GCI income flat as customers cut cable

First quarter income for General Communications Inc. was flat compared to 2011 as gains in broadband internet service were offset by a continued decline in basic video customers.

GCI released results May 2 of $1.4 million in net income for the first quarter of 2012, unchanged from the first quarter of 2011. Total revenue was up 4.3 percent to $171.9 million in the first quarter year-over-year, but net income was reduced by a $1.3 million decrease in Universal Service Fund support.

The USF reductions approved by the Federal Communications Commission last October (intended to facilitate greater rural broadband access by reallocating some $4 billion in USF support) are expected to slash $5 million or more from GCI revenue this year.

Revenue highlights for the first quarter were the managed broadband and consumer data segments for GCI. Spurred by the TERRA-Southwest network that was turned up in late 2011 serving major customers in Southwest Alaska, the managed broadband segment saw revenue leap 36 percent year-over-year, to $19 million.

The GCI internet segment should show strong growth all year as the Anchorage telecom continues to turn up residential service in 65 rural Southwest Alaska communities. Construction is also under way this summer on the TERRA-Northwest project to extend the TERRA-SW network to Nome.

Consumer data revenues also surged, by 22.4 percent year-over-year, to $20.4 million led by customer growth and increased average data use. GCI has added 3,500 cable modem customers since the first quarter of 2011, and saw an increase of a whopping 2,400 from the fourth quarter of 2011 alone.

The other side of the consumer data growth curve, however, is a major decline in basic video customers — potentially signaling a shift in viewing habits as some Alaskans may be tuning out cable service in favor of on-demand internet options like Netflix or Hulu.

GCI has seen a decline of 6,000 basic video subscribers in the last year, including a loss of 800 during the first quarter of 2012. Video revenue was down 4.3 percent, to $29 million, year-over-year.

“I think you can attribute some of the disconnects to folks finding the internet is a good source for their video requirements,” said GCI Chief Financial Officer John Lowber during the company earnings call May 3. “We’ve certainly seen some of that. The good news is that we’ve gone to a pay-to-play situation with the internet and we’re pricing for that service now. If they’re not paying us on the video side, they’re paying us on the internet side. Part of our strategy historically has been to cover all the bases and as the tide shifts from one to the other, to have the infrastructure in place to be able to benefit from it. We’re certainly seeing that on the internet side.”

Lowber said the price points for video service are topped out, and a proposed rate hike from Root Sports led GCI to drop the channel late last year.

“We’ve priced video to a point where it’s a pretty spendy offering and we have to be sensitive to that,” Lowber said. “Pressure on programming costs is passed through to consumers and we have to do some pushback on programming costs because we’re getting about as much as we can from the video base.”

One impact on GCI’s consumer base in 2011 that should recover in 2012 is the return of some 4,000 troops to Fort Wainwright in Fairbanks. During the second quarter last year, GCI attributed 1,000 video and 1,200 cable modem disconnects to the deployment.

Lowber said GCI expects a rebound from the troops’ return.

“We hope the come back and get reconnected,” he said. “We’d expect to see that in our metrics.”

Root, which carries Seattle Mariners baseball game, has been running a local radio campaign urging fans to “tell GCI to bring back Root Sports.”

Lowber, who described himself as a “long-suffering Mariners fan,” said disconnects from dropping Root Sports were at the “noise level.”

“That’s had an impact, but it’s been modest,” he said. “Root would like to attract us back and provide that service, but until they get their pricing to something reasonable, there’s no way we can pass that on to our customer base.”

Wireless revenue was also down 2 percent, and GCI has seen a decline of 2,000 wireless customers over the last year after overtaking Anchorage rival telecom Alaska Communications for second place in market share midway through 2010.

GCI and Alaska Communications both began selling the Apple iPhone 4S on April 20, removing a major advantage in device offerings previously held by AT&T, which is tops in market share in the state with an estimated 250,000 customers.

“It’s too early to say what the iPhone impact is going to be,” Lowber said. ”Anecdotally I know that there’s been a lot of folks that would love to do business with GCI, but they also love the iPhone and they’re torn about the decision to stay with us or go get an iPhone. Now they’ll have the opportunity when their contracts mature to move on to our facilities. That fairly significant disadvantage is behind us.

“We’re going to be aggressive in pricing it. We’re going to be aggressive in terms of bundling and coming up with creative promotions to leverage the business and get some of the metrics moving in the consumer business again. We see it as a net positive to us.”

GCI shares dropped to a 52-week low of $7.07 on May 4 following the earnings results, and closed at $7.61 on May 8.

Andrew Jensen can be reached at [email protected].