Digital slowdown could cloud Cablevision

Oct 29, 2001  •  Post A Comment

The only thing more notable than the steady subscriber gains in new digital services this year is the sudden, deep concern within the cable industry and on Wall Street that consumer and advertiser support will abate in a weak economy.
With new services estimated to contribute as much as two-thirds of major cable operators’ overall revenue growth, the issue of digital deployment-how much and how fast-is a very big deal indeed, analysts say.
Although a sudden slowdown in new digital service rollout would adversely affect all cable operators’ bottom lines, none may be more at risk than Cablevision Systems. Its limited but lucrative cable footprint of 4.3 million homes in and around New York City is offset by economically sensitive businesses that include Madison Square Garden, Radio City Music Hall and the Wiz electronics retail outlets. If things get tough, Cablevision Systems has fewer places to run for cover than do its peers.
Still, industry analysts, who generally are bullish on cable even in an economic downturn, remain cautiously optimistic about Cablevision despite a jolting warning issued by the company several weeks ago. That warning has re-ignited speculation that its controlling Dolan family could sell out at “the right price,” as the family has left open the door to do in the past.
“They’re basically putting the for-sale sign on,” said Uri Landesman, chief investment officer for AFA Management Partners, a Cablevision shareholder.
With companion systems in New York, AOL Time Warner, the country’s second-largest cable operator, would be a natural buyer, although antitrust and other regulatory obstacles could prevail. Cablevision officials have declined comment.
AT&T has been in the process of selling its stake in Cablevision for $1.3 billion to pay off some of its own sprawling debt.
Cablevision recently lowered its own 2001 earnings guidance on pro forma cash flow growth estimates to 6 percent to 8 percent-below the 7 percent to 9 percent growth originally expected. The company also said pro forma cash flow growth for high-speed data and telephony will come in at 10 percent to 12 percent-lower than the 11 percent to 13 percent originally expected.
It also canceled a $1 billion stock offering, citing volatile markets, and said it may resort to selling assets, raising equity other ways and doing what it must to strengthen its financial standing.
Founding Chairman Charles Dolan has privately told small groups of investors he will likely sell bonds or debt securities, or utilize existing bank facilities, to pay off Cablevision’s sizable debt. Some speculate the company plans to develop a new wireless-telephone service that will be coupled with next year’s planned cable telephony launch. Cablevision could raise funds by selling some wireless holdings outside of New York, such as the Northcoast wireless assets, which could fetch upward of $500 million-or one-third the value of Cablevision’s New York-area PCS assets.
CIBC analyst Jeff Wlodarczak says Cablevision also is likely to reduce its capital expenditures (85 percent of its plant will have been upgraded to 750 MHz by year-end) and its digital cable rollout, which only six months ago called for blanketing existing subscribers with more advanced interactive boxes.
Cablevision’s branded “IO: Interactive Optimum” digital cable package, which debuted in late September, is the last digital deployment by a major multiple system operator, but also one of the most ambitious. Still, a majority of Cablevision subscribers won’t have the new digital options until next year, when such advanced services as personal video recording and telephony will be added on.
Initial rollout to a targeted 50,000 subscribers is planned by year-end-nothing near the 500,000 digital box distribution Cablevision officials initially called for this year.
Pat Falese, Cablevision senior vice president of consumer product management, said the goal now is simply to “encourage sampling” of the company’s recently launched IO digital suite of services, led by video-on-demand.
Morgan Stanley Dean Witter analyst Richard Bilotti has gone further than most in predicting that new services will make up nearly two-thirds of major cable operators’ overall revenue growth, pushing revenue and earnings up 14 percent in 2002-if not abated by economic or other concerns.
He projects that by next year, 30 percent of all U.S. cable customers will have VOD and 33 percent will be digital subscribers.
Cablevision reports its third-quarter earnings on Nov. 8.#