Cable Sector’s Outlook Dims

Apr 26, 2004  •  Post A Comment

Is Wall Street’s love affair with cable beginning to end?
As cable operators Comcast, Time Warner, Cox Communications and Insight Communications prepare to issue their first-quarter earnings this week, a growing number of analysts are curbing their enthusiasm for the cable sector, arguing that the fundamentals that once made the sector an investment must are quickly slipping away.
Thanks to a combination of increased competition from rivals that were once considered also-rans, cable’s apparent inability to leverage its distribution capabilities over content providers such as ESPN and its smaller-than-expected capital expenditure declines, the once bright future of the cable sector is starting to dim, according to many analysts.
They argue that cable companies’ current stock valuations are out of sync with what is expected to be tough slogging against satellite and telephone competitors and predict many multiple system operators will see their free cash flow numbers suffer as a result.
“It’s much more competitive, and cable can’t raise prices as fast as it could in the past,” said Harold Vogel, CEO of Vogel Capital Management, who admitted to never being much of a fan of the cable sector and argued that the industry’s tried-and-true method of tacking on more services and charging subscribers handsomely for them is quickly running out of road in this new competitive landscape.
Indeed, many analysts now say that cable has lost its ability to easily raise prices even on mature products such as video and data. What’s more, efforts to cut programming costs have not been significant so far. And it appears that cable operators still face considerable capital expenditures whenever they launch a new service.
In other words, as Lara Warner, an analyst at Credit Suisse First Boston, put it, a “more sobering picture is emerging” as the competitive environment continues to undergo significant change.
This less positive outlook represents an about-face for many in the Wall Street community, who as recently as a year ago argued that cable’s triple-play of video, high-speed data and telephony would trounce already struggling Regional Bell Operating Companies and blunt the high growth rates of satellite operators DirecTV Group and EchoStar Communications.
It seems clear now that such scenarios were a bit far-fetched. Not only have the RBOCs realized the value in their high-speed data alternative, digital subscriber lines, but they have also begun to market the service with a vengeance, offering pricing that undercuts what most cable operators are offering. Customers are responding: SBC Communications, an RBOC operating out of 13 states, reported DSL subscriber growth of 446,000 in the first quarter-huge growth by either cable or RBOC standards.
Then there’s satellite, which has gained subscribers by touting its less-than-cable pricing and by addressing some of the competitive advantages that cable has over satellite, including digital video recording devices and the ability to pick up local stations. Things are likely to heat up even more now that DirecTV is controlled by Rupert Murdoch’s News Corp. and has promised to boost its subscriber count to 15 million from the current level of 12 million by the end of 2006.
In addition to their attempts to beat back cable individually, the RBOCs and satellite companies have joined forces to create their own version of the triple play, with the phone companies providing the DSL and telephony service in a bundle that also features video services via the satellite operators.
Meanwhile, as Mr. Vogel sees it, cable has continued to miss the big picture, particularly as the RBOC-satellite efforts tap into an ever-growing sentiment among consumers that they are paying too much for video and high-speed data.
“They have no concept of what a consumer can actually afford to pay,” Mr. Vogel said. “Paying $100 a month is nothing to guys [such as cable executives] who are really wealthy. The typical household is living from paycheck to paycheck. So as they throw more services on, a lot of people would have to stretch in order to buy these services.”