Moody’s: Broadband Is the Game

High-Margin Broadband, Commercial Services Will Offset Video Losses For Ops
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Cash flow growth is expected to decelerate to between 2% and 3% for cable operators in 2015, down slightly from the 4% rise expected this year. But a continued focus on higher margin broadband and commercial services should keep profit margins fairly steady for the foreseeable future, according to credit ratings agency Moody’s Investor’s Service.

In its report, Broadband is the Game, Cable is Poised to Win, Moody ‘s estimates that cash flow margins will decline mainly because of the maturing video business. Video customer losses and higher content costs should continue to impact that segment of the business going forward. And though the broadband business has also shown some signs of maturation as subscriber growth has slowed down, Moody’s believes cable operators will see profits rise as customers upgrade their service to higher speed and higher costs tiers. Earlier this year, the broadband subscribers surpassed cable video customers for the first time.

“It’s the broadband business now, and speed upgrades make it cable’s game to win,” the Moody’s report said

Proposed over-the-top offerings from Sony, Verizon, Dish Network and DirecTV are expected to have some downward effect on pay TV subscribership, but Moody’s believes it will be minimal.

Moody’s doesn’t believe that content providers are going to want to rock the boat of affiliate fees and ad revenue from cable that hard, adding that it expects content providers to make content available to a degree and at a price that targets people outside that audience.”

While widespread adoption of odver-the-top services could throw a wrench in that strategy, Moody’s believes “programmers will tread lightly, limiting pressure over at least the next year or so.”

On the commercial services side, Moody’s expects cable to continue to gain market share – it pointed to the pending Comcast-Time Warner Cable merger, which would allow the combined entity to serve larger customers in major cities like Los Angeles  New York City and helping to build on the more than 20% annual revenue in that segment for both companies. Providing cellular backhaul services – essentially using their network to transmit information between cell towers, also is expected to be a healthy business – Moody’s projects 7% to 10% annual revenue and cash flow growth for that segment alone over the next three-to-four years.

“What’s good for the cell towers is good for the cable operators serving them,” Moody’s said.

WiFi could also prove to be a cash generator for cable operators in the future, Moody’s said. Currently used primarily as a retention tool – operators offer it as a free add-on to broadband service – WiFi is becoming increasingly important and could withstand a small monthly surcharge without a resultant subscriber loss, Moody said. The credit rating agency estimated that at Cablevision – which was a pioneer in offering WiFi service – could lose as much as 5% of its customer base before an additional $2 monthly charge would be uneconomical. A $3 monthly charge pushes that acceptable subscriber loss to 7%, according to Moody’s.

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