Even in stable, recurring revenue businesses, sometimes disaster can strike. Back in 1996, AOL, now part of Time Warner (NYSE:TWX), had to employ thousands of temporary customer service representatives to deal with subscribers who had been chronically unable to connect to its online service. We all know about some of the more life-and-death examples, such as Johnson & Johnson's (NYSE:JNJ) management of the Tylenol scare in the 1980s.
It was a bad situation, and they dealt with it as best they could. Fortunately, both companies had plans in place to respond.
This past weekend Cox Communications (NYSE:COX) had a similar snafu, in this case, with its cable Internet service in Northern Virginia. This is one of the larger markets for Cox's Internet business, which had, as of its most recent annual report, 2.1 million customers nationwide and $870 million in revenues for fiscal 2003. It's also far and away the fastest-growing component of Cox' business, having nearly trebled in size in two years.
One of Cox' vendors for cable modems, the equipment that sits in each house on its network, is Toshiba (OTHER OTC: TOSHF). On Thursday, Cox initiated a firmware upgrade in Northern Virginia, apparently on Toshiba's recommendation. This action is similar to one the company had taken elsewhere on its networks, without incident.
Bzzzzzt.
This time, the upgrade rendered the most prevalent type of Toshiba modem, the 1100 series, useless. Every Cox Internet customer using a Toshiba modem lost connectivity. According to a Cox representative I spoke with, that's about 10% of its entire Internet customer base in Northern Virginia.
Let's talk about the amazing, first. According to people who work at Cox, the company called in all hands, from the vice presidents to the mail room folks, to work Saturday and Sunday assembling new modems and handing them out to customers.
Cox's offices were open all day Sunday for people to drop off their non-functioning modems for replacement ones. And the new modems, once plugged in, nearly immediately restored connectivity. This was, in my mind, an amazing reaction to a bad problem. And it didn't matter if you rented your modem from Cox or it was one you had purchased -- you got a new modem, no questions asked.
On the other hand, this sort of event shows why business is simply unpredictable. The cost in man hours, equipment, and lost revenues for three days times 10% of a big market will have to be substantial. There are some reports that since the upgrade came at Toshiba's insistence, Toshiba, and not Cox, will be on the hook for some of these costs. But lost revenue is gone forever, and there will be a tangible impact on the company's quarterly earnings.
Should you care if you're a Cox shareholder? Not really, unless there is some chance that this sort of thing is recurrent. As far as I'm concerned, Cox did an excellent job responding to the predicament, even though the scoreboard (financial statements) at the end will show it as a loss.
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Bill Mann owns none of the companies mentioned in this report.
