Basic Subscribership: Growth Is Back

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Cablevision Systems Corp.'s blowout fourth-quarter results last week highlighted a fundamental change in the health of cable system operators in recent months: the number of households that subscribe to basic-cable service is growing again.

Last Monday, the Bethpage, N.Y.-based cable provider reported the addition of 17,930 basic subscribers in the fourth quarter, ending the year with nearly 64,000 additional basic customers — its largest annual basic-subscriber growth in eight years. It was Cablevision's seventh consecutive quarter of basic-subscriber growth.

TIME WARNER LIFT

Cablevision is not alone. Time Warner Cable, the nation's second-largest cable operator, finished 2005 with 73,000 more basic subscribers than it started the year with.

But the growth is not being driven by some hitherto untapped demand for television programming. Instead, the driver is telephone service.

The boost that providing voice services has given “to basic-subscriber growth has just gotten clearer and clearer over the past 12 months,'' said Sanford Bernstein & Co. cable and satellite analyst Craig Moffett.

Moffett said the turning point in basic subscribers appears to have started at the end of the second quarter. And he gives the credit to low-cost voice service, which has had a “halo effect” on cable operators, he said.

In fact, the success that companies like Cablevision and Time Warner have had by sending voice calls over their networks using Internet protocols could well lead to a “separation between the voice-over-IP haves and have-nots,'' he said.

The good times could roll for a while. Cablevision, which now has 3 million subscribers, said the number of basic subscribers should grow between 2% and 2.5% this year, as well.

Phone service is driving the growth, said Cablevision chief operating officer Tom Rutledge, because it creates a bundle of TV, voice and Internet services that telephone and satellite companies are hard-pressed to match. By becoming cable customers, for instance, a consumer can spend $35 a month on phone service, instead of $75 a month, pocketing $40 a month, he said Thursday.

Indeed, the effect of the bundling was clear at Cablevision. The Bethpage, N.Y.-based operator added 119,496 digital, 93,900 high-speed data and 130,133 telephony customers in the period, all ahead of analysts' estimates. For the year, voice subscribers doubled, to 730,000. Revenue gained 9% to $5.2 billion and the cash it generated from operations shot up 13.2%, to $1.6 billion.

The hidden gem of voice-over-Internet Protocol service is “that it can be used as an impetus to bolster the growth of video and data,” UBS Warburg cable debt and equity analyst Aryeh Bourkoff said. These tiers of service — especially video service — turn over customers less frequently, generating more consistent profits.

The result was a 5% gain in the value of Cablevision's stock, to $26.46 a share, on Feb. 27.

COULD STEM DECLINES

The phone-led growth could stem years of decline in cable's popularity. In 2001, 69.2% of television households in the United States subscribed to cable, according to the National Cable and Telecommunications Association. That percentage has fallen every year since, to 66.8%. The total number of basic subscribers has barely budged, from 73 million in 2001 to 73.2 million in 2005.

Meanwhile, the two main satellite TV services have surged from 17.0 million subscribers in 2001 to 25.0 million in 2005, according to the Satellite Broadcasting and Communications Association.

According to Bernstein analyst Moffett, the end of the erosion came at the same time that direct-broadcast satellite giants DirecTV Inc. and EchoStar Communications Corp. began implementing more stringent credit policies, in an effort to weed out non-paying customers.

And the DBS pair's explosive growth — which came from expanding the market for pay TV services, Moffett said — has also slowed down.

DirecTV added 1.8 million subscribers in 2004, averaging about 460,000 new additions per quarter, and reported 505,000 new-subscriber additions in the first quarter of 2005. Since then, that growth has slowed to between 200,000 and 263,000 per quarter.

EchoStar, which is expected to release fourth-quarter results later this month, added between 340,000 and 430,000 new subscribers each quarter in 2004 and 335,000 new subscribers in the first quarter of 2005. That dipped to 225,000 additions in the second quarter and 255,000 in the third quarter of last year.

Moffett doesn't expect the cable industry as a whole to show positive basic-subscriber growth this year — he expects growth to be “neutral” in 2006 — but said he expects “modestly positive growth” for the largest operators this year.

KEY: BE AGGRESSIVE

The growth in basic-video subscribers, Moffett said, is directly tied to how aggressively an operator rolls out phone service.

Cablevision was the first major cable operator out of the blocks with a telephone bundle — it began offering a package of digital video, high-speed Internet and phone for $89.85 per month in June 2004 and almost immediately began to see a major increase in basic-subscriber growth. At the end of the third quarter of 2004, Cablevision reported an increase of 850 basic subscribers. By the end of the fourth quarter, basic subscriber rolls had risen by 10,788 customers.

The same appears to have held true for Time Warner Cable, which began aggressively marketing voice service across its 11 million-subscriber footprint in January 2005.

According to its financial reports, basic subscribers rose by 26,000 in the first quarter; declined by about 5,000 in the seasonally weak second quarter; bounced back to increase by 18,000 in the third quarter and grew by 34,000 in the fourth quarter. Time Warner ended 2005 with 73,000 additional basic subscribers.

Comcast, which launched voice services in 25 new markets in 2005 and plans to make the product available across its entire service area by the end of 2006, has already seen a lift in basic customers from its limited voice rollout. According to its quarterly reports, basic-subscriber additions began to pick up substantially last year after the No. 1 cable operator in the country got more aggressive with voice.

For example, Comcast lost basic subscribers in the first three quarters of 2005, when its addition of voice customers ranged from 15,000 to 46,000. But by the fourth quarter, when voice-over-Internet Protocol subscribers accelerated to 134,000 additions, Comcast added 40,000 basic customers.

“With Comcast now joining the voice-over-IP haves camp, it suggests that the industry-wide trend is only going to gain momentum,” Moffett said.

That is beginning to take hold already, given the robust digital and high-speed additions at Cablevision.

'HEAD SPINNING' IMPACT

“What's astonishing about the Cablevision results is that the numbers are head-spinning in how good they are,” Moffett said. “This is a company that has by far the highest penetration of basic cable in the country, yet they are growing faster than any other operator. They have by far the highest penetration of digital and yet they're still accelerating their digital penetration. They have by far the highest penetration high-speed data penetration, and just put up the best high-speed data growth quarter they've had in four years. All of that points back to the power of VoIP to pull through consumer demand for the rest of the product.”

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