As consolidation winds down and cable operators continue to focus on rolling out new services, one rather expensive aspect of their business might get overlooked.
The category comes with an unfortunate name-revenue leakage. But it is important to address nonetheless.
Revenue leakage-or lost revenue from customers who aren't billed enough or at all-can account for as much as 5 percent of total revenue, according to "Big Five" accounting firm PricewaterhouseCoopers.
As large cable companies expand their footprints and their service offerings, the problem could grow worse.
Granted, PWC has a vested interest in pointing out the perils of revenue leakage-it has introduced a product called the "Cable Profitability Maximizer" to identify and correct that phenomenon. But at least some large cable operators said they agreed that revenue leakage is a concern.
Just how big the problem is depends on the operator.
Revenue leakage is a touchy subject with a lot of cable operators, and few would go on the record to comment. But one MSO financial officer said that in general, most operators are aware the problem of and regularly devote resources it.
Revenue leakage is a part of the general auditing process, the MSO financial executive said. But he doubted that leakage amounting to 5 percent of revenue was possible in a well-run operation.
"In general, any change in continuity heightens the risk in an internal control environment," the executive said. "In a well-run environment, I'd be shocked [if revenue leakage reached 5 percent]. That's a licking."
But a company in the process of consolidating several large operations could run into trouble, he added.
"If you have a company that is in the midst of change, particularly management change, the control risk heightens dramatically," the executive said. "The more moving parts, the more complicated it is."
As companies begin to roll out new services and new technologies, the prospect of revenue leakage also grows.
Michael D' Eath, president and CEO of CaritaSoft Inc.-an Austin, Texas-based software company that has its own value-management products aimed at maximizing cable operators' profitability-said one growing problem for operators stems from nonresponsive set-top boxes, or set-tops that fail to transmit (via a telephone line) necessary information back to the operator's headend.
Limited mainly to information regarding pay-per-view services, those data losses could spread as operators offer more interactive services.
D' Eath said the potential for revenue leakage from non-responsive set-tops increases as more intelligence is placed inside the box. The potential problem grows with the introduction of interactive advertising transactions, like those offered by Wink Communications Inc., which allow cable subscribers to purchase items through their TV sets.
"It's just going to get worse," he said. "The technology continues to improve its reliability, but we're still at the mercy of the homeowner."
CaritaSoft's solution to the problem is tying its software into the cable operator's billing system.
"The information is available in the billing system, but it is hard to get to," D' Eath said. "We bring that information to the front when a call comes in if there is nonresponding on-premises equipment. Then we will flash that information on the [customer-service representative's] screen, and that gives the call-center operator an opportunity to ask the customer to check the phone line or if there is a problem with the set-top box-to ask a number of key questions."
CaritaSoft also generates reports cable operators can use to lead call-center workers into an outbound campaign to determine why set-tops are not responding. It can be as simple as asking a customer to plug in the phone line connected to the set-top. In cases where the problem is more complicated, call-center workers can ask customers a series of questions to determine how to fix it.
AT & T Broadband, which recently completed its $44 billion merger with MediaOne Group Inc., is another operator that takes revenue leakage-or, in its vernacular, "revenue assurance"-very seriously.
"In connection with the merger, we really have been reviewing all of the processes and making sure they fall in line," spokeswoman Tracy Hollingsworth said. "Revenue assurance is one of the processes we have been looking at and are going to continue to look at."
Time Warner Cable spokesman Michael Luftman said that MSO's own team of auditors does a sufficient job in plugging any revenue leaks.
"Our operations are quite well audited," Luftman said. "Our folks do a good job in keeping abreast of those issues. We're pretty confident that we are handling all of those integration issues pretty well."
Most cable companies have their own internal audit teams that scour over the books to plug revenue leaks. But as more and more disparate systems are added to the fold-with equally disparate billing systems-the problem has the potential of becoming more serious.
D' Eath said problems can arise with consolidating billing systems, particularly if they have common customers.
"What we can do is allow you not to have to merge those billing systems together," he added. "We can allow you to have a single view of the customer and have multiple billing systems underneath-one for data and one for video-and, at a call-center level, allow you to treat that customer as a single individual without having to push those two systems together."
PWC partner Randy Browning, who also heads up the CPM product, said he was targeting the top 13 cable operators in the country for the product, and expected to sign on his first customer soon.
The CPM is an offshoot of a similar product Browning has been selling to telecommunications companies for the past two years. It is a series of questionnaires, computer software and good old-fashioned analysis that identifies areas where cable companies aren't charging enough or, in some cases, aren't charging at all.
PWC said it has identified more than $180 million in lost revenue in the past 12 months in the communications sector, including cable operators.
Browning said he splits lost cable revenue into two categories: traditional leakage and opportunities leakage.
Traditional leakage includes cases where an operator didn't sign up a customer, it assigned the wrong pricing plan to a customer or it is just not getting all of the money it is entitled to. Also in this category are inadvertent franchise violations that lead to fines or inefficiencies in billing and other operations.
Opportunities leakage includes those areas where a cable operator could increase revenue simply by doing certain things differently, such as by simply changing outdated business rules.
For example, Browning said, cable operators could shorten the amount of time between not receiving payment from a customer and sending out a reminder letter, or the timing between issuing the reminder letter and turning the customer over to a collections agency.
"By taking a look at some of those rules and maybe changing some of them, you can improve your ability to collect your receivables," he added. "We tackle both on all projects."
Browning said the response from operators has been good so far. "Most executives, when I ask them if they are leaking revenue, I've never had one say no," he added. "We really advocate giving them the tools."
PWC already has a relationship with several MSOs through its audit business, including AT & T Broadband, so expanding that relationship to include the new product shouldn't be much of a stretch.
But it isn't a totally easy sell, Browning said, adding that the two biggest barriers are that some operators don't believe the amount of revenue that can be recaptured, and that they can't devote the human resources needed to do the proper analysis.
"It takes some commitment internally," he said. "In the internal-audit [portion], we have to talk to about 40 people. They don't have enough people to put on it."
