Charter 2004 Annual Report Download - page 21

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
penetration and increased revenue per customer. In 2004, our purchase sports programming sometimes contain built-in cost
corporate team produced eight national ‘‘Get Hooked’’ market- increases for programming added during the term of the
ing campaigns designed to: contract.
Historically, we have absorbed increased programming
(Promote awareness and loyalty among existing customers costs in large part through increased prices to our customers.
and attract new customers; However, with the impact of competition and other marketplace
(Announce the availability of our advanced services as we factors, there is no assurance that we will be able to continue to
roll them out in our systems; do so. In order to maintain or mitigate reductions of margins
despite increasing programming costs, we plan to continue to
(Promote our advanced services (such as DVR, high migrate certain program services from our analog level of service
definition television, telephony, VOD and SVOD) with the to our digital tiers. As we migrate our programming to our
goal that our customers will view their cable connection as digital tier packages, certain programming that was previously
one-stop shopping for video, voice, high-speed data and available to all of our customers via an analog signal, may be
interactive services; and part of an elective digital tier package. As a result, the customer
(Promote our bundling of digital video and high-speed data base upon which we pay programming fees will proportionately
services and pricing strategies. decrease, and the overall expense for providing that service
would likewise decrease. Reductions in the size of certain
PROGRAMMING programming customer bases may result in the loss of specific
volume discount benefits.
General As measured by programming costs, and excluding pre-
We believe that offering a wide variety of programming is an mium services (substantially all of which were renegotiated and
important factor that influences a customer’s decision to renewed in 2003), as of December 31, 2004 approximately 10%
subscribe to and retain our cable services. We rely on market of our current programming contracts were expired, and
research, customer demographics and local programming prefer- approximately another 34% are scheduled to expire by the end
ences to determine channel offerings in each of our markets. We of 2005. We plan to seek to renegotiate the terms of our
obtain basic and premium programming from a number of agreements with certain programmers as these agreements come
suppliers, usually pursuant to a written contract. Our program- due for renewal. There can be no assurance that these
ming contracts generally continue for a fixed period of time, agreements will be renewed on favorable or comparable terms.
usually from three to ten years, and are subject to negotiated To the extent that we are unable to reach agreement with
renewal. Some program suppliers offer financial incentives to certain programmers on terms that we believe are reasonable,
support the launch of a channel and ongoing marketing support we may be forced to remove such programming channels from
or launch fees. We also negotiate volume discount pricing our line-up, which could result in a further loss of customers. In
structures. Programming costs are usually payable each month addition, our inability to fully pass these programming cost
based on calculations performed by us and are subject to increases on to our customers would have an adverse impact on
adjustment based on the results of periodic audits by the our cash flow and operating margins.
programmers.
FRANCHISES
Costs
Programming tends to be made available to us for a license fee, As of December 31, 2004, our systems operated pursuant to a
which is generally paid based on the number of customers to total of approximately 4,200 franchises, permits and similar
whom we make such programming available. Such license fees authorizations issued by local and state governmental authori-
may include ‘‘volume’’ discounts available for higher numbers of ties. Each franchise is awarded by a governmental authority and
customers, as well as discounts for channel placement or service such governmental authority often must approve a transfer to
penetration. Some channels are available without cost to us for a another party. Most franchises are subject to termination
limited period of time, after which we pay for the programming. proceedings in the event of a material breach. In addition, most
For home shopping channels, we receive a percentage of the franchises require us to pay the granting authority a franchise
amount our customers spend on home shopping purchases. fee of up to 5.0% of revenues as defined in the various
Our cable programming costs have increased, in every year agreements, which is the maximum amount that may be
we have operated, in excess of customary inflationary and charged under the applicable federal law. We are entitled to and
cost-of-living type increases. We expect them to continue to generally do pass this fee through to the customer.
increase due to a variety of factors, including: annual increases
imposed by programmers and additional programming being
provided to customers as a result of system rebuilds and
bandwidth reallocation, both of which increase channel capacity.
In particular, sports programming costs have increased
significantly over the past several years. In addition, contracts to
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