Analysts ’04: It’s a Big Year for Cable


This year has the potential to be very interesting in the cable business, with competition increasing and a backdrop including such developments as Comcast Corp.’s unsolicited $48 billion bid for The Walt Disney Co. (dropped on April 28) and News Corp. chairman Rupert Murdoch’s bid to take market share away from cable with his newest toy, No. 1 direct-broadcast satellite provider DirecTV Inc. On April 12, Multichannel News senior finance editor Mike Farrell sat down in New York with three top analysts — Sanford Bernstein & Co.’s Tom Wolzien, Fulcrum Global Partners’ Rich Greenfield and Ziff Brothers Investments’ Lydia Loizides — to talk about the landscape. An excerpt follows. For more of this conversation, tune into the Nelson Network’s Cable Channel in convention hotels during the National Show.

MCN: What do you think are going to be the big issues for the industry this year?

Rich Greenfield: For us, I think the big issue really comes down to competition. On the video side, you’ve got Rupert Murdoch entering the arena, having bought DirecTV [Inc.] over the last year, and you’ve got [EchoStar Communications Corp. chairman] Charlie Ergen explaining that he’s going to fix the inventory shortages and become more aggressive in 2004.

On the flip side, you’ve got the [regional Bell operating companies] increasing DSL [digital subscriber line] net adds for the first time in a year, when cable-modem net additions are actually going to slow down year over year.

I think from an investor standpoint, understanding the competitive dynamics, despite the fact that free cash flow is starting, earnings growth is slowing or revenue and cash flow growth is slowing.

How is that going to impact the stock prices? We think it’s going to mute stock price improvement during 2004.

Lydia Loizides: I think competition is really important. I also think that stabilization around pricing is something that you are also going to see some focus on.

New-product development, as well as real product differentiation — what is your difference versus satellite? What is your difference on your voice services versus a competitor’s?

So I think we’re going to see some more definition around what products and services cable is going to be putting out there, as well as really trying to understand the customers, targeting them better, and getting back to their basics around not losing analog.

Understanding how to capitalize on digital and focusing in on customer services as well, which I think is something that you’re going to see a lot of people start to talk about.

Tom Wolzien: This is the year that cable comes face to face with the question of: Is it a commodity, is it a utility, or does it continue to be a bundle of value-added services?

As a commodity or utility, it should trade at utility types of multiples.

The high-speed data business, the move into IP [Internet protocol] telephony, are both basically utility businesses going forward, and so the question is, are they going to come up with value-added intellectual property to put into that, or put it into the data business and as they do so, will that start to collapse margins?

MCN: Do you see more Comcast-Disney-type deals out there — distributors and content companies partnering?

Wolzien: The interesting question is, does content need distribution or does distribution need content? I think as we are seeing the growth of what I’ve started calling the Internet bypass, the ability to, whether it’s a movie link ultimately or ultimately to get ESPN motion off, as that evolves, I think there’s an alternate distribution process that’s developing in this country that goes around the cable operator and begins to break this wonderful bundle of content and distribution that cable has had for the last 30 years.

So from a content provider side, I don’t think it’s absolutely necessary to own distribution.

From a distributor’s side, I guess it depends on which day you ask Comcast. Is this a financial investment or was this a long-term strategic decision that was made that they needed to move into content and scale? And by all reports that you get it would sound more like the latter, even though the public position has been that was financial only.

Greenfield: I believe that from the standpoint of synergy or one-plus-one-equals-three, I’m not sure I buy into that in terms of the benefits of combining content and distribution.

But I think if you look at News Corp. and its ability to combine the value of content and distribution, not just in the U.S., but globally, I think it’s clearly a one-plus-one-equals-2.2. There’s clearly some benefit to combining and obviously transactions like a Comcast, Disney come down to price on each side.

The reality is the two companies, I think from a big content, big distribution, putting companies together along those lines at the right price does add value.

MCN: Do you see another round of cable consolidation coming?

Wolzien: This is the start of the last roundup and I think when you’re down to five major content distributors, a handful of RBOCs, the idea of having three, four cable operators who cover the bulk of the country, there’s some logic in that. The scale that Comcast has brought together is pretty significant.

What happens, however, going forward is that there’s real pressure I think to put the last pieces together fairly quickly because if you’re the odd guy left out, you’re going to have semi-rural “C” and “D” counties, and that’s basically going to be your system going forward.

So there is a lot of pressure I think that was going to start to be felt on the Time Warners, on the Coxes, particularly, to start to rationalize this process.

Greenfield: Especially if they want to open themselves up to a wider footprint of possible buyer down the road. When you look at something that is distribution only, having 6 million or 7 million subscribers isn’t going to be all that interesting to a Viacom or an NBC Universal, or even a Disney if they change their view towards the necessity of distribution down the road, whereas having 15 to 20 million subscribers would make a distributor very interesting to a content player.

Wolzien: It also brings you back to the Murdoch question; where [News Corp. chairman Rupert] Murdoch has suggested that he wants 20 million subs at DirecTV. That’s eight [million] more than he’s got now. And those are going to come out of somebody’s hide because we’re seeing the overall growth start to taper off in terms of multichannel homes as we get up towards 90%.

That suggests that the companies that are consolidated, the cable operators that have put their operations together are better able to put up a front, a marketing front, against that than the guys who are still scattered about or are just being put together in terms of consolidation, that the greater risk will fall to those companies that are still in the 6 to 8 million range rather than ultimately the Comcasts in the 20-some [million] and the Time Warners in the 9 to 10 [million].

MCN: So, who gets acquired?

Wolzien: The single greatest property that remains is Los Angeles and you could justify Comcast coming down from the North, Cox coming up from the South, or Time Warner saying we want to control the top two markets in the country. Those are the players I guess.

Greenfield: And you’ve got Cablevision sitting here in New York with a pristine 3 million subscriber cluster in the process cleaning up all of its non-cable assets, and at least from an investor standpoint apparently trying to set itself up for a transaction in the next 12 to 24 months.