Even when everything is aboveboard at

Charter Communications

(CHTR) - Get Report

, subscriber numbers aren't always what they appear to be.

That, argues one short-seller, is evident in the second-quarter operating results that the St. Louis-based operator of cable systems released last week.

Charter, the nation's third-largest operator of cable TV systems, reported a net loss of 41,300 basic-cable subscribers in the second quarter ended June 30.

But judging from a footnote to Charter's statements, the company actually lost 52,400 basic subscribers in the second quarter on an apples-to-apples basis with first-quarter figures. That's to say that the company suffered 27% more departures than it reported.

The discrepancy -- a significant one, given the amount of attention Wall Street pays to subscriber gains and losses among the major cable operators -- is further evidence to cable TV investors that subscriber counts involve substantial judgment calls, even when such judgments fall within the bounds of legal behavior.

Moreover, the confusion illustrates the pitfalls of relying on company performance measures not based on generally accepted accounting principles. Those risks are not limited to the cable industry, as highlighted by recent concerns over

AOL Time Warner's

(AOL)

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America Online subscriber counts, as well as by investors' erstwhile infatuation with page views at long-defunct Internet companies.

The issue addressed in the Charter footnote, in fact, is related to the company's former practice, discontinued last fall, of counting high-speed Internet subscribers as basic-cable customers even if they weren't, in fact, subscribing to basic cable.

Though that onetime practice of counting data-only customers hasn't been a lightning rod for Charter, other subscriber count-related activities have. Last month, the U.S. attorney in St. Louis charged four former Charter executives with inflating the company's subscriber counts in 2001 -- an alleged conspiracy unrelated to the second-quarter 2003 number.

Charter, which plans to raise $1.7 billion to finance a tender offer for outstanding debt later this month, is fighting to pull itself back from a near-bankruptcy experience earlier this year. Charter's shares, which have ranged from between 76 cents and $5.50 over the past year, fell 34 cents Tuesday to close at $3.99.

Basic Training

At issue in the latest quarter's numbers is Charter's attempt to clarify the issue about whether people who subscribed only to Charter's high-speed Internet, or broadband, service should be counted as basic-cable customers, too. As late as the quarter ended Sept. 30, 2002, the company included all of its broadband customers in its basic-subscriber count -- a practice that, to use the June 2002 quarter as an example, added 44,000 subscribers to a basic-cable population of 6.5 million.

Those broadband-only customers arguably could have been included in the basic count because the cable delivering data to people's homes transmitted a limited number of video channels as well. But as Charter explained in last week's footnote, the broadband-subscriber-as-basic-customer policy ceased "because we determined that most of these customers were unable to receive our most basic level of analog video service" because either that service was unavailable or customers didn't know they indeed had some video service.

But now Charter says that a "detailed study" has determined that 11,100 of its current broadband customers "have been receiving, or were otherwise upgraded to receive, analog video service." A Charter spokeswoman declined Tuesday to explain the particulars of the study.

So, Charter explains in the footnote, those 11,100 subscribers were added back into the basic-subscriber count for the second quarter -- a quarter in which Charter reported it had a net loss of 41,300 basic subscribers. But because many of those 11,100 subscribers presumably were on Charter's books in the first quarter -- before Charter started recounting them -- the effect is to understate second-quarter basic-subscriber losses, says the short-seller, who spoke on condition of anonymity.

Different Metrics

Of course, it may be immaterial whether Charter lost 41,300 subscribers or something more like 52,400. On the company's second-quarter conference call, CEO Carl Vogel emphasized that the company was focusing on achieving returns on invested capital, "not unit growth for the sake of unit growth," according to the CCBN and FDCH e-Media transcript.

But analysts pay close attention to basic subscriber numbers and other unit counts anyway, as a measure of cable systems' operational health and ability to fight off competition from direct broadcast satellite operators.

In an Aug. 1 note, for example, UBS analyst Aryeh Bourkoff wrote, "Although the 2Q03 basic subscriber loss of 41,300 was higher than our expectation of a 30,400 decline, the 2Q03 decline compared favorably to the loss of 50,600 basic subs in 1Q03."

Muddling the sub-count issue further, says the short-seller, is that when he signed up for data-only service at his vacation home, which happens to be in Charter's service territory, he found out he would be paying 50 cents a month more for broadband-only service than he would be paying if he got broadband plus a token level of video service. The Charter spokeswoman said pricing packages varied throughout Charter's operations, but the customer's story was plausible.