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Small-Town MSO Suddenlink Thinks Big

A little more than
five years ago, cable veteran
Jerry Kent marked a new
era for his fledgling cable
company, renaming it Suddenlink
shortly after closing its biggest
deal to date: the $2.6
billion purchase of about
900,000 subscribers from
Cox Communications.

The name was apt.

That May 2006 transaction
transformed Kent’s company
— up to that point named
Cebridge Connections —
into the 10th-largest MSO in
the country. In a statement
announcing the closing of
the Cox deal, Kent said the
company “felt it was appropriate
to mark the start of a
new era with a new name.”


Today, Suddenlink has, through the magic of industry consolidation,
vaulted to the No. 7 spot among the industry’s
largest MSOs while maintaining its 1.2 million-subscriber
footprint. More importantly, it has outperformed its muchlarger
brethren in key financial metrics; has launched an
ambitious $350 million three-year rebuild program that
will nearly double the number
of available HD channels
and boost high-speed
Internet speeds significantly;
and, earlier this year, it
made its latest acquisition
— 83,000-subscriber NPG
Cable for about $350 million.

Kent said that Suddenlink
is comfortable with its
current size and debt levels
— its current pro forma
leverage ratio is around 5.5
times cash flow.

“We want to maintain
our current bond ratings,”
Kent said. “If we were to
buy something, we would
look to bring in additional
equity in order to complete
that acquisition. Even
though the debt markets are
at record levels and are very
accommodating, we’re not
going to lever up just to do an acquisition.”

Instead, Suddenlink will focus on operations, which includes
upgrading its systems.

Suddenlink is in the final year of its three-year Project
Imagine, an ambitious rebuild program that includes laying
more than 8,000 miles of fiber-optic cable, increasing
HD capacity from its current 60 channels to more than 100
channels and laying the foundation for DOCSIS 3.0 highspeed
data service. Project Imagine, announced in 2009,
is expected to be completed before the end of 2012.

Operationally, Suddenlink has been in the top echelon
of cable companies nationwide, averaging annual revenue
growth of 8.8% and cash-flow growth of 11.8% a year
for the past three years. In the first quarter, revenue increased
8.2% to $446 million and cash flow rose 8.4% to
$160.1 million. Suddenlink also added about 1,300 basic
video customers in the period.

In an interview May 31, Kent said that Suddenlink has
maintained that momentum with a focus on efficient operations,
strong customer service and a keeping a keen eye
on the competition.

Suddenlink’s attention to customer service also has
helped it in J.D. Power rankings — its scores have risen
from 599 points in 2007 to 633 points in 2010, making it one
of the most improved providers in its region.

And even that region is expanding. The acquisition of
NPG added another 210,000 RGUs in Missouri, Arizona
and California to its existing 1.2 million customers in
Texas, West Virginia, Louisiana, Arkansas, North Carolina
and Oklahoma.

That footprint was carefully crafted. Kent said when he
started Cequel Communications — Suddenlink’s parent —
in 2003, it was with the express intention of staying away
from the telcos’ video competition.

“We purposely have a footprint that has less landline telco
competition,” Kent said. He added that he has had experience
with telcos interested in video offerings — as a
co-founder and former CEO of Charter Communications,
Kent and his partners were hired early on as consultants
to PacTel, the former regional Bell company that was looking
into offering video. Later, Charter was approached
by then-Southwestern Bell CEO Ed Whitacre during the
early 1990s when that company attempted to break into
video the first time.

“Even back in Charter, we saw the coming evolution
of potential telco competition,” Kent said. “We have,
over time, tended to buy into second-tier and suburban
markets that are vibrant, particularly with a significant
amount of college and university towns that provide stability,
but are less susceptible to landline telco competition.
It has served us well.”

Current telco video offerings — from Verizon Communications
and AT&T — have focused more on larger areas.
Suddenlink estimates that AT&T’s U-Verse video offering is
available in only 3.9% of its homes passed. Verizon’s FiOS
is in 0% of its footprint.


