Cable Stocks Settle Down

Some Up, Some Down In Second Day After Title II Bombshell
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Cable stocks seemed to settle down Tuesday after a frenetic trading day on Nov. 10, leading some to believe that the panic surrounding President Obama’s call yesterday for stricter telecom regulation may be subsiding.

Shares of the top cable operators were split – Comcast and Charter Communications were up slightly while others like Cablevision Systems, Time Warner Cable and Liberty Broadband were down, although the declines were less dramatic (1% to 2%) than the previous day.  

The President in a Monday video message said that he would prefer the Federal Communications Commission adopt a Title II reclassification of broadband companies, a move that cable and telco TV operators shave said would grind investment and innovation in the broadband infrastructure to a halt.

While most analysts covering the stocks did not believe that full-blown Title II would become reality, there were fears that some of the more onerous aspects of a reclassification could be foisted on the industry, especially its two largest players – Comcast and Time Warner Cable – which are in the throes of the federal approval process of their pending $69 billion merger.

That sent cable stocks into a tailspin on Monday, with Charter Communications and Liberty Broadband (the tracking stock that includes Liberty Media’s 26% interest in Charter) down 6% each. Charter stands to nearly double its subscriber base through a series of swaps, sales and spins with Comcast and TWC after that merger is completed.  In addition, Charter is expected to be a major participant in what many believe will be a consolidation wave after the Comcast-TWC deal is closed early next year.

Cablevision Systems was the biggest loser at the end of the day, dipping 2.7% (51 cents each) to $18.09 per share on Nov, 11. Liberty Broadband was a close second, down 2.2% ($1.04 each) to $45.69 per share. Time Warner Cable tempered its losses on Nov, 11, closing at $134.83 each, down $1.67, or 1.2% per share.  

The rest of the sector was relatively stable – Comcast gained 1 cent (0.02%) to $52.89 per share while Charter rose 6 cents each (0.04%) to $146.68 on Nov. 11.

Analysts for the most part were of the belief that once the initial shock of a possible Title II reclassification wore off, most of what the President was asking for is already implemented.

According to the White House video, President Obama’s main concerns center around the possibility that ISP could block content, throttle back speeds and require that content providers pay a premium for so-called fast-lanes.

Taking a step back from the highly concerning broader long-term implications of Title II common carrier classification for broadband access (specifically, can an FCC “un-forbear”?), these specific four asks are extremely benign and would have essentially no impact on the outlook for broadband revenue growth,” Morgan Stanley media analyst Ben Swinburne wrote in a note to clients.

Instead, Swinburne said cable investors should be focused on managed services and pricing controls that could limit an ISPs ability to implement usage-based charges.

“Neither, however, were mentioned by the President,” Swinburne wrote, adding that the President’s track record has been to specifically avoid those aspects of Title II.

He pointed to former FCC Chairman Julius Genachowski’s 2010 Title II proposal, where “Obama asked the FCC to explicitly “forbear” more onerous aspects of Title II authority, including rate regulation,” Swinburne wrote. “Therefore, we believe the intent of the re-class is narrow and focused on: (1) securing regulatory authority for net neutrality -- a set of rules the cable industry broadly supports and Comcast has operated under since the 2011 NBCU consent decree and (2) explicitly banning paid prioritization / ‘fast lanes,’ which do not exist today and from which investors have effectively zero future rev expectations, in our view.”

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