Cable Operators

Assessing The Damage

3/08/2009 9:11 AM Eastern

The top financial executives at the two largest cable operators in the country descended on Palm Beach, Fla., last week for the Deutsche Bank Media and Telecom conference and despite the gloomy economic climate, tried to calm investor fears by claiming that growth, while a bit slower, will continue in 2009.

Time Warner Cable chief financial officer Robert Marcus was the first out of the block, taking the stage early last Wednesday morning. Time Warner Cable, on the verge of a split with its parent Time Warner Inc. — expected on March 12 — reported basic subscriber losses in the fourth quarter and slower growth in revenue generating units (a combination of voice, video and data subscribers). But Marcus was upbeat at the conference, telling the audience that while some subscriber-growth metrics may falter a bit, financially the company will continue on pace, with revenue and cash-flow growth at least as high as 2008 levels. For full-year 2008, revenue and cash flow rose 8% at TWC.

Marcus hinted that in setting its guidance for the year, Time Warner Cable was understandably cautious, given the current economic climate.

This year's planning process was unique relative to prior years,” Marcus said. “We did a lot of scenario planning. What happens if [revenue-generating units] don't pan out the way we anticipate them? What happens if ARPUs [average revenue per unit] don't hold up because there is pricing pressure or consumers won't bear rate increases? What happens if the commercial business doesn't grow quite as fast as we anticipated it was going to grow or if ad sales deteriorate even further?

“We were very deliberate in identifying what levers were at our disposal that would enable us to achieve the growth we talked about in spite of some of those events.”

Marcus said, for the most part, the economy has had little effect on the basic subscriber base — customers are not switching off their service entirely to save money. But he said that the company has seen some customers shift their existing packages.

For example, Marcus said TWC added 87,000 digital video recorder customers in the fourth quarter, a significant drop from the prior year.

“There were two things prior to the fourth quarter that we saw: The number of people upgrading from singles to doubles and doubles to triples was increasing; and the number of people migrating from triples to doubles and doubles to singles was decreasing,” Marcus said. “Both of those trends reversed in the fourth quarter.”

Marcus also said that wireless substitution was having an effect on voice service additions, but added that he still saw plenty of runway for growth in that product. Still, he didn't expect voice-service penetration — currently at 14.5% — to approach the same penetration rates as high-speed Internet (31.8%) in the near term.

Marcus said that he envisions broadband and voice as two separate categories.

“The broadband category continues to be a growing category, so we can benefit on the [data] side from growth in the category, as well as continued gains in share,” Marcus said. “While I would love to say the same for the voice business, it certainly appears that voice is not a growing category — one, because it was a much more mature business to begin with; but two, we do have this phenomenon of some cord-cutting, where there is wireless substitution for landlines. I think we will continue to gain share in the voice business, but we don't have the benefit of the wind at our back in the overall category growing.”

Marcus also said that programming costs will likely rise at a quicker pace in 2009, due in part by increased retransmission consent fees. In 2008 programming costs rose about 6%, he said.

Marcus also predicted that the local advertising market, still a small portion of overall cable revenue, will most likely continue its downward slide, adding that “there doesn't look to be a reprieve in sight.”

Comcast CFO Michael Angelakis was equally pessimistic about the advertising outlook, adding that weakness that the industry experienced in the fourth quarter appears like it will bleed into the first quarter and beyond.

“We are not forecasting a rebound at all in advertising this year,” Angelakis said. “We feel it will remain challenged.”

Angelakis was upbeat about the prospects for cable in 2009, adding that Comcast too expected to grow RGUs, albeit at a slower pace. Revenue and cash-flow growth, he said, should be on par with 2008.

Despite the recession, Angelakis said that the company had several bright spots in 2008, adding that business services grew revenue 47% in the quarter and 41% for the year. Free cash flow for the entire company, he added, grew 56% during the year.

Angelakis said that basic-video subscribers will probably decline in 2009 — Comcast lost about 575,000 basic customers in 2008 — but that is expected, given competitive pressures and the state of the economy. He estimated that telco competitors Verizon Communications and AT&T overbuilt about 20% of Comcast's total footprint and that could grow to 30% this year. While he expects some video customers to migrate to telco offerings, he added that Comcast continues to take “meaningful share” in voice and data subscribers from the telephone companies.

March