FINANCIAL ANALYSTS TELL NCTA CABLE'S DAY WILL COME AGAIN
NEW ORLEANS -- Despite deep, nearly 2-year slump in cable stock prices and Adelphia Communications’ big financial headaches, 4 Wall St. analysts agreed cable MSO stocks should rebound within next 12 months. Speaking on panel at NCTA convention here, analysts said cable’s prospects were looking up because industry’s heavy capital expenditures finally were beginning to moderate, its operating profit margins were starting to rise again, its new services were doing better than expected and other promising services were waiting in pipeline. They also cited slowing increases in most programming costs and rising take rate for premium services. “The competitive battle is the cable industry’s to lose,” said Douglas Shapiro of Banc of America Securities.
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Analysts said industry’s 2 main competitors -- satellite TV on digital video side and telephone DSL service on high- speed data side -- each had weaknesses that played into cable’s hands. They said DSL was falling behind in market- share battle against cable modems because of its higher costs and physical limits, not any regulatory disadvantages. For instance, Shapiro said, cable’s high-speed data customer count for first quarter appeared to be 12% higher than for comparable period in 2001, while DSL’s gains this year appeared to be 3 percentage points lower than last year’s increase.
Analysts said satellite TV growth had slowed markedly since start of 2001 despite its big, natural advantage of national footprint and marketing capabilities. They said satellite’s weaknesses would particularly emerge as battlefront increasingly shifted beyond digital video programming to high-speed data, IP telephony, video-on-demand (VoD) and other advanced digital services. Cable analysts also said satellite providers’ embrace of personal video recorders (PVR) wouldn’t be industry’s hoped-for salvation because cable VoD was superior technology and service. And they predicted, among other things, that satellite’s push to use coming, more powerful generation of Ka-band birds to deliver high-speed data to homes would fail because technology was unproved, service would be late to market and all customers would need costly professional installations. “DBS is a one-trick pony,” Shapiro said. “It’s a fantastic broadcasting business. But it’s incredibly inefficient at point-to-point communications.”
Lara Warner of Credit Suisse First Boston ominously warned cable that it better deliver on its big promise to lower its heavy capital spending on new plant, equipment and software. With MSOs carrying collective total of more than $75 billion debt after spending $65 billion on system upgrades so far, Warner said, capital costs must start falling soon or cable stocks will be punished further. “Investors expect to see declines start this year,” she said: “The capital markets’ limited appetite for leverage will hold the industry to that last promise.” Warner said
She expected cable’s capital spending to drop 25% this year from recent peak of $16 billion, then hold steady at about $10 billion per year.
However, MSOs shouldn’t deviate from their long-term strategies of reinvesting generously in their cable plant, said Richard Bilotti of Morgan Stanley Dean Witter. Bilotti, one-time satellite industry analyst who was sour on cable’s prospects for several years, said cable stocks were hurting now because all growth stocks were out of favor and Wall St. generally didn’t understand potential of new digital services. “The hell with goddamned Wall St.,” he said: “We have just gotten it wrong.” Calling himself “very bullish” on cable, he predicted industry would enjoy 13.5% compounded average growth in revenue between 2001 and 2006.
Bilotti did raise one red flag on soaring sports programming costs for cable operators. With N.Y. Yankees’ new regional sports network and Cablevision Systems locked in battle over network’s proposed $2 per-subscriber fee, he argued that sports finally was growing too expensive for both broadcasters and basic cable networks. He predicted sports networks soon would become premium cable services or specialized tier products. “I do think we're headed toward premium sports networks,” he said, recalling that regional sports networks started that way years ago.
Niraj Gupta of Solomon Smith Barney said cable industry must “break the logjam” over set-top box manufacturers to take away one of satellite’s prime advantages. With cable operators still relying on just 2 manufacturers -- Motorola and Scientific-Atlanta -- for most of their set-tops, Gupta said, they have less ability than satellite providers to innovate with boxes. Although quite upbeat about cable’s prospects in general, he also said industry must improve its marketing prowess to sell VoD and such even newer or coming services as multiple ISPs, IP telephony and home networking.