Why Cablevision Can’t Get Respect

Standing center stage in a Manhattan blues club with his hands a blur on the guitar, Jim Dolan brought the crowd to its feet fronting his band J.D. & The Straight Shot a few months ago.

Investors hope the 49-year-old CEO and scion of the founder of Cablevision Systems Corp. can command the same attention on Wall Street. At the moment, Cablevision suffers from what some investors dub the Dolan Discount, the markdown on Cablevision’s stock due to the company’s penchant for controversy, including a bruising public fight to block a stadium in New York City, a money-burning satellite startup called Voom, and caustic boardroom battles. While Cablevision’s stock has outpaced other media firms so far this year, today, it now trades at a valuation 20%-25% less than peers like giant Comcast, analysts say.

And two months ago, the cable giant tendered an all-cash $16.5 billion bid for Adelphia Communications, a move criticized on Wall Street as running counter to Cablevision strategy to dominate a single region.

The company’s defenses are still on high alert. After initial questions from a B&C editor, Cablevision public-relations executive Charlie Schueler launched an obscenity-laden tirade attacking the press and citing recent negative stories. Two days later, he agreed that Jim Dolan and COO Tom Rutledge would talk about the company’s performance. Then, at one scheduled interview time, Schueler said neither executive would speak, “and I don’t have a good reason why.”

Some defensiveness might be expected, but perhaps the company should take a cue from Jim Dolan’s debut album: Nothing to Hide.

Despite recent headlines, there’s plenty going right at family-controlled Cablevision, a $5 billion-a-year company, the dominant cable operator in greater New York City, owner of national cable networks AMC, Fuse and IFC, and holder of New York City crown jewels Madison Square Garden, Radio City Music Hall, the New York Knicks and the New York Rangers. By several key operating measures—including revenues, operating cash flow, sales of high-speed Internet—Cablevision outperforms major operators like Time Warner Cable and Cox.

During the first quarter—when the board was publicly divided over Voom—Cablevision’s system operations posted a strong 15% increase in revenues and an enormous 19% jump in operating cash flow.

The strength goes beyond just one quarter. While DBS continues to steal customers from other operators, Cablevision has increased basic-subscriber counts for four consecutive quarters. The systems have long topped the industry in the amount of revenue drawn from each subscriber: a whopping $95 a month. Cash flow is just as strong, averaging $36 per customer monthly. By comparison, that’s about 20% more than even Comcast’s $79 in revenue and $31 in cash flow.

The company is also more successful in selling products to potential customers, beating other major operators in basic penetration (67% of all homes versus the 55% industry average); digital-cable penetration (54% of basic subscribers versus 41%); and high-speed data (32% of basic subs versus 21%).

Why so much better? Some factors are rooted in smart decisions made years ago by the Dolans, who are known throughout the industry as mavericks. Chuck Dolan, 78, is a sharp but soft-spoken entrepreneur. He owns sports teams and Madison Square Garden but prefers to watch his New York Knicks on TV. He made cable history by wiring Manhattan in 1965 and conceived of the first movie network, which is today known as HBO.

Gold-Plated Systems

Jim Dolan, though persuasive in private conversation, isn’t as polished in public and lets other executives push the company’s line. Unlike his father, Jim is an ardent fan who revels in controlling sports teams. And the Voom battle was testament to how far he has stepped out from his famous father’s shadow.

Starting in the late 1990s, the Dolans sold all of Cablevision’s systems outside of metro New York, retaining a tight cluster in towns with very attractive demographics for advanced services.

Also, when all operators were upgrading systems several years ago, Cablevision “gold-plated” its plant, spending extra for more capacity, allowing the company to roll out new services more quickly. At the time, the company was criticized by investors for that spending, but it’s paying off today. For example, Cablevision subscribers can surf the Internet service at 10 megabits per second, triple the speed offered by other cable operators and eight times faster than Cablevision’s biggest threat, telephone company Verizon. That has allowed Cablevision to hold on to some customers tempted by steep discounts for DSL.

Industry and Wall Street executives give much of the credit for Cablevision’s operating success to Tom Rutledge, a former senior Time Warner Cable executive tapped in 2002 to run the cable-systems unit and promoted to COO last year.

He was recruited after a three-month stint as president of Time Warner Cable, succeeding Glenn Britt, who become chairman in August 2001. Rutledge had spent his career at the unit, starting as a management trainee in 1977 and working his way up the corporate ladder, running systems in Austin, Texas, and Portland, Maine, before reaching the top. When Britt changed the management structure, Rutledge wasn’t interested in sharing duties and quit.

Rutledge’s strength is in executing on basic but crucial system operations, including customer service, installations and sales. But his time as Time Warner Cable’s head of corporate development gave him the vision to help Cablevision hone its broader cable strategy. “Rutledge changed the whole company,” says Wall Street money manager John Kornreich. “He’s made a big difference keeping them on track with an orderly rollout of services.”

Bear, Stearns & Co. media analyst Ray Katz says giving Rutledge all the credit isn’t entirely fair to Jim Dolan, who is often harshly compared with his father. One sign of a good manager, says Katz, can be the ability to give a smart executive wide authority: “Jim hired Rutledge. And Jim has let him do his job.”

Telephone Soars

Moreover, adds Katz, “Jim opposed Voom, and he was right about Voom.” The company has since shut Voom down and has started dismantling and selling the venture.

Those three factors—Rutledge’s appointment, investment in the systems, and the strategy to concentrate in one geographic area—crystallized when Cablevision launched telephone service. In October 2003, the company surprised the industry by becoming the first operator to make phone service available to 100% of its customers.

Other companies, Cox Communications among them, had started deploying phone service years earlier using an older, more expensive technology. Cablevision had waited for the perfection of VoIP, voice over Internet Protocol, so when systems were upgraded for high-speed Internet service, they could also be equipped to add VoIP.

The bigger surprise was Cablevision’s aggressive discounting. In June 2004, it cut prices, offering new customers a “triple play” of phone, digital cable and high-speed Internet for just $30 per product. With those products normally selling for a combined $140 monthly, analysts feared the deep discounting would be unprofitable and the new subscribers would churn off once the promotion expired.

Instead, more basic subscribers signed up, and the package is profitable because Internet phone service is so cheap to provide. Cablevision has now sold telephone service to 15% of its 3 million customers, up from 13% at the end of March. “We think that the total value proposition is really effective competitively,” Rutledge recently said at a media conference.

Other cable executives disagree. Comcast COO Steve Burke lauds Cablevision’s success in securing subscribers but doesn’t see enough profit in the pricing plan. “That’s not the road that we see ourselves going down any time soon,” he told investors recently.

Cablevision would like to buy more systems, but Rutledge and Jim Dolan have said that they don’t see any good buys ahead.

Meanwhile, the company is girding for a battle with Verizon, which is upgrading its telephone system to offer video and will target many of Cablevision’s best markets. Growth for the cable giant may come through its Rainbow programming unit, which hopes to create a business around the programming originally slated for the high-definition networks on Voom.

One sure way for Cablevision stock to trade at a premium is the sale of the company—a subject of speculation for more than a decade. But no one sees that coming any time soon.

So to get their stock up, the Dolans need to keep the company on an even keel. “They should stick to their knitting,” says Bear Stearns’ Katz. “I think it makes the most sense right now.