After enjoying decades of subscriber growth, cable TV system operators are bracing for an eventual decline in the number of people subscribing to basic cable service. But at

Charter Communications

(CHTR) - Get Report

, that shrinking feeling may come sooner than expected.

Last week, two Wall Street analysts said Charter would likely end 2002 with fewer basic cable subscribers than it had in at the close of 2001. Those forecasts, in place of earlier expectations of little or no growth, spotlight the pressure on the highly leveraged cable operator to squeeze money out of advanced services rather than the basic TV channels that have been the foundation of the cable TV system business.

The more pessimistic outlook for Charter also indicates that shrinking subscriber counts industrywide in the cable industry -- once unthinkable, now inevitable -- could come sooner than expected. Given that Wall Street is already worrying about competition from satellite TV service and the reliability and relevance of cable TV cash flow numbers, premature falling basic subscriber counts would be another drag on the boost the industry hopes to get from growing sales of high-end services including Internet access and video-on-demand.

Shares of Charter, which is holding its annual shareholder meeting Tuesday, fell 23 cents Monday to close at $3.15. The company's stock has lost 81% of its value since the beginning of the year.


The first of the two estimate cuts came last Wednesday, when Deutsche Bank analyst Karim Zia said that Charter, which is slated to report second-quarter financial results Aug. 6, would likely lose 10,000 basic cable subscribers in the quarter instead of gaining 20,000 as previously forecast. (Charter has about 6.8 million basic subscribers in all.)

For the full year, Zia expects a pro forma basic subscriber decline of 1.4%, compared to his April predictions of flat basic subscriber counts over 2002 and 2003. Zia has a buy on Charter; his firm is a holder of the company's stock.

Behind Zia's forecasts from both last week and April is what appears to be a one-time item: Charter's write-off of more than 140,000 subscribers in the first quarter for nonpayment.

In a second relevant report last week, Merrill Lynch analyst Jessica Reif Cohen said Charter's basic subscriber base would fall 1% this year, rather than remain flat as she had expected earlier. Like Zia, Cohen said she was doubtful that the company could recover the first quarter's writedowns in subsequent quarters.

But Cohen also suggested that Charter's subscriber count was not what it appeared to be, saying that Charter took certain revenue from households subscribing only to Charter's Internet service and used that revenue to add to its basic subscriber count.

Cohen also said she believed Charter has "more aggressive" policy than its competitors regarding capitalization of technical expenditures. Cohen downgraded Charter from strong buy to neutral; Merrill has done investment banking for the firm in the past year and been an underwriter for the company within the past three years.

In a statement, Charter responded that the accounting issues identified in Cohen's report are "properly reported" in accordance with generally accepted accounting principles and have previously been disclosed in various

Securities and Exchange Commission



The importance of Charter's evident basic shrinkage is debatable for both the company and the rest of the cable TV industry, which Zia earlier this year forecast would see its basic sub count start falling in 2005. After all, Charter is expected to report double-digit growth this quarter in revenue and earnings before interest, taxes, depreciation and amortization, a common cable TV industry financial yardstick.

One short-seller of Charter and other cable stocks argues that the basic loss is indeed significant. Because cable companies have been talking about how incremental value is created by new subscribers who can subscribe to advanced services, they should acknowledge that value is lost each time a basic subscriber is lost, says the short-seller, speaking on condition of anonymity.

"It cuts both ways," says the investor, who also calculates that the capital expenditures necessary to provide new services make the present value of a new advanced service subscriber lower than that of a new basic subscriber.

But a cable industry veteran unaffiliated with Charter says it isn't quite so simple to analyze the basic dropoff.

"It's a concern, because you never want to see a decline," says the cable executive, who also requested anonymity. But, says the veteran, before drawing conclusions about the impact of the problem, one has to know more relevant details. It's possible that the lost subscribers are bad credit risks or are taking low-revenue services; thus, maybe losing them isn't so bad.

The fundamental question, yet to be answered, is how a basic subscriber loss translates into a company's ability to generate revenue and cash flow, says the cable exec. "You can draw conclusions," says the executive, "but it's very tough unless you look at the details."

Perhaps at Tuesday's annual meeting -- to be Webcast starting at 1 p.m. EDT -- shareholders will learn some of those details.