The largest cable operators are swapping, partnering and buying subscribers to gain geographic strongholds - Cable Report

Over the past two years, the map of U.S. cable systems has been changing more than the boarders in Eastern Europe.

To achieve economies of scale regarding customer service, lock up spot ad sales, and gain a more clearly defined audience for local programming and new media, the nation's largest cable operators are swapping, partnering and buying up subscribers in geographically consolidated pockets.

"It's the current focus of the industry to rationalize its existing assets," says Bill Fitzpatrick, executive vice president, group development for Tele-Communications Inc.

Beyond the basics of advertising and programming, new players to cable, such as Bill Gates and Paul Allen, see cable as a hot commodity. Stitching together a group of systems could be the fastest way to deliver new multimedia as well as interactivity and shopping. The ink was still wet on Paul Allen's pact to buy Marcus Cable when he said he was looking for other systems to buy.

More consolidation is likely, and the price tags for systems seem to be headed north. Just last month Prime Cable was bought by Cox Communications for $1 billion. The jewel of the deal was Prime Cable's system in Las Vegas, one of the nation's largest in a booming market.

All this comes as the Direct Broadcast Satellite, phone companies, wireless communications, market over-builders such as RCN and even the utilities want to eat cable's lunch. In the face of competition, "clustering is the right thing for cable to do now," says Drew Scheckler, senior vice president, operations for Jones Intercable.

In general, these clustered markets tend to be where cable companies are experimenting with the next level of service. Among others, Jones Intercable has a large cluster of systems serving about 425,000 subscribers in the Washington, D.C., area. The system has been the test bed for everything new out of the Denver-based MSO, says Scheckler.

Recently TCI, Time Warner and Cablevision Systems have been the more active system swappers, but most top 10 cable companies are playing along.

Cablevision Systems has aggressively swallowed up operations in and around the New York metropolitan area, where it presently serves about 2.5 million customers, the nation's largest regional cluster. Cablevision also has market clusters in Boston and Cleveland.

Time Warner operates a massive system in New York City, with smaller system consolidations in cities such as Tampa Bay, Fla.; Houston; and Milwaukee. "We're working on inventory all the time," says Time Warner representative Mike Luftman.

Comcast has been pursuing a clustering strategy for the past five years. Through system acquisitions of Scripps Howard and Maclean Hunter Limited, Comcast has created major clusters in places such as Philadelphia, north-central New Jersey and Greater Detroit. It also has clusters in Florida, Tennessee, Alabama and Southern California.

In addition to its purchase of Prime Cable, Cox has nine clustered markets that make up 85 percent of the companies' customers, who pay cable bills to Cox in Phoenix; New England; Pensacola, Fla.; Omaha, Neb.; Oklahoma City; San Diego; Hampton Roads, Va.; New Orleans; and Orange County, Calif.

MediaOne's delivery of its broadband cable and tech services depends on future clustering. The Denver-based MSO has large customer bases in suburban Boston, Atlanta, suburban Chicago and Minneapolis/St. Paul. Adelphia has seven clusters in 10 states, including New York, Pennsylvania, Virginia, ,Ohio and New Jersey

TCI's Leo Hindery has been aggressively clustering. The giant cable company has a large cluster in the Chicago market, made bigger last month when TCI bought the Jones systems in suburban Chicago. The company also has large clusters in metro areas, including Pittsburgh, Seattle and San Francisco. Part of Hindery's plan includes national spot advertising. Based in part on its clustering strategy TCI in February teamed up with Grey Advertising and Kraft to do one of the first national cable buys.

TCI's Fitzpatrick says that in the past year and a half, TCI and other cable companies have tried to use their less strategically placed systems for swap or shared ownership deals or have sold them outright for the revenue to add to their growing clusters. TCI has made about 28 system transactions, including partnerships, exchanges and sales. Right now TCI's top 10 markets account for 70 percent of its subscribers, compared with 44 percent a few years ago. With that concentration, TCI can realize economic benefits through general uniformity of customer service, programming and marketing as well as drive advanced services.

Clustering creates a "host of efficiencies" that, when combined, help our financial performance on both the revenue and expense sides, says Fitzpatrick.

COPYRIGHT 1998 BPI Communications, Inc.
COPYRIGHT 2000 Gale Group