Cash Flow Crimps VOD Push

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NEW YORK -Pressure to keep capital expenditures down and cash-flow growth up have been the major reasons why video-on-demand deployments haven't exactly measured up to digital cable's rollout at a similar stage of development, a group of Wall Street analysts said last week.

At a Paul Kagan Seminars Inc. conference here, Salomon Smith Barney Inc. analyst Niraj Gupta said that while cable companies are planning VOD deployments this year-Comcast Corp., for example, expects 500,000 of its digital subscribers to have access to VOD by the end of 2001-they are taking a cautious approach.

"The industry is exactly where it thought it would be," Gupta said. "Some of the vendors have had some pre-announcement issues over the past few months, but no operator said it would massively deploy VOD in the first quarter."

State Street Research senior vice president Larry Haverty said concern about maintaining at least 10 percent cash flow growth per quarter is the underlying cause of the industry's somewhat cautious VOD rollout.

Along those lines, he took note of Cox Communications Inc., which saw its stock drop 16 percent in one day during the second quarter last year, after it missed its cash-flow numbers by two percentage points. The main reason behind the shortfall: increased expenditures to fight off competition from Qwest Communications International Inc. in its Phoenix market.

"Everybody is at peace as long as the operators can squeeze out 11 percent cash flow growth each quarter," Haverty said. "But God help them if they hit 9.7 percent. And the fastest way to 9.7 percent is to deploy new services."

Haverty said that cable operators have at least five years to reach full deployment of VOD services-that is, unless News Corp. chairman Rupert Murdoch makes a successful bid for Hughes Electronics Corp., the parent of direct-broadcast satellite provider DirecTV Inc.

"The markets won't tolerate accelerated spending on VOD," Haverty said. "That's the last thing on people's minds, unless Rupert gets in the game. If Rupert ends up with DirecTV, then all bets are off."

Although DBS has some technical problems in providing true VOD, Haverty said that when the service is coupled with a personal video recorder system like that of TiVo Inc., satellite subscribers could get the same basic functionality. Add Murdoch to the picture-along which potential partners like Microsoft Corp., with its own Ultimate TV platform-and cable operators would have to substantially step up their VOD deployment plans to further differentiate themselves from that competitor.

"If Rupert gets control, it's very clear his mode will be to increase market share very rapidly," Haverty said.

Murdoch notwithstanding, UBS Warburg analyst Thomas Eagan said that as it stands right now, VOD is more costly to deploy than digital cable or high-speed data services.

"With all operators, the rollout of digital, or high-speed data, or telephony is all in managing the balance," Eagan said. "We're seeing most cable operators at cash flow breakeven for digital and high-speed data, which means if they roll out more, their cash flow should increase."

Digital and data also have their cost issues, Eagan said, particularly in markets where the services had never been available before. But by and large, VOD is much more costly at this point-at between $900 and $1,000 per stream, once back-office costs are factored in.

"VOD is still more of a cost center than a profit center," he said. "It's a competitive issue."

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