How the mighty have fallen. After a gangbuster year, culminating with the $45 billion marriage of AT&T Broadband and Comcast, the cable industry fell into a rut in 2002. Troubled operator Adelphia Communications (ADLAC), which the Securities & Exchange Commission and two federal grand juries are investigating for possible accounting improprieties, is casting a long shadow over the group. Looming consolidation has investors edgy. Since Jan. 1, a Standard & Poor's index of five cable stocks is down 51%.
That doesn't daunt Jim Robbins, president and CEO of Cox Communications (COX), fifth-largest U.S. cable company, with 6.2 million subscribers. For more than two decades, Robbins has led the cable pack, first in the costly system upgrades, then in fine-tuning customer service.
He's also a champion of cable telephony. Cox is already the nation's 12th-largest phone company and second-largest in many of the states in which it offers phone service. It processes more than 17 million phone calls a day over its broadband network.
BusinessWeek Online Technology Reporter Jane Black recently spoke to Robbins about potential acquisitions, industry consolidation, and how cable can beat the entrenched telephone players, the Baby Bells. Edited excerpts of their conversation follow:
Q: Cox has been aggressive in rolling out telephone service -- a notoriously difficult business. Is that helping the bottom line? And is there a competitive advantage?
A: We have 500,000 customers with 640,000 lines. We have 30,000 commercial customers with more than 1.2 million lines. We're thoroughly, completely committed to the telephone business. We'll announce another market later this year, and we're aggressively expanding our footprint.
Those who aren't offering telephone service are leaving significant cash flow on the table. We have the numbers to prove it. In more than a couple of [markets], we have in excess of 25% penetration. Those accounts throw off 40% margins. Average cash flow from them is above our company average by more than $100 [per customer bill]. It's a significant contribution.
But what's more important is the consumer experience. The consumer who's pressed for time and doesn't want to stay home on Monday, Tuesday, and Wednesday for installations or repair of their phone, cable, and Internet service. We do one installation in a two-hour period and send one bill. Ultimately, we're serving the consumer by offering convenience.
Q: Does cable -- and more specifically Cox -- have an advantage over the Bells?
A: Telephone doesn't have the last-mile capacity to do high-speed data ubiquitously. And it doesn't have the capacity to do video, which takes up tons more bandwidth than twisted copper can provide. It's as simple as that.
Until telephone companies wake up and make the investment, they can't compete effectively. They have to make the investment that we've made. And I can tell you we're hustling as hard as we can to get the customers wrapped up with a bundle [of services] and smothered with wonderful customer service so that they'll be customers for life. The first guy in always has an advantage. A huge advantage.
Q: For years, you've been touting the benefits of the bundle -- phone, video, and Internet. Does the Bells' technology plight embolden you and other cable operators?
A: All these [phone] guys grew up in a culture of guaranteed rate of return on investment. It was sanctioned by a public utility commission. But they're out in a competitive world now. It's a different story. They have to change the way they do business. All I can say is old habits die hard.
Q: There's a lot of talk that Cox is looking to buy some of Adelphia's key properties. The Los Angeles system alone could give you 1.2 million subscribers. Are the rumors true?
A: I'm not sure that bigger is better. AT&T is a classic case in point. But I'm not going to comment with specificity on anything [regarding] Adelphia or any particular market.
We're always on the lookout for systems that can be made to look like Cox systems [which have upgraded networks in concentrated urban areas]. If there's stuff that we can add to our plate that looks like it, then we'll consider it. But we'll be a disciplined buyer. We've demonstrated that by not going beyond a certain price in the AT&T sweepstakes.
Q: What is Cox's acquisition strategy?
A: If you take a look at our systems today, they're big, they're stand-alone, they're run in a decentralized way. The big ones provide voice, video, and data service. We like to concentrate in a particular market so we've got [it all]. We think that's where the revenue opportunity is. But we don't want anyone to think that we're deal-horny.
Q: Are you looking for systems that are upgraded for digital delivery?
A: If systems are already rebuilt, there's less that we have to do. If a system hasn't been upgraded but represents a significant cluster of homes that we can put our time and attention to, we do that calculation on the way in. State of readiness isn't a deciding factor.
Q: Some analysts say an acquisition would hurt Cox by delaying free cash flow.
A: You can't sit in any one camp or the other forever. We believe, and we've told the Street this, that we're concentrating on running our business the best way we know how. We think the first-quarter numbers show we're doing that decently. [On Apr. 21, Cox reported a 19% gain in revenues to $1.18 billion, from $991.42 million in the year-ago period, thanks to faster subscriber growth for services such as high-speed Internet access and digital telephones. But its net income dropped to $135.6 million, or 22 cents a share, from $686.6 million, or $1.14 per share in 2001's first quarter.]
On the other hand, you can't put your head in the sand and not pay attention to what's going on around you. As good stewards of the resources we've been given, it's important to stay abreast of opportunities that may be out there.
Q: Cable stocks are down this year. Cox shares have fallen about 20% since the first of the year. Is the sector being unduly punished?
A: There are a lot of things outside our control that are affecting our stock. There's the Adelphia situation. There's Enron/Arthur Andersen in general. There's uncertainty as to how robust the economic recovery is. Investors want to know: When will we get free cash flow? The industry has a fair amount of leverage.
Cox is an exception to that. At the end of the first quarter, we had a debt-to-earnings before taxes, interest, depreciation, and amortization [EBITDA] ratio of 3.8. That's as conservative as any, except Comcast. But [with its purchase of AT&T Broadband] that's about to change.
So I think all those factors are out of our control. The only thing we can control is our march to free cash flow -- which will be in the last quarter of 2003. I've never been more bullish on our business and its prospects.