Cable Show 2013: Analysts Say Malone, Price Power Drive Optimism

But Programming Costs Drag Sector
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Washington, D.C. – John Malone and broadband pricing power are some of the biggest positives in the cable industry today, while rising programming costs and regulatory uncertainty continue to be the biggest drags on stocks, according to an analyst panel at the Cable Show Monday.  

Kicking off “The Macro View: Investment Analysts on Cable’s Economic Outlook,” panel, Bank of America Merrill Lynch media analyst Jessica Reif Cohen said the return of Liberty Media chairman Malone, after a $2.6 billion investment in Charter Communications, has been a “big boost of confidence” for the industry,” and it has restarted consolidation talk. She added that the continued strong pricing power of cable broadband service, despite its maturity, is an added boon.

But Reif Cohen said increased programming costs continue to drag on the stocks.

Reif Cohen said the trend line for programming costs over the past year and the past decade has been dismal. “It’s not going to end well,” she said.

Reif Cohen noted there are three drivers for high programming costs – retransmission consent, sports programming and the affiliate fee structure. She predicted that retrans fees could reach $2 per subscriber per month in the next round of negotiations, while sports cost increases largely depend on the teams that hold the rights.

“Barring regulation, I’m not sure how that ends,” Reif Cohen said.

She noted that some networks have managed to negotiate healthy affiliate fee increases, even though their network lineups appeared weak. And other channels, which have had low fees in the past but are currently enjoying ratings growth, may be in line for a big fee increases.

While Reif Cohen seemed surprised that network groups like Viacom have managed to secure decent affiliate fee increases, despite having “one of two channels that matter,” she said that other programmers like Discovery Communications, are for a big boost in carriage fees.

Discovery has more than doubled its programming spend from $500 million $1.1 billion in five years and has an argument for a decent price increase, Reif Cohen said.

NBC Universal, which has had low affiliate fee increases in the past, also is under pressure to charge more, she added.

Growing competition from online video companies like Netflix and Amazon could help drive the cable industry into the next phase of its development, Reif Cohen said.

Recent chatter behind chip-maker Intel’s attempts at a TV service could help drive TV Everywhere, just like satellite TV’s emergence drove the rollout of digital TV.

And advanced products like commercial services and home security should continue to’ be growth drivers for MSOs.

Citigroup media analyst Jason Bazinet estimated that the dominant player in the home security space is ADT, which controls about 25% of the market. The other 75%, he said, consists of “Mom and Pop” companies, the market is ripe for “the right brand names to come in.”

Reif Cohen said marketing the product correctly will be a crucial element in cable’s success.

“Marketing is going to be the key,” Reif Cohen said, adding that consumers need to know the service is more than just home security.