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A triple threat

Knology keeps the competition's prices in check with its Internet, phone and TV services.

By LOUIS HAU
Published November 7, 2005

Last year, Tarpon Springs resident Nick Kopteros saw an offer to get phone, high-speed Internet and cable TV services. All from one company. At a discount.

Bright House Networks? Verizon Communications?

Nope. Kopteros, a 26-year-old information technology project manager for Danka Business Systems, became a customer of Pinellas County's No. 2 cable company, Knology. The West Point, Ga., company entered this market when it took over the former GTE Americast's cable TV operations that serve portions of Pinellas County in December 2003.

Compared with Bright House and Verizon, Knology remains little more than a shrimp among whales. But thanks to the added competition that Knology provides in parts of Pinellas, cable TV customers there enjoy among the lowest monthly rates in the bay area. Whether cable customers there use Knology or not, the fate of this little company will affect the price of bills where the cable companies compete.

Knology got off to a rocky start in Pinellas, where it had to purge outdated discounts and delinquent households from its base of customers. This year, the company faced a cash crunch that hampered the launch of services and raised questions on Wall Street about its financial viability. And although not unusual for a cable company, Knology continues to post quarterly losses. Last Wednesday, it reported a loss of $8.2-million in this year's third quarter, narrowing from $20-million lost a year earlier.

On top of that, Knology went public in December 2003 at a share price of $9. Since then, the company's stock price has withered by 75 percent, closing Friday at just more than $2.

Knology's entry into Pinellas County was the latest in a series of acquisitions and construction projects that had transformed the company from a tiny operator of secondary cable systems in Montgomery, Ala., and Columbus, Ga., to a regional player serving cable customers in markets scattered throughout the Southeast, including Charleston, S.C.; Augusta, Ga.; Knoxville, Tenn.; and Panama City.

Knology has thousands of customers in Pinellas County, but like most cable companies, it won't disclose precise figures for individual markets. Still, the company acknowledges that the Pinellas acquisition was by far its largest in terms of the number of homes that are wired to receive its service.

Companywide, Knology has about 426,000 customer connections, with each cable TV, phone and broadband subscription counting as a connection. The average customer subscribes to two services.

Pinellas was attractive to Knology because its size presented a significant growth opportunity, especially considering that neither Americast nor any of its competitors had yet to offer bundled and discount-priced "triple play" packages of phone, high-speed Internet and cable TV services, said Knology president and chief executive Rodger Johnson. Today, phone and cable companies are scrambling to launch multiservice packages to offer customers one-stop shopping for all of their telecommunications needs.

Verizon hopes to start offering pay-TV service in Temple Terrace via a new fiber optic network in early December, with Tampa and unincorporated Hillsborough County expected to follow next year. Bright House offers phone, broadband and cable TV services and last week joined other major cable companies and Sprint Nextel to begin offering cell phone service next year, too.

Knology was a pioneer of bundling services, selling cable TV, phone and broadband packages as far back as 1997. While Knology customers can opt to buy just one or two of the services, the company's marketing efforts are focused solely on triple-play packages. That's in large part because customers who sign up for all three bundled services are far less likely to switch to another provider to get a better bargain.

Knology's Pinellas business faced challenges from the start. Knology's initial public offering, intended to raise money to bankroll the expansion in Pinellas, did not raise as much capital as expected. CEO Johnson acknowledged financial constraints contributed to a delay in its rollout of phone service in Pinellas.

When Knology offered phone service in Dunedin in July 2004, the company promised to expand the service to all of its Pinellas customers within a year. Fifteen months later, Knology has yet to launch phone service in St. Petersburg, Largo, Seminole and parts of unincorporated Pinellas. The new date: year-end 2006.

"It takes time to build out systems and upgrade our entire network," said Mitch Bernatsky, general manager of Knology's Pinellas operations. "We wanted to make sure we rolled this thing out properly."

Still, things are looking up for Knology. In July, the company completed a refinancing of $305-million in debt. In September, the company completed the sale of its Cerritos, Calif., cable system for $10-million to WaveDivision Holdings. And in October, Knology completed a $10.8-million rights offering, raising more money.

These events helped ease the company's cash crunch, said Tavis McCourt, an analyst for Morgan Keegan & Co. in Nashville. Morgan Keegan was an underwriter of Knology's IPO.

Now that the immediate financial viability of the company is no longer a concern, Knology can focus its energies on rivals Bright House and Verizon, he said.

"They've turned around a lot of things," McCourt said. But the company's still-depressed stock price indicates that "the market hasn't quite recognized or believed it yet," he said.

Small cable companies face higher programming costs, higher interest rates on loans and the built-in disadvantage of competing against dominant cable or phone companies that enjoy instant marketing access to most households in the area, said John Higgins, business editor of Broadcasting & Cable magazine.

"When Verizon is talking about DSL, Verizon already has a customer relationship with virtually everybody in town," Higgins said.

While satellite carriers such as DirecTV and Dish Network sell their services in Pinellas, their biggest draw usually isn't price but a broader selection of programming. So they tend to have far less effect on cable rates than secondary cable companies like Knology, Higgins said.

Knology's mere presence in Pinellas is a boon for consumers, said James Dates, director of the Pinellas County Department of Justice and Consumer Services.

"They're doing what we want, which is to have a competitive cable environment to give our citizens a lower cable rate," he said.

- Louis Hau can be reached at 813 226-3404 or hau@sptimes.com

[Last modified November 5, 2005, 09:49:02]