Cable Outlook: Slow in ’12

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The cable industry still has two good
years of growth in it, according to credit-rating agency
Moody’s Investors Service, but after 2011, the growth
trajectory for operators could begin to flatten out.

In an update last week to its overall outlook on the industry,
Moody’s said that revenue and cash flow for operators is
expected to grow at 3% and 5%, respectively, through 2011.
That growth should be sustained by the still-growing telephone
and broadband segments of the business. But after
2011, Moody’s predicts that growth should slow to the low
single digits over the medium and long term.

Revenue and cash-flow growth in the sector has been
slowing for the past few years as the economy and competition
have dragged on the business.

Moody’s estimates are not out of line with most analysts,
who have predicted a similar slowdown in growth
as the cable business continues to mature.

“We thought it might have gotten slower by now, but there
are some unusual things that are happening, including the
ad market is starting to rebound,” said Moody’s senior vice
president Russell Solomon, co-author of the report. “We still
think there are some growth opportunities left.”

Although ad sales are a small portion of overall MSO
revenue, Solomon estimated that they accounted for at
least a 1 percentage-point drop in cash fl ow during the
slump. With cable programmers like Viacom and News
Corp. showing signs of a resurgence in ad sales, Solomon
estimates that could account for a 1 to 2 percentage-point
rise in cash-flow growth for MSOs.

That, along with increased revenue from sources like equipment
rentals — for digital set-tops and digital video recorders
— and fees for additional outlets, should help off set a continued
trend toward basic subscriber losses. The cable sector lost
about 1.6 million subscribers in 2009, according to SNL Kagan,
ending the year at 62.1 million, compared to 63.7 million in
2008. Moody’s believes that could dip below 60 million in 2010
as telcos and satellite providers continue to gain share.

“The core residential lines of business are becoming
more and more mature,” Solomon said.

Solomon added there are several wild cards that could
boost growth in the sector past 2011, most notably an overall
economic recovery, better than expected revenue from
the commercial telephony business and new technologies
like interactive advertising.

“If the ad market and the economy start to recover, unemployment
starts to subside, people move back into their
homes, you could start to see commercial picking up because
that is a big untapped opportunity,” Solomon said.

Miller Tabak media analyst David Joyce said that
Moody’s estimates are conservative and the ratings agency
is being particularly cautious regarding commercial services.
Joyce, who estimates the sector could grow revenue
and cash flow at a 4% to 6% clip (and operating cash flow
by at least 100 basis points better) for the next few years,
added that several companies are already generating significant revenue from commercial telephony.

He pointed to Comcast, which grew commercial revenue
by 49% and operating cash flow by 47% in 2009. Joyce
expects Comcast to grow commercial revenue another
30% in 2010, passing $1 billion.

Joyce added that although basic subscriber losses are
expected to continue at cable companies, the rate at which
MSOs are capturing high-margin telephone and data customers
is outpacing their video customer losses to telcos.

“Yes, there is a convergence of cable and telecom business
models, but for the foreseeable future, cable is winning share
of landlines and small and medium-sized businesses, more
so than telcos are grabbing video share,” Joyce said. “I do
think that cable will lose basic cable subs, but the data product
should more than make up for that going forward.”

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