Insight Communications Pursues the Full Bundle
Each quarter, Broadband Daily delivers to our annual paid subscribers data-rich analyses of leading companies in the broadband sector. The following is our Q4 01 analysis of U.S. cable operator Insight Communications, prepared by our broadband media research partner, Broadband Markets (www.broadbandmarkets.com). To look at our analyses of the other leading cable operators, AT&T Broadband, Comcast, Cox, Time Warner, Charter, Cablevision Systems and Mediacom, as well as a cross-company comparison of all the operators, please click on the Quarterly Reports button in the header or click on the Quarterly Reports graphic on our home page.
Insight
The nation's ninth largest MSO, Insight Communications was named "Operator of the Year" for 2001 by the now-defunct Cablevision magazine. Among the reasons cited by the publication for its selection were Insight's leadership role in deploying new bundled services, including VOD, and the MSO's consistently high rankings in customer-satisfaction surveys.
Insight's cable operations are located in four contiguous states: Illinois, Indiana, Kentucky and Ohio, the first three of which each contain more than 400,000 Insight subscribers. Most of its systems are located in second and third tier markets, including a heavier than usual mix of college towns.
Most of Insight's cable operations are owned by a 50-50 joint venture between Insight and AT&T Broadband. This venture nearly doubled its holdings early last year, when AT&T and Insight contributed 250,000 and 280,000 additional subscribers, respectively. Of the Insight subscribers rolled into the partnership, roughly 100,000 had earlier been purchased from AT&T. These, along with AT&T's 250,000 contributed subscribers, were located mainly in mid-sized Illinois cities.
To leverage its geographic concentration, Insight is consolidating its headends so that 95% of its customers are served by 13 headends: five in Illinois, four in Kentucky, three in Indiana and one in Ohio.
Insight has also been aggressively upgrading its plant. Excluding the 350,00 subscribers in Illinois systems previously owned by AT&T, Insight ended last year with 97% of its plant capable of delivering 750 MHz of bandwidth and two-way services. Including the Illinois systems, this figure falls to 74%, which means that the lion's share of these AT&T systems had yet to be upgraded by yearend.
Basic Subscribers and RGUs 4Q00 1Q01 2Q01 3Q01 4Q01
Homes passed 1,573,700 2,158,000 2,166,000 2,181,000 2,200,800
Basic cable customers 919,300 1,284,900 1,270,100 1,275,500 1,283,700
Basic cable penetration 58.4% 59.5% 58.6% 58.5% 58.3%
New Service Revenue Generating Units
Total new service RGUs 133,600 246,200 274,500 316,500 351,800
New service RGUs % of basic subs 15% 19% 22% 25% 27%
Digital video % of RGUs 77% 74% 73% 73% 73%
High speed data % of RGUs 23% 26% 27% 27% 25%
Like its joint-venture partner AT&T, Insight is one of the few top MSOs with a penetration rate below 60%. One of the reasons is that it faces competitive overbuilds covering a relatively high proportion of its service area.
During 4Q01 Insight added just 8,200 basic subscribers, as basic penetration slipped to 58.3% from 58.5% during the prior quarter and 58.4% during 4Q00. This marked the company's third consecutive quarter of declining basic penetration. According to company executives, Insight's basic customer base grew by roughly 1% during the course of the year, followed by a significant surge in sub growth during the first two months of this year. A factor contributing to the latter, they suggest, is that the company's multi-service offering is beginning to attract more customers, especially in its competitive overbuild markets.
During the company's 3Q01 earnings call, Insight executives emphasized their strategy of focusing on growth in advanced services rather than the more traditional metric of basic subscriber growth.
During the year, Insight's new service RGUs increased by 159%, from 133,600 to 345,800. At yearend RGUs as a percentage of basic subscribers had reached 27%, compared to just 15% at the end of 2000. Roughly three quarters of Insight's RGU's are accounted for by digital video customers.
