Getting a Busy Signal

7/18/2008 8:00 PM Eastern

Is cable’s telephony business headed for a slowdown?

Some recent market announcements and bearish analysts say it could be.

Cable-modem maker Arris recently reduced its revenue forecast for the second quarter, based partly on orders from cable operators. That caused some analysts, concerned about a maturing market and the broader economy, to note concern about the second quarter growth.

Cable telephony has been one of the industry’s hottest growth stories for the past several years. Already cable phone penetration averages in the mid-teen percentages — pioneer Cablevision Systems boasts a 36% telephony penetration rate — and growth has beaten expectations for practically every quarter since the service was widely launched by the industry several years ago.

But when Arris Group announced on July 8 it was reducing its revenue forecast for the second quarter — as it had done the same for first-quarter estimates — at least one analyst took notice.

Cable Telephony Scorecard
Company 1Q Phone Subscribers Penetration of Serviceable Homes
SOURCE: Individual companies and Multichannel News estimates
Comcast5.1 million11.5%
Time Warner Cable3.2 million12.6%
Cablevision1.7 million36%
Charter1.1 million11%
Cox2.46 million30%

Arris, in announcing the revenue revision, said that while demand for products was consistent, there are signs the cable telephone market is maturing. As a result, revenue for the second quarter is now expected to be $278 million to $280 million, instead of $288 million to $303 million.

On a conference call with analysts on July 8 to discuss the revision, Arris CEO Bob Stanzione said the company is still seeing strong demand for high-end products and noted that there is still a lot of room for growth in cable telephony.

“We’re just crossing 10% in the big cable operators in the U.S., and they have their eye toward 20% or 30% penetration,” Stanzione said on the conference call. “Therefore, I think that there will be continued growth, and there will be continued opportunities for Arris, not only in the U.S. but internationally, as time goes on. But, again, it’s not the remarkable quarter-over-quarter stuff that was happening a year ago.”

Pali Research analyst Richard Greenfield, shortly after the Arris announcement, expressed some concern.

Greenfield wrote in a research report that he already expected a decline in telephony subscriber growth, given the seasonal nature of the second quarter (when snowbirds and college student move to summer residences). But he said it might not be a given that subscriber growth will rebound significantly in the latter part of the year.

Greenfield had expected Comcast to add 575,000 telephone customers in the second quarter (down from 639,000 in the first quarter this year and 673,000 in the second quarter of 2007) and predicted Time Warner Cable would add 250,000 telephone customers in the period (down from 276,000 in the first quarter but above the 222,000 in the second quarter of 2007).

“Now we are a bit more concerned with our back half 2008 telephony estimates,” Greenfield wrote.

Greenfield believes the culprit may be the sluggish housing market. Household moves typically form the biggest opportunity for telephony additions — it’s easier to switch phone carriers when a subscriber is moving to another house or apartment and would need to have phone service installed anyway.

“I think the reality is that one of the big times for capturing phone customers is when people move,” Greenfield said in an interview. “Obviously, the environment does not bode well for moving.”

Housing starts have been hit hard by the economic downturn — they were down 28% in 2007 — and show little signs of improving this year. According to the U.S. Dept. of Commerce, housing starts in May were at a seasonally adjusted rate of 975,000, down about 3% from the April estimate of 1 million homes and 32% below the May 2007 rate of 1.4 million homes.

“It does spook me a bit as you think about end of the year into 2009,” Greenfield said.

Other analysts didn’t feel that the housing slump would have as great an impact, adding that telephony growth will vary by individual operator.

Collins Stewart media analyst Tom Eagan said he expects telephony adds to be weaker at Comcast in the second quarter, but predicts they will grow even stronger at Time Warner Cable in the period.

Eagan said in an interview that stronger Time Warner telephone additions will primarily be due to the cable company’s being able to offer the service more widely in its Los Angeles and Dallas markets during the period. Both markets have been marred by basic-subscriber losses caused by difficulties in integrating and upgrading the local systems to Time Warner standards. That began to turn around in the first quarter, when the integration of those markets was essentially complete.

Overall, Eagan predicts that cable operators will increase their telephone market share by 6% for the year, repeating the 6% gain they enjoyed in 2007.

Eagan also disagreed that cable telephony additions were spurred by housing moves. That metric, he believes, affects video subscribers more.

“It’s easy to switch to phone,” Eagan said. “If you’re going to switch from satellite or go from cable to satellite, it takes some break in momentum, takes some inertia. With telephone providers, I think that people just get tired of paying the higher price and now they realize that they have an option.”

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