Charter Throws in the Towel, Prepares to File for Chapter 11

| Feb 13, 2009 | Business Network Services - U.S. | Competitive Intelligence Report

| Analyst: Brian Washburn

Current Perspective: Negative
Vendor Importance: Very High
Market Impact: Moderate/High

Event Summary

February 12, 2009 - Charter Communications has reached an agreement in principle to reduce its debt by $8 billion, and the company in turn will resume its delayed $74 million in interest payments originally due in January 2009. Charter intends to implement its debt reduction plans through a Chapter 11 filing, which will begin by April 1, 2009. Under the negotiated plan, the company will have no disruptions in service and Microsoft co-founder Paul Allen will retain the company's largest voting interest. Charter currently has about $800 million in cash and equivalents.

Analytical Summary

• Current Perspective: Negative on Charter Communications’ announcing its plans for a Chapter 11 filing, because there is no guarantee the reorganization plan will be implemented as planned; the carrier intends still to carry nearly $12 billion in long-term debt against about $6.5 billion revenues; and the company becomes vulnerable as a takeover target. Charter Business' operations may not be affected while in bankruptcy, but the company may implement major changes after its re-emergence.

• Vendor Importance: Very high to Charter Business, because the company is now saddled with the uncertainty of what might happen to its operations in the future. Consumers and SMBs served off Charter's hybrid fiber/coax infrastructure may trust that their services will be unaffected, but conservative-minded enterprise customers may re-evaluate Charter Business's role in their service provider mix, since optically-fed business services are not the carrier's flagship revenue-generating products.

• Market Impact: Moderate to high on industry competitors, because one way or another, Charter Communications' upcoming bankruptcy will change the market landscape. The carrier has remained independent partly due to its high debt load – once its debt is reduced it may become a takeover target, which would affect its focus on enterprise services. The carrier may need to delay new business-related capital investments while in bankruptcy, and if it re-emerges, may be in a better position to invest in its higher-end business services.

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Current Perspective

Competitive Positives and Concerns

Recommeneded Vendor Actions

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Recommended Competitor Actions

• Competitors that were interested in acquiring Charter Communications in the past should keep a close eye on the bankruptcy proceedings, and calculate at what price points an acquisition might still make sense. Cable competitors have been profitable and robust to date, and DOCSIS 3.0 promises a boost to high-speed broadband on HFC that bests telcos still using twisted-pair copper. Slowed customer growth (or losses) during bankruptcy, and possible future net neutrality legislation, may push down the company's overall value.

• Competitors can try to lure enterprise customers presently served by Charter Business to their services through promotional incentives to switch to their optical-based services. Carriers can play up that business services are a side business for Charter, which only contributes about 6% of the carrier's revenues, and therefore vulnerable to being ignored by the carrier. They can further warn existing Charter customers that the company will probably be acquired once it emerges from bankruptcy, which makes the company's future entirely unpredictable.

• Competitors can warn that Charter Communications is going broke while it has $800 million in cash and equivalents. They can point out that Charter clearly does not have agreements with all of its stakeholders: Bondholders getting a decent deal from the carrier may approve, but investors that were wiped out may say otherwise. They can insinuate the carrier may be in for protracted bankruptcy proceedings, in which case customers end up also paying the price.

• Wholesale partners working with Charter Business need to keep an eye on their arrangements, bankruptcy proceedings, and a potential acquisition after the cable provider emerges from bankruptcy. Among cable providers, Charter Business was uncharacteristically open to working with service partners, a trend that may change if the carrier re-emerges and is taken under new management.

Recommended End User / Customer Actions

• Existing customers in long-term contracts with Charter Business should ride out their current contracts, but make sure they gain RFPs from multiple service providers at renewal. Charter will need to demonstrate that it is not letting its services, customer service and support languish. Though there are examples of customers being well-served by carriers in bankruptcy (WorldCom/MCI and Global Crossing are two examples), renewing customers should think twice before signing multi-year contracts with a provider that is preparing to enter bankruptcy.

• SMBs served by Charter's HFC-based services do not need to take any action at this time, and SMBs considering Charter's services probably do not need to change their buying considerations. The cable provider's upcoming bankruptcy filing should not affect these services.

• Enterprise-class customers considering Charter Business may want to think twice before they sign on with the carrier. If they do decide to go with Charter, it may be best to keep the contract window short, in case the quality of the carrier's services and support deteriorate. An alternative option are opt-out clauses in SLA guarantees, that allow the customer to cancel at no penalty in the event of recurring service problems.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommeneded Vendor Actions

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