News

Bundle Plan Panned

6/27/2004 8:00 PM Eastern

Wall Street reacted unfavorably to a plan by Cablevision Systems Corp. to offer its triple-play bundle of voice video and data at a substantial discount, triggering a sell-off that resulted in a 7.7% ($1.70 per share) decline in the MSO's stock.

On June 18, Cablevision announced it would charge new customers just $29.95 monthly for each of its iO: Interactive Optimum, Optimum Online and Optimum Voice services. The discount for new customers of the “Optimum Triple-Play” will run for at least one year.

In total, the three services would cost new customers $89.95 per month — a $30-per-month discount to the regular price.

DSL IMPACT SEEN

While the discount appears to be a move to make Cablevision's services more attractive to more price-sensitive customers — existing subscribers will not receive the discounts — several analysts saw the price slashing as a signal that competitive offerings by the regional Bell operating companies were having a greater effect on Cablevision's subscriber base than was originally thought.

But while the initial reaction to the price cuts by the analyst community was generally unfavorable, several switched their position after closer inspection.

Merrill Lynch & Co. analyst Jessica Reif Cohen at first saw the discounts as “exceptionally aggressive,” but in a subsequent research note said the offer “is simply a high-profile promotion that expires in essentially one month (on July 31st) with tight parameters for customer eligibility.”

Although the offer is a steeper-than-average discount for a longer-than-average time period, Reif Cohen said, other cable operators aren't likely to follow Cablevision's lead.

Banc of America Securities cable and satellite analyst Doug Shapiro saw the Cablevision sell-off as an overreaction. In a research note, Shapiro said that while the price discounts seems to be substantial, it is only $15 per month lower than existing promotions.

And because Cablevision is only offering the discounts to new customers, at most it could affect about 5% of the MSO's base of 3 million subscribers, clustered in and around New York City.

“Unlike other MSOs, Cablevision can get away with this pricing without provoking a competitive response because of its small size,” Shapiro wrote. “And unlike Cablevision, other MSOs have stated they are reluctant to price VoIP too aggressively.”

The threat of a price war between cable and the regional Bell operating companies has been one of the greatest fears of investors practically since the telephone companies began bundling their digital subscriber line high-speed data service with local and long-distance telephony and video service from direct-broadcast satellite providers.

But the investment community had previously believed that price war would be initiated by the RBOCs, who had more to lose if cable voice service threatened to cut into their lucrative landline telephony business.

WEAK SUB TRENDS?

“We believe this promotion is a sign that subscriber trends may have weakened sometime after April, and the company is attempting to make up for it with an aggressive campaign in the short-term,” said CS First Boston cable analyst Lara Warner in a research report. “Alternatively, it may represent a shift in strategy toward aggressively pursuing market share, rather than a more-measured approach to revenue growth, as CVC has been demonstrating recently.

“Either way, it means a more competitive landscape is emerging and pricing is under real pressure.”

Still, Cablevision's stock price kept falling. Cablevision shares were down 78 cents each to $21.22 on June 21, and dipped another 92 cents each to $20.30 on June 22. In addition, cable MSO stocks also saw declines early last week, in part because of fears of an industry-wide price war.

“Cablevision is the first cable company to break through the $100/month triple-play floor,” wrote Soleil Securities cable analyst Laura Martin in a research note. “Since price is usually the last competitive battlefield, investors are worried this is a precursor to industry-wide price cuts.”

OTHERS DIP, TOO

That was reflected in the declines at two of the top MSOs — Comcast Corp. and Cox Communications Inc.

Comcast and Cox shares each fell 5%, to a respective $27.70 (down $1.36 each) and $28.70 (down $1.40 apiece) between June 18 and June 22.

But aside from a 6% (23 cents per share) drop in Charter Communications Inc. stock in the same period, other MSO stocks were relatively unscathed.

There is an upside to Cablevision's pricing experiment, Martin wrote — it could serve as a test case for other MSOs.

“Cablevision's action will become an effective test market for Cox and Comcast to test consumer elasticity to price vs. demand,” Martin wrote.

“While common wisdom is that consumers [especially at the high, bundled end] are relatively price-insensitive, if Cablevision's pricing strategy yields better economics through more added subs than the lower price point, other cable operators may follow suit … but only if the economics work.”

March