On a pro-forma basis, Insight added approximately 150,000 RGUs during the year, a 47% increase over 2000. The difference in RGU growth between its upgraded and non-upgraded systems is highlighted by the fact that the Illinois systems, which are still in the process of being rebuilt, generated just one out of every twenty new RGUs during 2001, but account for roughly one in four basic subscribers.
Digital Video 4Q00 1Q01 2Q01 3Q01 4Q01
Digital-ready subscribers 777,000 1,099,000 1,116,000 1,121,200 1,144,400
Digital-ready homes % of total homes 85% 86% 88% 88% 89%
Digital customers 103,300 182,900 201,200 229,600 257,700
Quarterly net adds na 31,000 18,300 28,400 28,100
% change versus prior quarter -41% 55% -1%
Penetration of digital-ready subscribers 13.3% 16.6% 18.0% 20.5% 22.5%
Penetration of basic subscribers 11.2% 14.2% 15.8% 18.0% 20.1%
Penetration of total homes passed 6.6% 8.5% 9.3% 10.5% 11.7%
Monthly digital revenue per digital sub na $ 18.95 $ 20.06 $ 18.70 $ 19.13
Sequential quarterly growth rate 30.0% 10.0% 14.1% 12.2%
At yearend, digital video service was available to more than 1.1 million (89%) of Insight's customers, up from 777,000 at the start of the year, which was 85% of its base at that time. More significantly, the number of customers able to receive the company's interactive digital product--which includes VOD--increased from 145,000 to 950,000, or 74% of its base. Most of this increase occurred during 4Q01.
Insight added 28,100 digital units during 4Q01, down slightly from the prior quarter's 28,400. For 2001 as a whole, it added 105,800 digital customers. At yearend, Insight claimed a total of 257,700 digital subs, 22.5% of customers able to receive the service and 20.1% of total basic customers. In its non-Illinois systems yearend digital penetration was 26-27%, with several systems, including Columbus (35%) already north of 30%. Insight's target for yearend 2002 is 33% digital penetration.
Of its yearend digital base, roughly 210,00 (81%) were receiving the two-way Insight Interactive service. The average incremental monthly revenue generated by Insight's digital customers was $19.13 for the quarter, up slightly from the prior quarter's $18.70, but off from a 2Q01 peak of $20.06.
High Speed Data 4Q00 1Q01 2Q01 3Q01 4Q01
HSD-ready homes passed 1,204,100 1,567,600 1,607,200 1,673,300 1,708,900
HSD-ready homes % of total homes 77% 73% 74% 77% 78%
HSD customers 30,300 63,300 73,300 84,900 88,100
Quarterly net adds na 11,872 10,000 11,600 3,200
% change versus prior quarter -16% 16% -72%
Penetration of HSD-ready homes 2.5% 4.0% 4.6% 5.1% 5.2%
Penetration of basic subscribers 3.3% 4.9% 5.8% 6.7% 6.9%
Penetration of total homes passed 1.9% 2.9% 3.4% 3.9% 4.0%
Monthly revenue per HSD customer $ 43.96 na $ 41.34 $ 41.56 $ 42.45
Sequential quarterly growth rate 39.2% 15.8% 15.8% 3.8%
Insight's progress on the high speed data front was slowed during 4Q01, following the late September bankruptcy filing by Excite@Home. For two weeks after the filing, Excite@Home ceased provisioning new customers. Insight management subsequently decided to stop activity marketing the @Home service. As a result, it added just 3,200 HSD customers during 4Q01, down dramatically from the third quarter's 11,600 run rate.
Insight's HSD footprint expansion was also slowed by the @Home problem. During 4Q01 just 35,600 new homes gained access to the service, compared to 66,100 during 3Q01. At the end of the year, a little more than 1.7 homes had access to Insight's HSD service, roughly 78% of its base. The bulk of the homes without access to the service are located in the Illinois systems acquired from AT&T.
As 2002 began, 4% of Insight's total homes and 5.2% of homes with access to the service were HSD customers. Both of these figures were slightly more than double the yearend 2000 levels of 2.5% and 1.9%, respectively.
