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What Will the ‘Rutledge Effect’ Be?

Cable analysts and investors are hoping to
get a little insight into the “Rutledge Effect” later this week.

That’s Rutledge as in Tom Rutledge, the former Cablevision
Systems chief operating officer who left the MSO in
December to become
CEO of
Charter Communications.
Charter and Cablevision a re
scheduled to report
and year-end
results on Feb. 27
and Feb. 28, respectively.

Rutledge has
been largely credited
with Cablevision’s
success over the
years — it has
outperformed every
other large
cable operator
during his nearly
10-year tenure
at the Bethpage,
N.Y.-based MSO.
But Cablevision
has faltered in
past quarters, having
lost 50,000 video customers in the first nine months
of 2011, and some fear the company has become a victim
of its own success.

With the highest penetration rates in all key operational
metrics — basic video, high-speed Internet and telephone
customers — some analysts have questioned how much
room is left for the company to grow.

At Charter, the opposite appears to be true. With the
lowest video penetration (35%) of any publicly traded operator
and with a footprint that is mainly in secondary markets
across the country, the St. Louis-based MSO appears
to be ripe for Rutledge’s brand of strong customer service,
robust product off erings and savvy marketing to help drive
customer growth.

Rutledge’s imprint on Charter won’t be felt for at least
a few more quarters — he officially took the helm on Feb.
13; analysts are at least hoping to hear a glimpse of his vision
for the company on Charter’s earnings conference
call on Feb. 27.


For Cablev ision, analyst s are equal ly cur ious
to see how the Bethpage. N.Y.-based MSO
has weathered what has been a heightened period
of competition from rival Verizon Communicat
ions. In the fourth quarter, Verizon added
about 194,000 FiOS TV video customers, making it the
seventh largest pay TV service provider in the country,
with 4.2 million customers. Cablevision, the ninth-largest
pay TV company with about 3.3 million video customers
as of Sept. 30, has
the largest exposure to
Verizon in its territory,
with roughly 40% of its
footprint competing directly
with FiOS.

ISI Group media analyst
Vijay Jayant has expressed
concern over what he sees
as an aggressive discounting
effort by Cablevision.
The MSO is marketing a
$69.95 per month tripleplay
package to new customers,
including a free
digital video recorder and
an iPod Touch, with no
contract required and a
guarantee the price would not rise for two years.

That $69.95 promotional offer ran for about a week in January and is not likely to return, according to company executives.

“The Cablevision offer — the most aggressive we’ve ever
seen — was, if nothing else, an indication that Cablevision
was getting very aggressive on pricing,” Jayant wrote
in a recent research note. “To be sure, we’d be cautious to
read too much into Cablevision’s promotion from a couple
of weeks ago; whether they are struggling to keep sub
share or just going on the offensive won’t be known until
they report results. But at the very least, this can’t be interpreted
as a positive data point for subscriber trends.”

A few days later Verizon countered with its own offer to
new customers — a $99.95 monthly triple play for one year,
with a multiroom DVR.

Most analysts are predicting continued basic customer
losses at Cablevision, ranging from 8,000 to 23,000 in the
period. Additions of high-speed data, already a highly
penetrated service, are expected to come in between 8,450
and 18,000, according to analysts. Phone additions should
tally from 1,300 to 19,000, according to analyst estimates.

“We expect a difficult growth environment in the near
future as Cablevision navigates an aggressive competitor
in Verizon,” wrote Morgan Stanley media analyst Ben
Swinburne in a recent research note.


Analysts were a little more optimistic regarding Charter
Communications, mainly because the company pointed
to positive subscriber metrics last month.

In a Securities and Exchange Commission filing in January,
Charter said Primary Service Units (a measure of
voice, basic video and data customers) were significantly
positive in the fourth
quarter, that it had
doubled its net gain in
broadband customers
in the period and that
phone customer growth
was about even with the
prior year.

Swinburne expects
Charter to shed about
40,500 basic-video customers
in the fourth
quarter, an improvement
over the 63,000 it
lost in the prior year. Miller
Tabak media analyst
David Joyce predicted
basic-video losses of about
36,000 customers in the period, while Collins Stewart media
analyst Tom Eagan predicts losses of about 60,000 customers.

Charter has focused on high-speed Internet and phone
additions in the past several quarters — it had about
730,000 non-video subscribers in the third quarter, about
15% of its base. The company has said that it beefed up
marketing, customer service and installation spending in
the quarter to attract new customers, which could affect
cash-flow growth for the period. But Credit Suisse media
analyst Stefan Anninger wrote in a recent research note
that it is money well spent.

“Given its industry-low HSD penetration rate of just
30%, Charter has a long runway for growth in broadband,”
Anninger wrote. “The opportunity to dramatically raise
HSD penetration levels remains a cornerstone of our positive
view of Charter stock.”