Knology Goes on the Offensive

Knology Inc. (Nasdaq: KNOL) says it is increasing capex by about 15 percent in 2009 to fuel a "fill-in" strategy that allows the company to expand plant into new neighborhoods and boost competition with incumbent MSOs and satellite TV operators.

Knology will goose capex by $8 million in 2009, with $6.5 million of that total earmarked for "fill-in" opportunities, company president Todd Holt explained on this morning's fourth-quarter earnings call. Knology spent $47.4 million in capex in 2008, and expects that to jump to $55.4 million this year. (See Knology Reports Q4.)

An undisclosed portion of those dollars will support Knology's gradual upgrade to Docsis 3.0 (more on that later).

As for the fill-in strategy, Knology plans to selectively expand its hybrid fiber/coax (HFC) network in "attractive areas" where it already has headends and the operational infrastructure in place and expects to get a quick return on its investment.

It kicked off that strategy last year in Huntsville, Ala., where Knology competes with financially troubled Charter Communications Inc. . (See Charter Turns to Chapter 11.) There, Knology spent about $250,000 to get access to an additional 400 homes. Based on the Huntsville results so far, Knology estimates it can get a cash-on-cash payback on fill-ins within three to four years, according to Holt.

Knology has not identified its next fill-in move, but the company will be selective and "cherry pick" new areas based on what's already known about the level of cable and satellite competition, Holt said. Knology also operates in Augusta, Columbus, and West Point, Ga., where it matches up with Comcast Corp. (Nasdaq: CMCSA, CMCSK); Knoxville, Tenn. (another Comcast area); and in Panama City and Pinellas County, Fla., where it faces Bright House Networks .

Some new construction is already underway, but Knology expects the fill-in investment to generate an additional 8,000 marketable passings in 2009.

Knology ended 2008 with 676,794 "connections," adding 8,001 in the fourth quarter and 36,227 for the full year. Fourth-quarter revenues reached $103.6 million, up from $94.8 million a year ago. That was not enough to avoid a net loss of $2.1 million (6 cents per share), narrowed from a year-earlier net loss of $6 million (17 cents per share).

Docsis 3.0 update
Last November, Knology announced an aggressive Docsis 3.0 deployment strategy that will enable the operator to offer shared Internet speeds of 50 Mbit/s or more. Under a phased approach, the operator said about 20 percent of its network would be wideband-enabled by the end of 2009. That will rise to 50 percent by the end of this year, with the balance to be completed by 2010. (See Knology Calls Wideband Play .)

Knology has not yet revealed where wideband will show up first, but decisions are being made "on a market-by-market basis as the competition situation dictates," according to Knology chairman and CEO Rodger Johnson.

Given that guidance, expect Pinellas County, a Verizon Communications Inc. (NYSE: VZ) FiOS market, to be the first Knology system to get the speedier cable modem platform. Knology execs said they have yet to see its MSO competitors deploy Docsis 3.0 in any of the overbuilder's markets.

Comcast expects to wire up 65 percent of its footprint with Docsis 3.0 by the end of 2009 and across the board by the end of 2010, so Knology will be seeing it soon enough. (See Comcast Sets Wideband Goal and Comcast Sub Growth Weakens in Q4 .)

— Jeff Baumgartner, Site Editor, Cable Digital News

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