Insight's in-house HSD service will rely on AT&T's backbone. The company is serving 85% of its customer base from a single point-of-presence, with two more POPs serving the other 15%. It had been paying @Home roughly $13 a month per HSD customer, and expects to reduce its comparable internal costs to $9 or less.
Pursuing the full bundle
Insight aims to be the first major MSO to offer a complete bundle of digital video, VOD, high-speed data and telephone across its entire footprint. During the first half of 2001 it undertook a limited telephony launch in Louisville, KY. It followed this up with a 3Q01 launch in Evansville, IN, and by its March earnings call had also begun a telephony rollout in Columbus, OH. It ended the year with 6,000 telephony customers.
Insight management points to recent gains in basic subscribers in Evansville and Columbus, suggesting that the company's bundled-service strategy could provide a key competitive weapon in these overbuild markets. They also note that the vast majority of telephony customers (96% as of 9/30/01) choose a single-bill option and that penetration in some nodes exceeded 7% after just 5 months of marketing the service.
Monthly Revenue per Subscriber 4Q00 1Q01 2Q01 3Q01 4Q01
Monthly cable revenue per customer $ 37.90 $ 38.87 $ 37.34 $ 37.63 $ 37.70
% of total revenue per sub 84.7% 88.5% 81.6% 81.0% 79.0%
Monthly digital revenue per sub $ 1.72 $ 2.47 $ 3.02 $ 3.17 $ 3.64
% of total revenue per sub 3.8% 5.6% 6.6% 6.8% 7.6%
Monthly HSD revenue per sub $ 1.29 $ 1.51 $ 2.21 $ 2.58 $ 2.87
% of total revenue per sub 2.9% 3.4% 4.8% 5.6% 6.0%
Monthly advertising revenue per sub $ 3.85 na $ 3.17 $ 3.08 $ 3.50
% of total revenue per sub 8.6% 6.9% 6.6% 7.3%
Total monthly revenue per sub $ 44.76 $ 43.91 $ 45.74 $ 46.46 $ 47.71
During 4Q01 Insight generated an average of $47.71 per month per basic customer, up 6.6% from 4Q00 levels and up 2.7% sequentially. Part of the reason for this relatively modest increase is that Insight management has taken a conservative approach to rate hikes as it has upgraded its networks and launched new services. During the year it raised basic rates by only 2.4% even as it faced 8-10% increases in programming costs.
This year, with much of its upgrade and launch activity behind it, Insight is planning to increase basic rates by 5-6%, which should give revenue and cash flow growth a boost.
Excluding its Illinois systems, Insight's 4Q01 per-customer revenue fared somewhat better, with a monthly average of $48.64 and an annual increase of 8.4%.
Like its peers, Insight is seeing a changing mix in the components of its revenue base. Whereas traditional cable revenue accounted for nearly 85% of total per-customer revenue during 4Q00, its share fell to 79% in 4Q01. At the same time, the share contributed by digital video and HSD both roughly doubled. The former jumped from 3.8% to 7.6%, while HSD expanded from 2.9% to 6% of total revenue. Together, the two services accounted for 13.6% of the average 4Q01 customer bill, up from 6.7% a year earlier.
Operating Results ($000) 4Q00 4Q01 % change
Pro forma Pro forma
Revenues $ 172,576 $ 183,139 6.1%
Programming & other operating costs $ 61,887 $ 64,866 4.8%
SG&A $ 30,727 $ 34,120 11.0%
Operating cash flow $ 79,962 $ 84,153 5.2%
Cash flow margin 46.3% 46.0%
Monthly cash flow per subscriber $ 20.14 $ 20.57 2.1%
Insight's fourth quarter pro forma revenue was up 6.1%. Quarterly cash flow grew a little slower at 5.2%, as the company's margin slipped 300 basis points to 46%. Monthly cash flow per customer was up 2.2% for the quarter, at $20.57.
For the year, Insight's capital spending totaled $325.6 million, an amount it expects to decline to $300 million this year. Its guidance calls for annual revenue and cash flow to both grow by 14-16% this year, well ahead of its 4Q01 growth rates for both measures.
