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Satellite Growth Bigger Threat for Small Cablers

Jan 12, 2004  •  Post A Comment

The difference between large and small cable operators is about to get bigger.
With News Corp. in the process of putting its stamp on No. 1 satellite operator DirecTV, analysts predict that size and system location will be even stronger factors in determining which of the cable operators will be best positioned to do battle with an invigorated satellite industry.
Cablers such as Mediacom Communications or Insight Communications are seen as particularly vulnerable, not only because their subscriber base is so much smaller than the biggest multiple system operators but also because these operators do most of their business in smaller or more rural markets, where satellite penetration is greatest.
Larger operators, meanwhile, have the benefit of operating in major markets, where zoning laws and the proliferation of apartment buildings has thus far limited satellite’s ability to make significant inroads. In addition, big players such as Comcast and Cox Communications are further along than the smaller players in offering value-added services such as high-speed data, video-on-demand and telephony, which help prevent customers from switching to satellite.
“Smaller systems in tertiary markets, no matter what company it is, are going to have a harder time competing,” said Alan Bezoza, an analyst at investment firm Friedman Billings Ramsey. “[Direct broadcast satellite] getting more into this environment will prove to be very tumultuous [for smaller players].”
To be sure, multiple system operators of all stripes are girding for battle with the satellite industry. News Corp. officials are making no bones about their commitment to use the company’s strengths in content and distribution to bolster the fortunes of DirecTV, promising to reach 20 million subscribers by the end of the decade from the current level of 12 million. Plus, DirecTV rival EchoStar Communications, after acknowledging it took its eye off the ball in the third quarter, has promised to get back on track and continue the company’s robust subscriber growth trend.
For cable, the efforts by both EchoStar and DirecTV are significant because the growth opportunities in the pay-television market have just about run out. With more than 80 percent of the households in the United States paying for some form of television, a good chunk of satellite’s growth will likely come at the expense of cable.
The stakes become even greater as DirecTV and EchoStar continue to offer access to local channels in more markets, removing one of the most compelling attributes cable has had over satellite.
While most analysts agree the big-name operators are well suited to duke it out with the satellite companies, small operators, the biggest of which are Mediacom, with 1.6 million subscribers, and Insight, which has 1.3 million subs, face a less certain future. (Most analysts agree that another smaller player, Cablevision, which boasts 3 million subs, is the exception; with most of its systems in suburban New York, Cablevision is generally regarded as well positioned against satellite.)
Mayday for Mediacom
Analysts said Mediacom could have a particularly tough time. Already, the company has acknowledged that satellite has put pressure on its basic subscriber growth.
As DirecTV expands its local presence, that pressure is likely to increase and could put the company in the position of having to rely even more on new services such as high-speed data and telephony to drive long-term growth, said Aryeh Bourkoff, an analyst at UBS Securities.
For his part, Mediacom CEO Rocco Commisso said his company is prepared for the changing landscape.
“This is a different company in a different industry than it was three years ago,” he said at an investor conference last week in Phoenix. “We’ve grown in homes passed. We’re launching new services.”
However, John Pascarelli, Mediacom’s executive VP of operations, acknowledged at the same conference that his company was “hit hard” last year by satellite.
He said the company was responding to the increased competition by shoring up its local presence. It’s focusing more on localism, including coverage of more high school sports events and community politics, he said.
“We want to be able to provide that to communities,” Mr. Pascarelli said. “We believe it will be a significant differentiation.”
Whether that remains enough against a behemoth like News Corp. remains to be seen.
Richard Greenfield, an analyst at Fulcrum Global Partners, said the tough part will be overcoming what he called the “Murdoch marketing machine.” News Corp. Chairman Rupert Murdoch could use Fox’s coverage of the World Series to tout the benefits of satellite vs. cable, while at the same time using his New York Post newspaper to argue that cable pricing is too high.
With the marketplace getting tougher for smaller players, consolidation could be the solution, some analysts said. Opportunities for consolidation among the smaller MSOs does exist, they said.
“The drumbeat out of Time Warner Cable is that they want to be a consolidator, and Comcast owns 50 percent of Insight, so there could be some logical rollup opportunities there,” said David Joyce, an analyst at Guzman & Co. “The trend will be for operators to try to increase in size in order to have significant bargaining power when it comes to negotiating with content providers.”
Comcast as a rule refuses to comment on speculation.