Media must spread the good word

Aug 5, 2002  •  Post A Comment

Whether or not any troublesome issues vexing the cable industry prove to be life threatening, it’s important for operators to understand and respond to them to control the damage that already is under way.
It’s not just that the cable sector has taken a beating in a rough-and-tumble stock market with cable stock prices down an average 75 percent from a year ago. Although cable companies fundamentally are in the best position they have been in for more than a decade, they are suffering from the grim overhang of the government accounting probes and turmoil at AOL Time Warner, and the alleged criminal misuse of funds and bankruptcy at Adelphia Communications.
The probes and charges leveled by The Department of Justice and the Securities and Exchange Commission can have a prolonged, distracting impact that can retard progress on many fronts, cable executives said.
They already are prompting arresting questions, the answers to which may further traumatize the entire media industry-questions such as whether the Time Warner board’s decision to merge with AOL was based on bogus information and due diligence, and whether there ever can be a comprehensive, indisputable sense of accounting at all levels in an emerging, complex multitiered universe.
At the very heart of the AOL Time Warner probe and the Adelphia charges is the riveting issue of whether public companies, legally or illegally, have fallen into a pattern of packaging financial numbers to meet the investor expectations they help to set.
Financial solutions
And then there are the heavily leveraged operators Charter Communications and Cablevision Systems, both of which are set in this week’s earnings calls to address solutions to their financial problems that could involve going private, selling assets, closing businesses and cutting costs.
With his company’s stock price having dipped to nearly $2 a share and serious questions looming about its accounting practices, Charter co-owner Paul Allen may soon decide to take it private despite outstanding public debt. Cablevision’s ruling Dolan family, under fire to close a $1 billion funding gap by January, faces questions about family-led direct satellite service, PCS, content and other pet projects that have lost money.
In the meantime, the gains cable operators generally have mustered in their existing and new operating businesses just aren’t enough to override such extraordinary adversities, which have been compounded by an unstable economy and advertising recovery, slower-than-expected new digital service adoption, questions about capital expenditures and sizable debt and fixed costs.
Cable valuations remain in a free fall, while free cash flow forecasts and new service rollout projections are being tempered. And no cable operator is substantively closing the formidable disparity between costly system upgrades and a return on that investment from new digital-related revenues. So the industry’s $50 billion broadband backbone so far mostly reduces churn rates, nominally boosts basic subscribers and provides fertile ground for early bundling of new and existing services.
Although it’s no silver bullet yet, the best argument for what the broadband platform can do is Comcast Corp.’s latest call for $1 billion in digital and online revenues this year.
Such good news-which dominated the second-quarter cable performances of Comcast, Cox Communications and Time Warner-has been mostly buried by foreboding concerns, some of which are intangible and unpredictable.
Until now, cable industry executives and analysts believed the sector’s woes weren’t anything a decisive upturn in advertising and the economy couldn’t fix. But any hope for a quick recovery was dashed by new government numbers last week revealing higher unemployment, a deeper recession and slower economic momentum than first thought. For now, cable operators generally are adhering to their initial conservative subscriber and operating growth estimates for the year, while Madison Avenue and Wall Street hold tight to their modest advertising growth forecasts.
In the face of continuing adversity last week, it seemed the only one buying cable’s bright story was Microsoft founding Chairman Bill Gates, who nearly tripled his stake in Cox Communications to 5.8 percent and will remain a shareholder in the combined AT&T-Comcast to keep his foot in the broadband door.
But even the most enthused cable executives conceded they are less sure these days about the timing of their eventual broadband fortunes, because of the confluence of factors, so many of which they cannot control.
For instance, there isn’t an industry analyst or executive who has quantified the financial gains that could accrue to cable operators or to AOL Time Warner, depending on the complex and diverse terms of a third-party multiple ISP pact.
The industry template may end up being any deal struck between AOL Time Warner and AT&T-Comcast’s combined 22 million subscribers as part of the dissolution of their troubled Time Warner Entertainment partnership. Cable operators most likely will be the beneficiaries of the bar being set for the sharing of revenues, subscriber service and advertising and marketing costs. AOL Time Warner, which now will have to be more conciliatory, considers these pacts more critical than ever to the broadband future of its online service, given static or declining growth expected in all of its subscriber bases.
