Cable Outlook: Slow in ’12

Moody’s Report Says MSO Growth Looks Good For Two More Years

By Mike Farrell -- Multichannel News, 3/29/2010 7:17:00 AM

The cable industry still has two good years of growth in it, according to credit-rating agency Moody’s Investors Service, but after 2011, the growth trajectory for operators could begin to flatten out.

In an update last week to its overall outlook on the industry, Moody’s said that revenue and cash flow for operators is expected to grow at 3% and 5%, respectively, through 2011. That growth should be sustained by the still-growing telephone and broadband segments of the business. But after 2011, Moody’s predicts that growth should slow to the low single digits over the medium and long term.

Revenue and cash-flow growth in the sector has been slowing for the past few years as the economy and competition have dragged on the business.

Moody’s estimates are not out of line with most analysts, who have predicted a similar slowdown in growth as the cable business continues to mature.

“We thought it might have gotten slower by now, but there are some unusual things that are happening, including the ad market is starting to rebound,” said Moody’s senior vice president Russell Solomon, co-author of the report. “We still think there are some growth opportunities left.”

Although ad sales are a small portion of overall MSO revenue, Solomon estimated that they accounted for at least a 1 percentage-point drop in cash fl ow during the slump. With cable programmers like Viacom and News Corp. showing signs of a resurgence in ad sales, Solomon estimates that could account for a 1 to 2 percentage-point rise in cash-flow growth for MSOs.

That, along with increased revenue from sources like equipment rentals — for digital set-tops and digital video recorders — and fees for additional outlets, should help off set a continued trend toward basic subscriber losses. The cable sector lost about 1.6 million subscribers in 2009, according to SNL Kagan, ending the year at 62.1 million, compared to 63.7 million in 2008. Moody’s believes that could dip below 60 million in 2010 as telcos and satellite providers continue to gain share.

“The core residential lines of business are becoming more and more mature,” Solomon said.

Solomon added there are several wild cards that could boost growth in the sector past 2011, most notably an overall economic recovery, better than expected revenue from the commercial telephony business and new technologies like interactive advertising.

“If the ad market and the economy start to recover, unemployment starts to subside, people move back into their homes, you could start to see commercial picking up because that is a big untapped opportunity,” Solomon said.

Miller Tabak media analyst David Joyce said that Moody’s estimates are conservative and the ratings agency is being particularly cautious regarding commercial services. Joyce, who estimates the sector could grow revenue and cash flow at a 4% to 6% clip (and operating cash flow by at least 100 basis points better) for the next few years, added that several companies are already generating significant revenue from commercial telephony.

He pointed to Comcast, which grew commercial revenue by 49% and operating cash flow by 47% in 2009. Joyce expects Comcast to grow commercial revenue another 30% in 2010, passing $1 billion.

Joyce added that although basic subscriber losses are expected to continue at cable companies, the rate at which MSOs are capturing high-margin telephone and data customers is outpacing their video customer losses to telcos.

“Yes, there is a convergence of cable and telecom business models, but for the foreseeable future, cable is winning share of landlines and small and medium-sized businesses, more so than telcos are grabbing video share,” Joyce said. “I do think that cable will lose basic cable subs, but the data product should more than make up for that going forward.”