Wall Street Loves Cable … Still

Analysts Bullish on Stocks Despite Regulation Threats, Customer-Service Concerns and Tight Budgets

By Mike Farrell -- Multichannel News, 5/17/2010 12:01:00 AM

Los Angeles — Despite the looming specter of regulatory pricing scrutiny, a panel of top cable analysts remain bullish on the industry, pointing to its superior infrastructure and broadband leadership, but warning that potential weak spots remain in customer service and shrinking consumer wallets.

Sanford Bernstein cable and satellite analyst Craig Moffett, who created a bit of a firestorm with his downgrading of the entire cable sector on May 10 — which some believe helped lead to a major sell-off in the stocks — defended his decision in a panel last Wednesday at The Cable Show here.

Moffett’s actions were in response to the Federal Communications move to classify cable broadband service as a Title II telecommunications service. But what worried Moffett the most was a clause in the ruling that gave the commission the right to regulate rates. While the FCC has said it will tread lightly, and Moffett believes it will, there is still the threat that rate regulation could come.

The problem is the core of Title II includes language about just and reasonable pricing,” Mofett said. “This is not a, ‘We have the option to opine on whether processes are just and reasonable’; this is a, ‘We are compelled to opine if prices are just and reasonable.’ All we have raised, notwithstanding the promise of forbearance, is the reasonable question about the long-term flexibility of pricing.”

But Moffett stressed that he is still bullish on the cable sector, pointing to its robust infrastructure and leadership in the broadband market.

“I’ve had a clear view for years as to why I have been a cable bull,” Moffett said. “In the broadband wars, cable wins.”

UBS cable and telecom analyst John Hodulik, who noted that the FCC has had pricing power over the wireless industry for years and has not enforced it, said any potential regulatory threat does not change his view of the sector.

“The operating environment in cable is better,” Hodulik said, adding that the competitive threat may have reached a crest with Verizon Communications announcing last month that it would no longer build out new FiOS markets and DirecTV being less aggressive in new subscriber additions.

“The growth is there, and there is opportuopportunity for margin expansion with the rebound in advertising,” Hodulik said. “The environment is good. It’s not a bad time to be investing in utility-like companies like cable.”

Merrill Lynch media analyst Jessica Reif Cohen was equally bullish on cable’s growth prospects, adding that the move by many MSOs to go all-digital could unlock additional bandwidth for video on demand, HD, additional ethnic programming and higherspeed data service.

“Going all digital has and will have a huge positive impact,” Reif Cohen said. “There is an $8 billion [video] rental market that should be cable’s.”

Despite the optimism, threats remain. Citigroup media analyst Jason Bazinet said that although cable has made big gains with new services, it may have lost sight of its core video business, adding that DirecTV has only 5 million fewer customers than Comcast, Dish Network is larger than Time Warner Cable, and the cable industry still ranks at the bottom of customer satisfaction surveys.

“Take care of your customers,” Bazinet said. “There is no reason you shouldn’t be able to grow basic subscribers and the Street would look at [cable] as a healthier business than it does today.”

And while the threat of customers cutting the cable cord in favor of Internet video has ebbed and fl owed over time, Moffett said the mitigating factor is simpler.

“I don’t think the risk of over-the-top video is some 24-year-old kid who has access to really cool Boxee boxes,” Moffett said. “The driver of disintermediation is going to be poverty.”

Moffett said that as programming costs rise and cable bills inch higher, there is a point where customers just won’t be able to afford service. And that day is approaching faster than the industry may think.

Moffett estimated that after paying for food, shelter and transportation, the average U.S. household has about $100 left per month to pay for everything else.

“The idea that $80 a month is OK for the price of entry for video is potentially a very, very dangerous expectation for this industry,” Moff ett said. “…Cable is one of the few industries that has to serve 100% of the population, and the bottom quintile doesn’t have any money.”

Moffett said the industry should work toward developing programming packages geared toward lower income families.