But for now, the short-term benefit to a long-awaited ISP deal-just like the unwinding of TWE-will deliver more of a psychological than a real lift. Analysts said such imminent deals are less about immediate balance sheet gains as they are about preventing worse financial news down the road. For instance, paying as much as $1 billion in cash and $3.5 billion in stock to AT&T-Comcast to settle the TWE matter might not be as bad as the losses that would be incurred from taking public AT&T-Comcast’s 27 percent stake or all of Time Warner’s consolidated cable assets in this miserable market. But try reflecting that on your balance sheet.
In delivering what for now is the industry’s strongest operating performance, Comcast officials lamented cable’s dilemma of wrestling with both concrete and figurative demons, referring specifically to the TWE negotiations and the accounting probes.
“It’s not our job to make people have different perceptions of value,” Comcast President Brian Roberts told analysts. “We’ve got to run the business and put the numbers on the board, like I think we have done … and you’ll have to make your own judgment.”
Comcast and Cox officials conceded their best defense may be to do a better job of showcasing cable’s good news-in this case, both companies’ better-than-expected second-quarter results (although Cox’s digital subscriber growth was lower than expected, while Comcast’s digital subscriber growth exceeded all forecasts). Like Time Warner Cable a week earlier, Cox and Comcast reported stronger operating results and reversed basic subscriber declines to post 1 percent or better growth-in stark contrast to AT&T’s steeper-than-expected second-quarter basic subscriber losses.
For the first time ever, Cox and Comcast actually grabbed market share from satellite and telephone competitors with both their video and nonvideo bundled offerings-proof that digital convergence is alive and well, albeit making more gradual inroads than originally expected. Even with capital expenditure questions looming large, Cox indicated it may deliver free cash flow in 2003, a year ahead of forecast, and 20 percent return on invested upgrade capital in four years.
Broadband no saving grace
Still, CSFB analyst Lara Warner sounded Wall Street’s general note of caution, that the future cost of upgrades, subscriber retention and new service rollouts could compromise cash flow margins. That’s because high-margin digital subscriber growth and the rollout of new services such as video-on-demand have fallen short of initial robust targets. After all, broadband was supposed to be everyone’s saving grace.
Cable executives said the place
where their companies may sustain the most immediate damage is in their historically low valuations, which may be tested in the coming months as Adelphia is forced to sell some or all of its cable systems, Time Warner Cable eyes going public and Mr. Allen looks to take Charter private.
While individual company liquidity can be questioned, funding appears readily available to the right parties for the right reason, as witnessed by AOL Time Warner’s recent $10 billion credit facility and Cox’s $1.1 billion bank facility. But short of a fire sale, potential sellers are balking at some ridiculously low multiples, and buyers at the limp stock values-their primary deal-making currency. The risks are just too high.
For instance, the steep drop in stock prices (Comcast has dropped from $38 a share to $23 a share in seven months) has reduced Comcast’s acquisition of AT&T Broadband from $4,500 per broadband subscriber last December to $3,000 per subscriber or nearly 15 times 2002 cash flow, according to Kagan’s Cable TV Investor. It prompted even Mr. Roberts to pose the question, “Was there a value leakage from the Comcast shareholders in doing [the AT&T] transaction?” Despite the loss of $20 billion in value, Mr. Roberts said he would have done nothing different in negotiating the deal.
Not surprisingly, Comcast and Cox officials last week said simply they won’t make new acquisitions any time soon. A growing number of analysts said they are more willing to lay odds on an AOL Time Warner takeover by General Electric Co. and its NBC subsidiaryif AOL Time Warner announces its intent to spin off its cable systems and still sees its stock languish below $10 a share, or around $40 billion. That is as good a barometer as any of how out of whack cable metrics, valuations and forecasts can be.
Veteran Bear Stearns analyst Ray Katz said cable simply must learn to function in the shadow of scandal and work harder at telling its good news about what he calls “the sustainable new growth” that signals “an important inflection point.”
But perhaps the best advice came from Mr. Roberts, who told analysts last week, “This is a time for us to put our head down, stay focused and just execute.”