COULD CABLE'S VIRTUES REALLY ‘ALL GO AWAY’?

From day one, cable has been competitively challenged. First it was the broadcasters, then Washington, D.C., on behalf of the broadcasters in the late 1960s, then municipalities in the franchise wars of the ’70s and ’80s, the banks in the credit crunch of the early ’90s, telcos and overbuilders, the FCC in the rate re-reg of the mid-90s, along with satellite providers from then to this day and now, once again, telcos as well as Internet providers. There have also been blocs of vocal cable customers, content providers and always the newspapers. Don’t forget Wall Street, which alternately gives and takes away. So it came as no surprise that CableFAX Daily quoted Comcast CEO Brian Roberts last week saying that cable’s virtues “could all go away” if the industry doesn’t guard against telcos and the DBS players. The proper response to that is, “Can it really all go away?” I’ve thought about it for nearly 30 years, from the rise of the average cable stock price from $2 in 1974 to the peak of $6,096 (unadjusted for splits) in 2000, down to the low of $1,354 a year ago (10/17/02) and on the way back to $1,993 at 10/22/03. Fears of competition are why MSO values are up only 47% from last year’s mammoth low, but I think the fears are overdone. Brian’s remark infers the possibility of an all or nothing result from the broadband battle that will be fought in the years ahead. But that same concern was the very reason cable values were so incredibly low in 1974, before one of the greatest booms in market history. In fact, cable rose to be the primary source of TV for nearly 70% of the population without ever having the opportunity to reach 100%. The real issue is the size of eventual market share. I estimate that, due to duplication of platforms in some homes, only about 80% of U.S. homes, net of signal theft, are paying for multichannel video service. This figure may not rise much above 85% because of family economics and cultural tastes. One hundred percent can see Everybody Loves Raymond, but most of the people who need to see The Sopranos or Nickelodeon have had ample time to sign on. There will always be new-new subs, but if their potential is relatively limited in size, the focus turns to taking existing subs from someone else. Brian Roberts said the way to win that battle is to go on the offense, and not let the other guy control the flow of the game. He cited VOD, HD and HSD, the new services cable is rolling out as fast as possible. DBS was first with hi-def, but it’s too early in the product cycle (under 6% set penetration) to make a difference at this point. VOD and high-speed data, however, are weapons cable can use but satellite can’t. They give operators a feeling of being unique. But they can’t rest on those laurels. Telcos are selling themselves as low-cost providers in the high-speed world. And it’s logical that satellite distributors will rush DVR-equipped receivers to subscribers, because they enable VOD features for every program, while cable treats VOD as a premium tier. MSOs are beginning to test the DVR market, but they’re probably not moving as fast as they should. DBS cannot spend as freely as it would like, but as the newcomer, it needs subs, while cable is concentrating on extra-cost services to its already large base. DVR is satellite’s best weapon for subscriber take-aways, so cable’s attention to new DVR set-tops will have to increase. The dust may never settle on this confrontation. But DBS’s new frontier — higher-power birds — is expensive and uncertain, and cable’s next weapon is IP telephony. That’s just one of its answers to a telco industry that’s cutting prices to get high-speed subs and hoping to build its own bundle by reselling satellite. And that’s why I think cable never “goes away.” Because it hasn’t tapped all the potential in its pipe, and actually holds itself back because of the complexity of all it can do. For the first time in its history, the once dilatory cable is marketing as many new services as it can, but perhaps at least one less than it should. Analyst Paul Kagan is an active money manager and investor and often owns shares of the companies mentioned in his columns. He owns chares of Comcast. He may buy or sell before and after his columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction.