SEC Probes Sub Counts At Two MSOs

Comcast Corp. and Cox Communications Inc. both received letters in June from the Securities and Exchange Commission asking questions about how the big cable companies count and report subscribers, the companies confirmed last Friday.

Both received the SEC correspondence about the same time last month, though spokespersons for both companies could not specify the dates and page lengths of the letter. Both companies could not say when their responses were due.

“We can confirm that we got the letter. Yes, we will respond,” said a Comcast spokeswoman who had not read the SEC letter.

About two and one-half years ago, Cox received a similar letter from the SEC, but it was apparently a random check of Fortune 500 companies, an industry source said.

Evidently, the arrival of the SEC letter didn't set off alarm bells at Comcast and Cox. One source said that the letter was quite general and actually difficult to answer due to its vagueness.

A cable-industry source claimed the SEC probe was not routine but that based on the questions asked, the agency charged with policing Wall Street did not appear to be launching some kind of fraud investigation.

Other SEC inquiries of MSOs have led to more serious charges, although there is no indication that would happen with the Comcast and Cox inquiries.

In April 2003, Charter Communications Inc. announced that it was the subject of an SEC investigation into its accounting practices, including the way it counted subscribers. That SEC investigation came almost a year after Charter said it was the subject of a federal grand jury probe into its accounting methods.

Later, after two internal reviews and a restatement of its 2000 and 2001 results, Justice indicted four former MSO executives on 14 counts of fraud and conspiracy. Among the charges: the former Charter executives counted customers who had disconnected service as current subscribers.

Although the DOJ and SEC investigations are ongoing, Charter has been praised by the SEC for cooperation and current executives and directors are not the subject of any investigation.

Perhaps the most high-profile case involved Adelphia Communications Corp. Among the myriad charges of fraud and conspiracy levied at former Adelphia chairman John Rigas; his sons, former chief financial officer Tim and former executive vice president of operations Michael; and former assistant treasurer Michael Mulcahey was that they misled investors by artificially inflating subscriber numbers.

Adelphia, currently in Chapter 11 bankruptcy, also restated financial results and subscriber figures for 1999, 2000 and 2001.

One industry source speculated that because Cox and Comcast are cable's biggest local phone players, the SEC decided to lump them in with a broader look at subscriber totals at major phone companies, including AT&T Corp., Verizon Communications, BellSouth Corp. and SBC Communications Inc.

Cox's letter was described by a source as consisting of “broadly worded” questions “asking the same thing.”

The SEC wanted to know Cox's methodology for counting cable subscribers, whether the methodology changed within the last three years and how that change was disclosed, if necessary, the source added.

Comcast is the largest U.S. cable company, with about 21.5 million basic subscribers. Cox is the fourth-largest, with about 6.4 million.

Determining who is a cable subscriber has, in some cases, been more art than science.

Cable-subscriber counts can fluctuate at the margin, because people do things like activate service in their summer homes and disconnect in the fall. Some cable companies have master agreements with apartment owners, in which the number of cable subscribers attributable to the cable company does not accord with a building's level of occupancy.

Subscriber counts can also vary with regard to group homes, military bases, hotels, motels, even jails and prisons.

In October 2002, the National Cable Telecommunications Association, in conjunction with 11 cable operators, agreed to standardized definitions of subscribers, defining customer relationships as those who receive at least one service - either voice, video or data, without regard to which services customers purchase. The NCTA also created a standard definition for revenue generating units (RGUs) as the sum total of all primary analog video, digital video, high-speed data, and telephony customers, not counting additional outlets.

Mike Farrell contributed to this report.