Charter 2006 Annual Report Download - page 24

CHARTER COMMUNICATIONS, INC. 2006 FORM 10-K
services or cash payments to those broadcasters in exchange for orderly franchise renewal process in which granting authorities
retransmission consent could further increase our programming may not unreasonably withhold renewals. In connection with
costs or require us to cease carriage of popular programming, the franchise renewal process, many governmental authorities
potentially leading to a loss of customers in affected markets. require the cable operator to make certain commitments, such
Over the past several years, we have not been able to as building out certain of the franchise areas at various levels of
increase prices sufficiently to fully offset increased programming service requirements and allowing for public access channels.
costs, and with the impact of competition and other market- Historically we have been able to renew our franchises without
place factors, we do not expect to be able to do so in the incurring significant costs, although any particular franchise may
foreseeable future. In addition, our inability to fully pass these not be renewed on commercially favorable terms or otherwise.
programming cost increases on to our customers has had and is Our failure to obtain renewals of our franchises, especially those
expected in the future to have an adverse impact on our cash in the major metropolitan areas where we have the most
flow and operating margins. In order to mitigate reductions of customers, could have a material adverse effect on our consoli-
our operating margins due to rapidly increasing programming dated financial condition, results of operations, or our liquidity,
costs, we are reviewing our pricing and programming packaging including our ability to comply with our debt covenants.
strategies, and we plan to continue to migrate certain program Approximately 12% of our franchises, covering approximately
services from our analog level of service to our digital tiers. As 15% of our analog video customers were expired at Decem-
we migrate our programming to our digital tier packages, certain ber 31, 2006. Approximately 8% of additional franchises,
programming that was previously available to all of our covering approximately 11% of additional analog video custom-
customers via an analog signal, may only be part of an elective ers will expire on or before December 31, 2007, if not renewed
digital tier package offered to our customers for an additional prior to expiration. We expect to renew all or substantially all of
fee. As a result, we expect that the customer base upon which these franchises.
we pay programming fees will proportionately decrease, and the Legislative proposals have been introduced in the United
overall expense for providing that service will likewise decrease. States Congress and in some state legislatures to streamline
However, reductions in the size of certain programming cable franchising. This legislation is intended to facilitate entry
customer bases may result in the loss of specific volume by new competitors, particularly local telephone companies. See
discount benefits. ‘‘— Regulation and Legislation — Video Services — Franchise
We have programming contracts that have expired and Matters.’’
others that will expire at or before the end of 2007. We plan to Competition
seek to renegotiate the terms of these agreements as they come We face competition in the areas of price, service offerings, and
due for renewal. There can be no assurance that these service reliability. We compete with other providers of television
agreements will be renewed on favorable or comparable terms. signals and other sources of home entertainment. In addition, as
To the extent that we are unable to reach agreement with we continue to expand into additional services such as high-
certain programmers on terms that we believe are reasonable, speed Internet access and telephone, we face competition from
we have been, and may in the future be, forced to remove such other providers of each type of service. We operate in a very
programming channels from our line-up, which may result in a competitive business environment, which can adversely affect
loss of customers. our business and operations.
In terms of competition for customers, we view ourselves as
FRANCHISES a member of the broadband communications industry, which
As of December 31, 2006, our systems operated pursuant to a encompasses multi-channel video for television and related
total of approximately 3,600 franchises, permits, and similar broadband services, such as high-speed Internet, telephone, and
authorizations issued by local and state governmental authori- other interactive video services. In the broadband industry, our
ties. Such governmental authorities often must approve a principal competitor for video services throughout our territory
transfer to another party. Most franchises are subject to is direct broadcast satellite (‘‘DBS’’) and our principal competitor
termination proceedings in the event of a material breach. In for high-speed Internet services is digital subscriber line (‘‘DSL’’)
addition, most franchises require us to pay the granting provided by telephone companies. Our principal competitors for
authority a franchise fee of up to 5.0% of revenues as defined in telephone services are established telephone companies and
the various agreements, which is the maximum amount that other carriers, including VoIP providers. Based on telephone
may be charged under the applicable federal law. We are companies’ entry into video service and the upgrades of their
entitled to and generally do pass this fee through to the networks, they will likely become increasingly more significant
customer. competitors for both high-speed Internet and video customers.
Prior to the scheduled expiration of most franchises, we We do not consider other cable operators to be significant
generally initiate renewal proceedings with the granting authori- competitors in our overall market, as overbuilds are infrequent
ties. This process usually takes three years but can take a longer and geographically spotty (although in any particular market, a
period of time. The Communications Act of 1934, as amended cable operator overbuilder would likely be a significant competi-
(the ‘‘Communications Act’’), which is the primary federal tor at the local level).
statute regulating interstate communications, provides for an
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