC: First of all, you’ve got retrans, sports rights, volume discounts, bundling, unbundling that I’ve been speaking about for the last 13 years. You want to call me the loudest voice in the business? I’d be proud to be called that. It’s fact. I have fought my battles.
And I suffered a lot, but you would have thought that if the government aspires to be what they think they are for the people, they would have done something about it.
MCN:What do you want them to do?
RC: Back in 1992, they regulated our business, but they didn’t regulate the supplier side. And I wrote a big paper then that basically said, in a nutshell, [that] in a capital-intensive business … if you have to spend the same money to have the same wire but the demand or the potential subscriber base is reduced by half, at the end of the day it’s going to cost you more as opposed to less. Boy, have I been right.
What I forecasted then actually happened in the last 20 years in that, if you want to regulate us, you’ve got to regulate the cost. So why don’t you deal with the programming side? And the reason why they don’t deal with the programming side is because frankly there are too many interests with enough power in Washington to take care of their interests. It’s the sports leagues, it’s the universities, its Hollywood and that’s it.
MCN:What about ESPN?
RC: We took them on and we lost. Now they’re suffering the consequences.
MCN:Because you were saying publicly that ESPN was going to price themselves out of the business.
MCN:Do you think the market is taking care of this now?
RC: No. I think $50 a month for programming costs, that’s average. Some are more and some are less. Me and you, we don’t watch everything. Why should we be forced to buy the whole package? I don’t know how it’s going to get fixed but it’s $50 today, it’s going to be $55 tomorrow, it’s going to be $60.
MCN:Are you offering skinny bundles?
RC: Not yet. We want to but we have to deal with the contracts that we have on hand.
MCN:How will programmers handle skinny bundles?
RC: I don’t know. But I think Verizon has broken the ice. I think [Dish Network’s over-the-top subscription service] Sling [TV] has broken the ice.
MCN:So you think distributors will say no, that it will be a market resolution, not a government resolution to this?
RC: Unfortunately, yes. Just like retrans. We’re probably going to get better.
TL: I think they will be slightly improved. I was at the FCC on Tuesday [March 1] and my impression is they want to do some fixes at the surface, but they don’t want to get to the fundamental issue, which is how do we strike better deals, how do we get more reasonable deals done? They want to fi x things like online blocking and maybe ceding negotiation rights to other parties and things like that but those don’t fundamentally get you to getting deals done [at] a market rate.
MCN:What are you looking for from the government?
TL: One of the things we’ve proposed is a cooling-off period where you get to an impasse, like in a labor negotiation. Both parties say you can’t get any further … Then, they have to go to mediation and an objective third party takes a look at both sides’ offers and says, “Hey, either one of you is being unreasonable or you’re both being reasonable and you’re just being stubborn, whatever it is.” But then that report gets published and the public can figure out who the good guy and the bad guy is.
RC: For programmers, unless you have differentiated programming, better programming and so on, you can’t put a rate increase in excess of X. Two, unbundle everything. Have a price for ESPN, and so on.
Three, no volume discounts. Why should my customers and I pay more than the customers of Comcast? Four –
TL: Well, in that one, no cost-based volume discounts. The littlest guys pay a huge premium to get the same signal.
RC: If somebody wants to shut me down in Des Moines, a CBS station, I should be able to import that CBS station.
TL: A couple of other ideas we’ve kicked around are, one, an expiration date so that every contract has to expire on the same date, so that you can’t play the market against each other. You can’t do the, “I’m going to black out Dish on Tuesday, Mediacom on Wednesday, DirecTV on Thursday,” to jack up the price. That we think would help tremendously.
The other [is] setting a market rate — just have one rate for the market. If you elect retrans, you wanted $1, you wanted $10, you elect that rate — it’s for everybody in the market. And they get to decide whether to pay that.
MCN:What else upsets you?
MCN:The FCC’s recent decision to open up the box to third-party vendors?
TL: Google hasn’t really grown their video business. So this to me is a backdoor way into the video business, right? Google gets those streams, they can take those streams, they can overlay their ads, they can spy on our customers, know what they are watching. Those ads become significantly more valuable because you know what the person cares about. So those are all things we’ve paid for.
MCN:Why are you and others so concerned about this current set-top box proposal?
TL: We’re getting ready to announce a major capital plan for the next three years. Rocco has made significant strides in reducing the debt. So now we’ve got money to invest back in the business. If we have an expense, a huge expense that we can’t recoup any money for, guess where our money is going to go? It’s going to go to pay down those boxes, it’s not going to go to build a better product. And that’s what the government is missing. It’s discouraging companies from investing in broadband because they’re going to be protecting their investment.
RC: That’s No. 1, Tom. And when they think of cable, they think of Comcast, they don’t think of Rocco and all the smaller guys, am I right?
