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Major MSOs Expecting Steady Capex for 2002

2/17/2002 7:00 PM Eastern

Cable operators' capital expenditures this year will likely mirror 2001 outlays, with spending increases by AT&T Broadband and Cablevision Systems Corp. offset by drops at Charter Communications Inc. and Comcast Corp.

Spending within the category also continues to shift towards "variable" capital, such as set-top boxes and cable modems. "Fixed" spending on such items as coaxial cable and amplifiers continues to drop, because most MSOs have finished rebuilding their plant to 750-megahertz capacity.

The fixed category will eventually see some shifts — if not an increase — once operators start rolling out video-on-demand, Data Over Cable Service Interface Specification 1.1 modems and Internet-protocol telephony products, all of which will require different software components. They might also require some tweaks to the cable plant itself, such as the addition of servers or dense wave-division multiplexers.

AT&T Broadband has planned a 2002 capital budget of between $4.2 billion and $4.4 billion. Most expenditures — mainly to upgrade key systems in Boston, Chicago and San Francisco in advance of its merger with Comcast — will come in the first have of the year.

That's welcome news for vendors. Last year, AT&T spent only $3.3 billion on capex.

Cablevision will increase its capital budget from $1 billion to $1.3 billion this year, with most spending tied to its rollout of Sony Corp. digital set-top boxes.

But even that $1.3 billion forecast is down from earlier estimates, in part due to Cablevision's reduction in the number of digital boxes it is expected to employ.

Cable singing a new tune to Wall Street: the deployment of "success-based" or "just-in-time" capital. This means a greater percentage of money will be spent on pieces of equipment that have a direct impact on revenue, such as cable modems or set-tops.

Charter and Comcast plan sizable drops in capex spending in 2002. Comcast's outlays will fall from $1.8 billion in 2001 to $1.3 billion, while Charter's will drop from $3 billion to $2.5 billion.

That's mainly because both companies have finished most of their 750-mHz rebuilds. And Comcast expects to add fewer digital subscribers in 2002 than it did in 2001; its rate stands at 28 percent. Charter is at 31 percent.

Charter said some capex spending would continue into 2003 because of the need to rebuild some systems it recently acquired from AT&T Broadband.

The change from fixed to variable capital-equipment spending is evident at AOL Time Warner Inc. The company's capital-expenditure budget rose from $3.56 billion in 2000 to $3.634 billion in 2001. MSO unit Time Warner Cable represented about $2.2 billon of that figure.

Overall, money spent on fixed cable equipment dropped from $1.005 billion to $823 million from 2000 to 2001, while variable capital spending — including outlays for cable set-tops and modems — jumped from $1.153 billion to $1.398 billion.

The cable unit's variable spending — some $1.4 billion in 2001 — accounted for 63 percent of the division's total capex outlay last year, compared to a projected 53 percent in 2002, said AOL Time Warner chief financial officer Wayne Pace.

"Capital expenditures are expected to be in a comparable range in 2002," Pace said. "This is an investment we can modulate up or down, depending on the pacing of our earnings and the timing of the rollout of new services."

AT&T spent $3.3 billion in capex in 2001, with $1.5 billion put towards advanced services and $583 million spent on plant upgrades.

The plant upgrade portion is expected to double in 2002 to roughly $1.2 billion, AT&T Broadband president Bill Schleyer told financial analysts. The extra $600 million or so goes a long way to explain the $1 billion year-over-year capex jump.

"A substantial portion will be for success-based capital," Schleyer said. That figure is tied to the advanced services category, in which AT&T spent $1.5 billion in 2000 and $1.6 billion last year.

By year-end, 70 percent of AT&T Broadband systems will have been upgraded to 750 mHz, said Schleyer.

Cox Communications Inc.'s capital expenditures will total about $2 billion in 2002, said CFO Jimmy Hayes. About $700 million of that will be "success-based" capital: $550 million for upgrades and rebuilds and $450 million in recurring capital costs.

The remaining $300 million to be spent for the commercial division, on high-speed self-reliance and corporate technology.

Cox will have upgraded 89 percent of its systems 750 mHz by year-end, Hayes said. Ninety-six percent of its systems will be digital- and data-ready.

Cable's Capital Expenditures
MSO 2001 2002
Source: Company reports, Banc of America Securities
AT&T Broadband $3.3B $4.2B-$4.4B
Time Warner Cable $2.2B $2.2B
Comcast $1.8B $1.3B
Charter $3.0B $2.5B
Cox $2.1B $2.0B
Adelphia $1.8B $1.8B
Cablevision $1.0B $1.3B

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