Is Cable's Boat Rising?


Holiday retail sales took a dramatic nosedive, with consumer spending dropping to 1970 levels. That surprised analysts — and the fact that analysts were so surprised, well, surprised me.

Where have these bubble-heads been? They were also caught off guard when the Conference Board, which measures consumers' confidence in the economy, found Americans weren't feeling all that good about things.

Closer to home, cable stocks tumbled anywhere from 38 percent to 50 percent last year. That surprised no one.

But what might be a little surprising is that cable's boat might finally be lifting after a long, dry spell. At least one analyst — Morgan Stanley's Rich Bilotti — told The New York Times
last week that "cable companies will have a higher strategic value than content companies."

That has not been the case, according to Bilotti, since 1970. That's when aspiring cable customers literally chased trucks to get the new service. Since then, cable's growth has skyrocketed.

But last year, that growth took a step back. According to the Federal Communications Commmission, 2002 was the first year that cable actually lost subscribers.

That is not as alarming as it sounds. Wall Street, we hope, seems now to understand that cable is a mature business and that its future growth lies in the industry's ability to get existing subscribers to pony up more money for cable modems, digital video and now, video-on-demand.

Bilotti had another interesting point: Cable's rate of return on reinvested capital is 20 percent, compared to 3 percent to 6 percent for content companies. That's a telling story when you consider that it was only five or six years ago that MSOs bet the ranch, upgraded plant and began rolling out advanced digital services.

Given this economy, and a looming war with Iraq, it's hard to tell how cable will fare in continuing to roll out new services. Most economists are not counting on consumers to lead the country out of this recession, as has been the case with others. That's largely because they are simply tapped out.

Consumers took advantage of low interest rates and refinanced their home mortgages. They took advantage of zero-point financing and sprung for new cars. And now we're starting to see the first signs that the housing market — where most people have put most of their money — is showing signs of weakness.

Those are all very important factors for cable operators to take into account as they continue to price and market new services. While VOD looks very promising, can it reach mass-market proportions during these daunting times?

Probably not. What we are seeing is pockets of affluence — most recently New York — where the well-heeled are leading the on-demand charge. But if VOD is attractively priced, discounted and bundled, then five years down the road, it could be as basic as basic cable.

In the months ahead, operators will be testing even more price points and packages. We hope they find the price-value combination that resonates with customers, so they dig deeper into their pockets — and then cable's boat will truly rise.