I don’t have the resources that Comcast has. They want to go and destroy or decrease the market power of Comcast, but whatever rules are applicable should not be the same rules applicable to me. I’m not Comcast, I’m not hedged with the programming assets. I only make money from being a distributor, whereas Comcast makes money from being in Hollywood and so on. We are a totally different animal. And that’s the mistake that’s been made, unfortunately.
TL: But the thing that blows up this whole set top [issue] is the Roku box. So, this little tiny Roku box is going to have a DVR functionality to it that completely replaces the set-top. So what is the government after? What are you trying to regulate the market into if that box exists today?
MCN:What about OTT. Are you going to offer an OTT product?
RC: In our markets or in the U.S.A.?
MCN:That’s a bigger question. You tell me.
RC: If a cable company tries to do that to me, I will do it to them.
MCN:Is that day coming?
RC: No, I don’t think so.
MCN:Would you ever offer an OTT product in your market?
MCN:Are you guys planning that?
RC: We’re doing some TV everywhere. I mean, that’s just a standard evolution.
TL: It’s really hard for us to be a leader in that space. You have to be a follower, because it takes the big companies to create the contract provisions that we could jump onto, you know what I’m saying? It’s hard. But you could do it.
The problem with OTT, if you talked to an engineer, is that if everything moved that way it puts a tremendous strain on the network. I mean like when they showed that football game at 10 a.m. on Yahoo!, network congestion shot up. So there is an advantage to having a linear stream that handles the video traffic.
MCN:A lot of people talk about cord-cutting. What’s your outlook for the cable industry?
RC: It could come to an end. I don’t see it. But look at your own businesses, right guys? Without wanting to pick on your business, right? Or the business that I used to lend money to. Take the newspaper industry, you know a little bit about this.
Do you know that the equity value of this company [Mediacom] is greater than the The New York Times, the Chicago Tribune, the L.A. Times?
MCN:That doesn’t surprise me.
RC: It surprises me because 30 y ears ago, I wasn’t allowed to call some of these companies because they were too good for me. Does it surprise you to let you know that The New York Times, Gannett, McClatchy, Knight Ridder, The Washington Post — all were in the cab le business?
And they decided to stay in the newspaper business and get rid of the cab le business. That’s pretty smart. How is it possible? Who was running those companies that made those decisions to get rid of the cab le business and stay in the newspaper business? H ow come they didn’t see the future?
MCN:Believe me, it’ s a question I ask myself every single day.
RC: Broadcasting. The only reason why broadcasting is still alive is because of the giveaways from the government. First the spectrum and two is retrans.
MCN:Do you have any regrets about going private?
RC: No, and I might still go public. You never know. If someone wants to give me …
RC: No, seriously. We went public at 18 times cash flow. If there’s another crazy market, come to me baby, I’ll sell you. [Laughter.]
MCN:We talked about you not being a buyer. Are you going to be a seller? What’s your plan? What’s your exit strategy?
RC: One month, one day, one year at a time.
[Commisso then starts making a series of calculations, one that estimates what would happen if he lost 25% of his cash flow in one year.]
MCN:Why are we making that assumption?
RC: I want you to think the way I think.
MCN:You’re thinking worst-case scenario.
RC: I don’t think how much money, I think about how am I going to screw this up. All right?
MCN:What would your dad say about all of this?
RC: I think my dad would say, because I know what he went through. He’s an immigrant, he was a prisoner of war for five years in Africa under the British, came to this country, got his citizenship papers, brought us all over in 1962. He would say … my father would probably say I expect that of my son.
If I have anything good to say in my entire history as to who I am and why I am who I am it’s because of the financial community. It’s not the programming community, it’s not my peers. It’s not the newspapers. It’s the financial community and my employees.
And if I had one area that I think I’m OK at, better than average, it’s finance. Finance is my area of strength.
RC: He knew something about me that I didn’t even realize. He’s the one that instilled that in me and said, “You are the one that’s got to go to school, you’re the one that could get into any school, you’re the one.” He sent money when we were poor, poor, poor, poor, poor that I don’t even want to talk about. He told my mother, “You make sure you send that kid to music school.” That’s why I play the accordion and the piano.
MCN:Do you have a number, an age or a price that you want to get out?
RC: Absolutely not.
MCN:How old are you now, Rocco?
RC: I’m 66.
MCN:Will you still be doing this at 70?
RC: Probably. I don’t know.
MCN:What do you think drives you?
RC: I think the No. 1 driver is the fact that I don’t have a second gig and — o h my God, you have to see all the analysis that I did in m y own head, on a piece of paper and a projection model to see how am I going to screw this up, how do I protect myself from screwing up? When you deal with a financing and all the loan agreements that we used to do, you have to think about all the things that could go wrong five years down the road and make sure that, if things do go wrong, you’ve got wiggle room to get out of the mess.
Never in a million years did I say I’m going be around for 20 years.
When I left Alan [Gerry] and started this company, I had an overwhelming objective to show the world that this is not the end of the cable business, even though I didn’t know at that time that the Internet was going to come around. We were talking about maybe offering phone then, but not the Internet.
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