MSO Execs Pour Cold Water on Overbuilds

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Baltimore-Pressure on cable stocks may be diverting some investment toward competitive cable overbuilders, cable executives here warned.

The decline in cable stocks has not dried the pool of available capital for cable operators, Comcast Corp. vice chairman Julian Brodsky said. But MSOs still face pressure to deliver new services, because new wireline competitors can also boast deep pockets.

"The pressure on cable stocks is from the uncertainty on how the various competitive forces play themselves out," Brodsky said during a panel session at the East Coast Cable 2000 show. "Particularly the phenomenon of new cable operators-there is an enormous amount of capital chasing a tantalizing proposition that if someone can get 15 percent of the voice, video and data market and somehow magically maintain margins, they think this is a slam-dunk business."

Brodsky also warned that overbuilders want to skim the cream by targeting affluent customers.

"What we're seeing is not a level playing field, particularly in the build-out requirements," he said. "They are spread out over five to seven years. That's de facto redlining and skimming."

Cable-stock prices have fallen off about 30 percent this year, even though most MSOs have met or exceeded revenue and cash-flow growth targets. Despite this, cable operators are, generally speaking, underleveraged, so they can get the money they need from banks and debt markets, Brodsky said.

"The industry has ready access to capital," agreed

Cablevision Systems Corp. chairman Charles Dolan. "Stocks are under pressure, but the analysts that take the trouble to really look at the companies know they are on the right track."

Though Wall Street may be a little skittish about cable operators' prospects for new services, Brodsky said the industry's plan for controlled rollouts of new products should help eliminate service problems down the road. That's a lesson overbuilders may need to learn.

"It's going to take a little time to sort itself out," Brodsky said. "How Comcast got into the data business, we limited ourselves to cable modems in six markets. We took 18 months to put in our first 25,000 units.

"We trained people how to go out and go in the back of a computer and put in the necessary Ethernet card, we trained the customers until we got a cadre and could then go into other markets," he added. "I think the DSL [digital subscriber line] people are seeing that is not so easy to do. And I think that will be multiplied enormously by these untrained companies coming into the marketplace."

Former CableVision Industries Inc. chairman Alan Gerry heard an investment pitch from one well-heeled overbuilder that did little more than tout a pile of franchises, he said.

"I think there is going to be a rude awakening," Gerry warned. "I don't think some of them [overbuilders] really plan to turn on a system. I think they're in the business of raising money."

Noting that operators spent much promotional money to develop cable programming into unique brands, Brodsky personally lamented the fact that such content is now available to its competitors. That outcome "was perhaps a strategic mistake and a result of our own naiveté and exuberance in building this industry," he said.

Gerry, who has been a private investor since he sold his company to Time Warner Inc. in 1996, agreed.

"I think it was most unfair the way we built the brand, and we built the loyalty to the different programming, and then had someone else come along and take it away from us," he said. "You don't see the government coming in and saying General Motors has this great transmission that they spent billion of dollars developing, and now they're going to have to give it to Ford and Volvo and Volkswagen and everybody else."

Dolan, whose company owns extensive programming assets through Rainbow Media Holdings Inc., said cable operators must remember that it's unique programming that appeals to customers: not high-tech boxes or state-of-the-art plant.

"We do prefer vertical [integration]," Dolan said. "We believe very much in content-the more a subscriber can identify, the better. There are strategies that work in New York that may not work in other areas. But you develop products particular to your operations.

"You ought not try to be the retailer of programming that you receive at wholesale from the satellite," he said. "I think those operations will continue to be quite vulnerable."

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