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A small dip, but a huge hit

Why was Jim Robbins startled at the punishment investors are meting out to Cox Communications? Robbins has emerged to replace John Malone as the high priest of cable, the one to whom investors, suppliers and regulators look to strengthen their belief in cable's future.

But Cox Chairman Robbins broke the faith by missing the numbers he had pledged, and the repercussions could last for many months.

Robbins is still living out the pain from Cox's most recent earnings day, when the disclosed financial results for the second quarter were a little shy of expectations. The market hammered Cox's stock far in excess of the relatively small cash-flow shortfall, drawing other major MSO stocks into the downdraft. At the time, Robbins lamented that "$3 million [caused] a $3 billion decline in the market value of the company." Actually, by the end of that day, the drop was more like $5 billion.

No surprise here. We're not talking about a steep slowdown in growth, just a couple of percentage points. We're not even talking about actual declines in year-to-year cash flow like the ones AT & T Broadband has been posting. But the way Cox has been positioning itself for the past two years makes stiff penalties inevitable.

Cox had for months been swearing that it would post strong cash-flow growth for 2000, 11%-13%. The mediocre first quarter meant that the wave of new digital and Internet products would have to put Cox on a strong growth track for the rest of the year to make the goal. Now the company is guiding investors toward the lower end of the range.

So much of the promise of cable is just that, the promise. Investors are riveted on deployment schedules, asking how many digital subscribers were signed up this month? Did the connect rate of Internet subs in the second quarter exceed that of the first quarter? They're terrified at the threat from competition, not just DBS but wired overbuilders that are springing up. So they don't like even small surprises.

Although Comcast President Brian Roberts would like people to look more toward his company for leadership, Atlanta-based Cox had won out. Robbins was so worried about losing his place at the industry table as other MSOs gobbled up others that he went on a $7 billion shopping spree, paying up to $5,400 per sub to increase his base by 50%, to 6 million customers, ensuring that Cox wouldn't be too much smaller than Time Warner or Comcast.

Cox has convincingly preached that quality would win the day: quality systems, quality customer service and quality management. Its most impressive move was to push hard on delivering not just digital cable and high-speed Internet but also telephone service.

Cox could do this in large part because it was ahead of the cable pack in upgrading its systems and fine-tuning its customer-service operations, investing long before it became fashionable among other operators.

"There's nothing worse than overpromising and underdelivering," said a senior executive with one MSO that watched its stock get crunched despite its own strong performance during the quarter. "We can't control what Jim Robbins does or what Brian Roberts does; we just have to do our own thing."

Here are some problems. Part of the shortfall came from problems in the 600,000-subscriber Phoenix system where US West, now part of Qwest, has been using digital phone technology, VDSL, to offer not just high-speed data but full-blown cable service. The rival was tough, offering three months free service to new customers and targeting the 60% of the market where Cox had not rebuilt and, hence, doesn't have an attractive package of networks to offer.

Yow! Phoenix is Cox's largest market, a huge cluster in one of the hottest growth areas, and was acquired more than five years ago along with Times Mirror Cable. But it's only 60% rebuilt?

Here's another fun one. Cox had a huge meeting for investors and analysts in San Diego, its second-largest system, June 1, a month before the end of what would be a weak quarter. Robbins and other Cox executives gave no hint of a problem. "Either they didn't know what was going on in Phoenix, or they didn't tell us two months into the quarter," said Bear Stearns & Co. media analyst Ray Katz. "I think it was that they didn't know. Any way you cut it, it's going to whack your stock price."