Not to say that Suddenlink doesn’t have competition —
satellite TV has a big presence in Suddenlink territory —
but the MSO has managed to fend off the threat with the
bundle. Suddenlink estimates
that about 60% of its customers
take at least two products, with
triple play penetration at about

Miller Tabak media analyst David
Joyce said that by their nature
smaller operators generally have
less telco competition than satellite
because they generally operate
in more rural areas. Cable
has been able to hold the advantage,
he said, via its two-way infrastructure.

“Satellite-delivered HSD has
been at [digital subscriber line]
speeds at best, and a voice product
still needs to come from a telco,
so the natural bundling is still
a competitive advantage for cable,”
Joyce said.

Both DirecTV and Dish Network have a strong presence
in Suddenlink markets, but Kent said the cable company
has managed to hold its own — service penetration has
held steady at about 46% for the past year. Even a resurgent
Dish Network — it recently reported its first quarter of positive customer growth after three quarters of losses
— hasn’t had much of an effect.

Even the threat of a possible broadband offering — Dish
has recently been amassing wireless spectrum — and its
recent purchase of video-rental icon Blockbuster is not expected
to change Suddenlink’s approach to the business.

Kent said that even if Dish were to offer a satellite broadband
product, it wouldn’t be much different than the telco
DSL service that they are reselling today. As far as Blockbuster,
Kent said that so far, it has had a minor effect.

“We had a deal with Blockbuster to roll out co-branded
video-on-demand service,” Kent said. “That’s been put
on hold for now.”

The numbers seem to back him up. Between 2008 and
2010, the latest figures available, Suddenlink has managed
to keep its basic customer rolls fairly steady — it
has lost about 4.5% of its basic video customers in that
period, versus 6% for the rest of its cable peers. Overall
revenue-generating units, a mixture of video, voice and
data customers, have risen more than 16% at Suddenlink
during that same period. And with the network upgrade,
Kent sees even more room for growth.

“We hear people in the industry ask, what is the next big
wow product?” Kent asked. “I think it’s simple. We have
half the homes in
our footprint that
we pass with our
plant where we
have no customer
relationship. We’re
very happy to sell
phone and Internet
service to a home
that may be stuck in
a satellite contract.”

Suddenlink is not
the only cable company
to embrace
non-video customers
— Charter Communicat
ions has
been a big booster
of the practice. The
idea is that is that by
selling phone and/or data service to those homes, the cable
company gets a foot in the door and a possible avenue
to upsell video service to subscribers once their satellite
contract expires.

In the meantime, the cable operator gets to boost sales
of its highest-margin products. Suddenlink estimates that
gross margins (which do not include capital investments)
are about 70% for phone and 90% for data service.

As of the first quarter, Suddenlink had about 177,000
non-video customers, or about 14% of its total customers.


Kent also sees growth in business-services and cellular
backhaul, which should only get better as its network upgrade
project moves closer to completion.

Suddenlink chief financial officer Mary Meduski estimated
the business-services market within Suddenlink’s
footprint to be about $1 billion per year. Suddenlink does
not break out commercial services revenue separately, but
Meduski said that commercial HSI and phone revenue increased
about 26% in the first quarter. In 2010 it increased
the number of commercial Internet customers by 9.3% to
39,800 businesses and commercial telephony subscribers
more than doubled to 11,100. Suddenlink currently targets
companies with between 50 and 250 employees. And
on the cellular-backhaul front — basically transporting
traffic via landline between cell sites — Suddenlink has
signed deals for more than 600 towers, with bids out for
another 800 towers.

Kent said that Suddenlink has an agreement with TiVo
whereby Suddenlink customers can access their DVR and
schedule recordings remotely. Coming up: a personalized
app with Tivo to go on iPads and other Internet-TV services.
Last week, Suddenlink launched Suddenlink2GO, an online
video service similar to TV Everywhere that features thousands
of hours of content accessible anywhere the customer
has a computer and a high-speed Internet connection.

“You talk about momentum and how do we maintain momentum,”
Kent said. “Project Imagine was a three-year investment
plan that is going to pay dividends for years to come.”

Almost like ushering in a new era.