Data Subs' High Value
Sanford Bernstein Says 'Uncounted' Subs Add Much
By Mike Farrell -- Multichannel News, 12/21/2003 7:00:00 PM
Cable valuations, currently between $3,500 and $4,000 per subscriber, are missing a key component that could in some cases triple the value of a subscriber, according to a recent research report by Sanford Bernstein & Co.
While Wall Street has focused on basic video-subscriber losses at several MSOs in the past few years, Sanford Bernstein analyst Craig Moffett discovered that the truly high-value customers — high-speed data and telephony subscribers who do not take video service — are not counted.
Net Sub Gains
Moffett wrote in his report that typically, MSOs are growing high-speed data subscribers at a faster rate than they are losing video customers, resulting in net customer gains instead of losses. What's more, high-speed data and telephony subscribers are more valuable because they not only generate more revenue, but they churn off the service at half the rate basic video customers do.
Not that Moffett believes cable should abandon video, but he added that the ranks of non-video subscribers are rising — and generating a tremendous amount of cash flow for MSOs in the process.
For example, Moffett wrote that the number of customers subscribing to high-speed data or telephony only in the past year has risen 52% at Cox Communications Inc. and has nearly doubled at Cablevision Systems Corp. He estimated that about 270,000 Cox customers are non-video subscribers, accounting for about 4.1% of all of Cox's customer relationships, up from zero only three years ago.
More importantly, these non-video subscribers are much more valuable than the video-only customers they replace. Moffett wrote that most are data-only customers that pay about $50 per month for service ($10 more than if they bundled it with video) at a margin of about 80%.
A video-only customer at the lowest tier of service — lifeline basic — pays about $10 per month at a 90% margin. But, according to Moffett, after billing, customer service and other costs, the video-only customer is basically a losing proposition with "a negative lifetime value."
Even an average video-only customer paying about $45 per month generates $31 in monthly revenue, still less than the average data customer.
"Surprisingly, non-video subscribers are almost never counted and are generally not included in per-subscriber valuations," Moffett wrote. "By ignoring the growth in non-video subscribers, investors are systematically undervaluing cable companies."
Moffett added that usage-based segmentation points to a huge difference between subscriber types. Where a few years ago, the difference between the best and worst cable subscriber was only about four times on a revenue basis, today that difference is 16 times, Moffett wrote.
According to Moffett, the value of a cable subscriber depends largely on segment mix. A cable MSO that trades at between $3,500 and $4,000 per subscriber is actually a blend of customers ranging from no value at all to those that are worth, in his estimation, nearly $12,000 each.
Moffett reached that lofty figure by applying a 13 times multiple to the $915.54 in annual cash flow generated by a Cox triple-play (voice, video and data) customer. However, as a "sanity check," he noted that his weighted-average value for Cox is about $3,700 per customer.
But Moffett also pointed out that the highest-value subscribers also have the lowest churn, the longest life and are growing at a faster rate. (He estimates that non-video customers are rising at a more than a 70% compound annual growth rate for Cox alone.) On the flip side, the lowest valued subscribers are flat to shrinking.
"Cable operators are therefore shifting to a more stable, defensible mix of subscribers," Moffett wrote. "In short, not all cable subscribers are created equal."
At Cox, that tenet is apparently been taken to heart. According to Moffett, Cox has been most successful in converting low-value subscribers into high-value segments — single-product customers are declining, while two-product subscribers are rising at a 30% annual clip and three-product customers are up more than 75% annually.
Cox's triple-play subscriber segment make up 7% of the subscriber base but account for 17% of total revenue. Two-product customers account for 30% of subscribers and 46% of revenue, while lifeline basic customers account for 10% of the subscriber base but only 1.4% of total revenue.
Subs Moving Up
Moffett also estimates that in the next five years, 19% of Cox's subscribers will shift from being one- or two-product customers to being three-product customers, adding more than $1,600 to the average subscriber valuation during that period. Also during that time frame, another 10% of Cox's subscriber base will move from being one-product customers to two-product customers, adding $450 to valuations.
Therefore, the shift to bundled subscribers alone would add nearly $2,100 in valuation to Cox over the next five years, assuming no basic subscriber growth or price appreciation. Given that Cox's total customer relationships are rising about 2% per year, that would represent another 10% increase in valuation for Cox, to about $6,100 per subscriber over the next five years.
| Cox Usage-Based Subscriber Segments | |||
|---|---|---|---|
| ARPU | Annual EBITDA | Value Per Sub | |
| Source: Sanford Bernstein |
|||
| Lifeline Only | $9.99 | ($154.04) | ($2,002) |
| Basic/Expanded Basic | $41 | $87.29 | $1,135 |
| Phone Only | $47 | $24.27 | $316 |
| Data Only | $42.25 | $137.70 | $1,790 |
| All Video & Phone | $109.92 | $485.69 | $6,314 |
| All Video & Data | $105.71 | $599.12 | $7,789 |
| Triple Play | $155.19 | $915.54 | $11,902 |
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