Agency Sees Big Cash Gains for Cable

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Consolidation in the cable industry and the maturation of
plant upgrades has created a core of competitive companies with high prospects for growth,
concluded a recent study by Duff & Phelps Credit Rating Co. (DCR).

According to DCR's "Cable Industry New Services
Outlook," new services like digital cable, high-speed data and telephony are becoming
a reality, and they should drive future cash-flow growth, as well as create free cash flow
in cable companies across the country.

DCR vice president Michael Weaver wrote that the prospects
for continued credit improvement by the cable industry appear very good, as operators see
new revenue streams from advanced services, realize modest free cash flow and monetize
noncore investments.

"Operators have a means to fund additional
acquisitions or capital-expenditure acceleration without incurring increased
leverage," Weaver wrote. "The overall result is that credit-protection measures
for the industry should improve dramatically."

Weaver sees cable-modem growth accelerating, especially
after the equipment becomes available through retail channels, which is expected later
this year.

Although install rates for the service are currently about
1,200 to 2,000 new customers per week, those numbers should increase dramatically with the
commercial availability of Data Over Cable Service Interface Specification modems and
cable modems installed directly in computers, Weaver wrote.

Last week, Kinetic Strategies Inc. reported that the North
American install rate has already grown to 2,500 per week.

Although cable-modem service faces competition from
telephone companies' asymmetrical-digital-subscriber-line service, Weaver believes
both services can coexist peacefully.

"The ADSL rollout is not as mature as cable-modem
service, and subscriber levels are very low, but it is likely that each service would be
successful, and that ultimately, a near-equal market-share position will be
achieved," Weaver wrote.

He added that it is generally thought in the industry that
the breakeven point for cable-modem service is about 5 percent to 10 percent penetration.
He estimated that both ADSL and cable modems could achieve penetration rates as high as 30
percent each.

Digital cable also seems to be catching on, according to
Weaver. Initially conceived as a defensive response to direct-broadcast satellite
offerings, digital cable has resulted in higher pay-per-view take rates and a monthly
incremental revenue gain for operators of $12 to $16.

"Digital cable has perhaps the greatest near-term
prospects of all of the new cable services because it is immediately
cash-flow-positive," Weaver wrote. "Furthermore, this new service will reduce
potential churn to DBS."

Telephony services also present a major revenue and
cash-flow opportunity, Weaver wrote, although only two companies -- Cox Communications
Inc. and MediaOne Group Inc. -- have made any major strides in the arena.

AT&T Corp., which is currently testing telephony
service in a few markets, is expected to become a major force in cable-based telephony
once it begins to roll out the services on a wide-scale basis.

However, Cox appears to be leading the pack in the
switched-telephony business, with more than 90,000 customers and penetration rates as high
as 40 percent in one market -- Omaha, Neb.

Weaver said another factor that points to the success of
the Cox offering is that many customers are taking more than one telephone line from the
cable company. This indicates that Cox has replaced the local telephone company as the
sole provider of telephony services in at least some households.

Weaver wrote that prospects for local telephony appear to
be good for the cable industry for now. He added that some operators have indicated
750-home-node penetrations of 25 percent to 40 percent in some cases, and cable companies
can offer competitive pricing that is unlikely to be matched by local telephone companies
because their rates are already subsidized by business telephone services.

"It is expected that cable companies should be able to
ultimately achieve a penetration of 25 percent to 35 percent," Weaver wrote. "It
is estimated in the industry that a penetration of as low as 10 percent will be profitable
for the cable-industry participants."

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