Spectrum Pulls Cox Units Out of RDOF, Facing $12.7M Penalty

Spectrum is withdrawing Cox's subsidiaries from the federal Rural Digital Opportunity Fund, exposing the operator to a potential penalty of about $12.7 million. The company disclosed the move to the FCC this week, confirming the Cox entities will stop serving rural locations they had committed to reach.

The Cox subsidiaries had already built out to "a substantial number" of the 8,212 rural locations assigned to them under RDOF. But Spectrum said it was pulling them out "due to challenges, including related to speed testing and service milestone requirements."

What does withdrawal cost?

The FCC's RDOF rules carry real financial teeth. Defaulting ISPs can be fined 1.89 times their total average support per location, plus 10 percent of the support already received. FCC disbursement data shows the company has drawn more than $2.9 million in RDOF support as of this week.

Set against Cox's total awarded support of more than $6.6 million, those two components put a potential fine in the region of $12.7 million. That figure assumes the FCC applies the default formula without relief.

Spectrum's attorneys left the door open to contesting it. In their filing, they wrote: "Charter understands that, by withdrawing from the RDOF program, the Cox Entities will no longer receive RDOF support and may be subject to the Commission's applicable non-compliance rules. Charter reserves its right to seek relief from such rules on behalf of the Cox Entities, including waiver, as may be necessary."

Who serves the leftover locations?

The unserved locations do not simply fall off the map. Cox's remaining areas will become eligible for grants under a supplementary funding round managed by the National Telecommunications and Information Administration.

Spectrum told the FCC it has already handed NTIA a list of the remaining locations so they can be served through that effort. The process will not be quick. NTIA is still finalizing its lists of potentially eligible locations, which state broadband offices will refine before taking additional bids — a sequence measured in months, not weeks.

What is behind the withdrawal?

The RDOF exit lands three months after Spectrum completed its $34.5 billion merger with Cox Communications in August, creating the largest cable operator in the United States. The company has asked to go by Spectrum, its consumer-facing brand, since the deal closed; its legal name will change to Cox Communications in the coming months. Spectrum's lawyers noted the company remains legally called Charter Communications for now.

The withdrawal also comes against a backdrop of weakening subscriber performance at the Cox side of the business. Last week, Spectrum published Cox's subscriber and financial metrics for the first time, since Cox had been a private company before the merger.

The numbers came in worse than analysts expected. "It is no surprise that Cox has been losing broadband subscribers but the pace at which they've been losing them is above what we estimated," New Street Research analyst Vikash Harlalka wrote in an investor note. The year-over-year decline in broadband subscribers was three times worse at Cox than at Charter before the merger, he wrote.

Pricing helps explain the gap. Cox's average revenue per broadband user was nearly $86 in the second quarter, compared with $70 at Charter. Harlalka said the steeper losses made sense in the context of those high prices.

The pattern is industry-wide. Cable operators have been buffeted by subscriber losses in recent years amid competition from fixed wireless and fiber, and most have been cutting prices to repair their standing with customers.

Spectrum will report its third-quarter results on Friday, Nov. 6, offering the first full look at the merged company's subscriber base and a fuller picture of how Cox's rural buildout obligations fit its broader investment plans.