KNOLOGY PUSHES PENETRATION RATES AFTER VERIZON VIDEO BUY

Telcos looking down the long road of getting into the video market can take a thimble of solace in last week's first public financial report of Knology since it completed its acquisition of Verizon's nee GTE's erstwhile video operations.

Though it uses a hybrid fiber/coax network architecture that looks more like traditional cable than a telco, Knology is in a similar position with telco video provider, often entering the market as a second and occasionally third provider.

For the year, the West Point, Ga.-based overbuilder reported revenue of $172.9 million, an increase of 21.9% over 2002. Year-end subscriber numbers also jumped significantly due in large part to acquisition. As of Dec. 31, Knology claimed 381,815 total connections, a leap of 46.3% from 2002, with just under half of those coming from cable TV subscriptions.

Included in those numbers are more than 58,000 video subscribers that the company picked up from the former Verizon Media properties in Pinellas County, Fla., and Cerritos, Calif. The company said during its earnings call that it already has integrated the Florida systems into its operations but that it will sell off the Cerritos system. That market, which was one of the first fiber-to-the-curb trials for the former GTE, has 7000 video subscribers.

Perhaps most heartening, though, to telco video aspirants is that despite never being the incumbent cable operator, Knology has been able to achieve penetration rates far above what most analysts had predicted for overbuilders. Of the company's top eight markets where it is offering triple-play services, it has two in which 80% of its addressable market takes at least one service and three that are hovering around 70%, according to Roger Johnson, CEO of Knology. The acquired Verizon properties, which provide video only, had penetration rates of about 20%.

“This low penetration in the acquired markets provides significant opportunities for growth for us in the future,” Johnson said during the earnings call.

However, the one number the company can't escape is the one on the bottom line. Knology reported a 2003 net loss of $87.8 million. It is projecting 2004 revenue of between $216 million to $224 million with a net loss of at least $70 million. Despite the penetration rate gains, the overall market for overbuilders continues to be difficult, said Mike Paxton, a senior analyst at Cahners In-Stat Group. RCN, the other publicly traded overbuilder, has said it plans to file a prepackaged Chapter 11 soon.

“These guys are losing money hand over fist and have been for years,” Paxton said. “Some of the overbuilders are trying not to scale like they thought they were and focus on just a couple of markets where you can really compete well.”