Business Overview

The cable division concentrated on two major strategic activities in 1998. First, it continued the customer-oriented initiatives that it had started in 1997, and second, it grew substantially through acquisitions.

Let's go back a year. The programs and initiatives begun in 1997 ranged from a new name, Cable One, to over two dozen other programs designed to enhance customer and associate satisfaction. These actions were undertaken in the face of increasing competition from direct broadcast satellites (DBS) and came at a price of slowing cash flow growth in 1997.

In 1998 the investments began to pay dividends. Total cash flow (earnings before interest, taxes, depreciation, and amortization) increased to $126.5 million, up almost 21 percent from 1997's $104.7 million. Cash flow from systems that were owned for the entire year increased $13.2 million, or almost 13 percent over 1997.

At the end of 1998 the division had 733,000 basic subscribers, up 95,700 from year-end 1997. Approximately 115,400 subscribers came from newly acquired systems, 29,000 subscribers were lost in systems that were sold, and internal growth added about 9,200 new customers. Internal growth in subscribers was slightly better than 1 percent, and total growth was 15 percent.

This past year was busy on the acquisition front. In March the division acquired 7,400 customers in the cable system serving Grenada and Bruce, Mississippi, from Bresnan Communications. At the end of June the division acquired 36,000 subscribers in Anniston, Alabama, from Time Warner. Finally, at the end of July the division purchased from Marcus Cable systems serving 72,000 subscribers in Mississippi, Louisiana, western Oklahoma, and the panhandle of Texas. In addition, the division sold 14 of its smallest systems, with a total of approximately 29,000 subscribers, to Classic Cable.

All of these acquisitions and sales furthered the division's clustering in key geographical areas; the acquisitions were made at prices well below some of the large deals seen in the headlines. Cable One is now the largest operator in Mississippi and has more subscribers in that state than in any other. It also has a significant non-urban presence in Oklahoma and Arizona.

Cable One continued to invest in system rebuilds and upgrades. In 1998 the division spent $70 million to increase plant capacity, deploy fiber and other technologies to improve picture quality and reliability, improve the security on premium services so that customers with cable-ready sets did not need a converter, and start rolling out Internet services in its largest systems. While the technology of cable's core business--providing analog television signals to customers--continues to be much the same, new technologies are opening up the prospects of future new businesses.

DBS remains the most pressing competitive challenge to cable operators. While Cable One continues to experience small losses in subscribers due to DBS, the losses are being more than offset by internal growth. Many cable operators have now launched digital cable services as their primary response to DBS competition. Cable One expects to begin providing this new technology and its accompanying services by the end of 2000. The benefit of Cable One's concentration on non-urban markets has allowed it to wait until the digital technology and service offerings settle down.

Some cable operators around the country also are deploying high-speed cable modems, primarily in urban markets, to enhance their competitive position. Cable One has chosen not to enter the high-speed business until uniform standards for the high-speed modems are in place, until modems are for the most part purchased by customers rather than provided by cable operators, and until most modems can be self-installed by customers. Cable One instead has launched a dial-up telephone Internet service. This service was introduced in ten systems by the end of 1998 and will be expanded to an additional nine systems in 1999, covering 70 percent of subscribers. As a result, Cable One will be in an excellent position to start providing high-speed service when the time is right.

In the meantime the division will not have spent millions of capital dollars on technology that becomes obsolete quickly, but will have been through all of the customer service, marketing, billing, and headend issues that the high-speed business will bring with it. At year-end 1998, Cable One had approximately 2,500 Internet customers and believes that, in the long run, both slower speed dial-up and higher speed cable modem businesses will simultaneously exist in the same market.


Changing Cable Channels...and Priorities

By Jeffrey L. Olson
General Manager, Cable One, Sioux City, Iowa

Change in the cable industry goes a lot further than using the remote control to switch channels. As Sioux City's general manager, my priority list has evolved considerably in the past several years. In prehistoric times (that is, four years ago), I spent most of my day reading financial statements, reacting to cash flow needs, and troubleshooting.

Today, while cash flow remains a top priority, my office calendar is very different. I devote much of my time to training, coaching, and motivating my staff. Above all, I am focusing as never before on meeting and beating the competition, increasing customer satisfaction, and using new technology to improve the business.

Competition, on the horizon four years ago, is now a fact of life in Sioux City. Direct broadcast satellite (DBS) companies have stormed the marketplace, and the threat of competition from telephone companies and municipal utilities is right around the corner. Every day television and radio commercials, newspaper advertising, and direct mail pieces tout the advantages of DBS over cable.

Because cable companies were relatively new to the competitive arena, we've had to revolutionize our culture and our approach to doing business in order to position ourselves to beat the competition.

Customer satisfaction is key. Although making customers happy has always been a top priority in Sioux City, we've recently revised past practices and launched new initiatives to build customer loyalty. We know our competitors offer many of the same channels and that their prices are similar to ours. Our primary advantage is delivering superior service in a local setting. We try to make every contact with each customer a positive experience, starting with the first phone call to establish cable service. Our employees (whom we call associates) are empowered to do whatever it takes to meet the customer's needs.

The quality of our technology also is important. Cable One has invested heavily to improve the reliability of our service, improve picture quality, and keep cable outages to a minimum. If maintenance requires us to interrupt service, we make every attempt to perform the work in the middle of the night, when viewership is the lowest. Response times to outages also have improved. Technical advances even make it possible for an alarm to alert us when a cable outage is about to occur due to power failure. We have backup power sources throughout the system, so we can respond swiftly, before customers actually lose service.

Just as cash flow and customer satisfaction can be objectively determined, we have begun measuring associate satisfaction. Associates who take pride in their company and their work create satisfied customers, which in turn leads to cash flow growth. An associate attitude survey was first given to employees in 1996 and repeated in 1998. As a result, we are developing new initiatives surrounding associate empowerment, training, performance evaluation, and work environment.

As is the case for many Cable One systems, the Sioux City system has been upgraded within the past two years. In addition to enabling us to carry more networks and reduce cable outages, these investments position us to offer future services. These include digital cable, cable modems, and telephony. We are prepared to offer any or all of these services through our cable plant just as soon as the economics support entry into any or all of them. Future increases in cash flow will come from these new services as well as from pay services such as HBO and Showtime.

Our advertising department, too, is taking advantage of technological advances to insert local commercials on cable networks. In early 1999 we installed state-of-the-art digital insertion equipment, which replaced the unwieldy, labor-intensive tape decks we used before. Digital equipment allows our advertising associates to respond much more quickly to advertisers' demands for quicker ad changes. Also, advertising schedules run at levels much closer to full capacity, and audio and video levels are much more consistent.

Are we beating the competition? So far, so good. Our increased emphasis on customer satisfaction and associate satisfaction, along with our rebuilt cable system and other technical advances, position us well for the future. But we know we can't take success for granted. We've got to keep sharpening our competitive edge.