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CTAM in NY: Cable Pipe is King

10/07/2011 6:53 AM Eastern

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New York - Cable operators are first and foremost infrastructure providers, not media companies, a fact that makes them supremely more attractive businesses, Sanford Bernstein cable and satellite analyst Craig Moffett said at the CTAM in NY conference here Thursday.
Moffett, the sole speaker at the "Cable Business Landscape" panel compared the cable broadband business to wireless and other video providers, adding that cable operators have fewer competitors, less saturated markets and a more stable cost structure. In his talk, Moffett noted that wireless companies have 106% penetration, 7 competitors in each market and fixed costs represent 80% of total costs; video is 85% penetrated, has three to four competitors in each market and fixed costs of 60%. Cable broadband, on the other hand, has 66% penetration, two competitors in each market and fixed costs that are 90% of total costs.
"It [broadband] is structurally the most attractive business," Moffett said.
And while cable operators have been losing market share on the video side, Moffett said the growth curve for its chief pay TV competitor, satellite television, is beginning to slow down. Moffett said that several years ago, he devised a model that predicted satellite TV penetration would reach its peak at about 35%. The industry is at about 33% penetration now and already the huge growth rates of the past have slowed considerably - DirecTV added 26,000 net new subscribers in the second quarter, the lowest growth number in its history. Dish Network lost 135,000 net subscribers in the period.
While broadband growth is slowing as well as the market matures, the difference is that cable is taking share, Moffett said. He added that if you define broadband service as a product that delivers speeds of 10 megabits per second, 51% to 57% of American households are served by only one infrastructure - cable. If the speed bar is raised to 25 Mbps, 78% to 82% of American households have cable as their only choice.
Telcos, which have touted their fiber based broadband services still are predominantly wireline DSL providers Moffett noted - DSL service availability is three times that of Verizon FiOS and AT&T U-Verse combined. And replacing DSL service with fiber has made the disparity even worse Moffett added, because they tend to replace DSL where it works best.
"What you are left with is slower and slower speeds," Moffett said."It is a huge problem for the telcos."
Moffett also came out in favor of usage based pricing for high-speed Internet service, adding that critics are missing the big picture.
"If you are using enough broadband so it is serving as a substitution for video service, you'll just pay out of the other pocket," Moffett said. "People are arguing over which lane the toll is going to be in. If you own the bridge, it doesn't matter."
But Moffett warned that cable operators are not without their problems either. Because the business is dependent on providing service to basically everyone, it is vulnerable changes in to household income. And household income is falling.
Moffett noted that the top 1% of households in the U.S. earn 24% of all income, with the top 20% of households earning 49.5% of total income. The bottom two quintiles earn less than $19,000 per year and after paying for necessities like shelter, food, transportation and healthcare, are already $1,000 in the hole.
"It is an extraordinary problem facing this industry, which has to address the entire population," Moffett said.

November