Wracked by pressure to keep cable rates low and the trend
toward moving select premium services to basic tiers, revenue per subscriber at the 10
largest MSOs took a slight hit during the third quarter, which ended Sept. 30.
And this year may just be the beginning of a continued
While that might sound ominous for cable operators, most
analysts don't believe that it's as bad as it seems. Instead, many believe that
the numbers reflect what they have been saying all along -- basic cable is a maturing
industry, and growth will be driven by ancillary services.
"That is what the equity values are now
reflecting," said Spencer Grimes, media analyst for Salomon Smith Barney in New York.
"That the core cable business is maturing is becoming increasingly evident."
And the numbers, at least for the third quarter, seemed to
prove that theory out.
For the three-month period, only one MSO posted a
double-digit increase in RPS -- Jones Intercable Inc., at 36.5 percent. The rest of the
MSOs analyzed posted increases ranging from minus 2.6 percent for Time Warner Cable to 8.6
percent for Cox Communications Inc. On average, rate increases came in at between 6
percent and 8 percent in 1998.
Time Warner's and Tele-Communications Inc.'s
figures may be slightly distorted, because both companies have financial structures that
don't allow them to report revenue received from systems that they jointly own. For
example, according to Time Warner, the company does not claim revenue from systems in
which it owns stakes of 50 percent or less.
TCI is partly in the same boat, because of the byzantine
structure of its various holding companies. TCI also owns partial stakes in several other
cable companies for which it does not make revenue claims.
"This year, there has been more talk of competition
than in years past. Basic revenue is not where the profit is," noted Carol Mann,
director of cable and satellite research for Strategis Group.
Competition from direct-broadcast satellite could also be a
factor, especially when subscribers sign up for DBS and drop their cable to a lower-cost
broadcast-basic tier in order to receive local, over-the-air channels.
But Grimes believes that the effect of DBS on RPS at the
MSO level is minimal.
"I still think that number [current subscribers
switching to broadcast basic] is minuscule," Grimes said. "It's less than 5
percent, and there is no indication that it is rising."
But one analyst believes that competition has had at least
some impact on the bottom line.
"If you looked at third-quarter 1997 and 1996 customer
growth, it has definitely slowed," said Gary Farber, a cable analyst with SG Cowen
& Co. in New York. "The impact of DBS is difficult to extrapolate out from cable
growth, but it's got to be taking some of the growth away from [basic cable].
What's offsetting that -- what the market is focusing on -- is new services."
More of a factor in prospects for sluggish basic-revenue
growth is the push to keep annual rate increases at 5 percent to 6 percent this year.
That's lower than usual in the face of reregulation threats from Washington, D.C.,
"It seems that cable operators are being sensitive to
regulation," said Mark Todtfeld, an analyst with NationsBanc Montgomery Securities in
John Alchin, senior vice president and treasurer of Comcast
Corp., agreed that "the industry is in a transition phase."
Comcast had a 6.3 percent increase in RPS in 1998, slightly
less than in previous years. Alchin attributed the bulk of the 1998 increase to rate
"The business is certainly more competitive," he
said. "The good news is that this is happening at a time when we have a whole host of
new products that we're deploying over new networks that we are operating."
At Jones, the explosive growth in RPS was attributed to new
revenue streams, efforts to slash programming costs and new cost-efficiency programs in
customer service. However, Jones' growth also could be due in part to its 1998 plan
to purchase the limited partnerships that make up its systems.
While Jones identified new services as the drivers for
future growth, it also sees opportunity in niche-product tiers within the basic-cable
"We think that we can garner more cash flow on
lifeline service by enhancing it with new services, like a weather service," said Jim
O'Brien, president of Jones. "Some people don't want 200 channels, but if
you offer them an off-air weather channel and Internet access, they'll
Jones began implementing that new tier -- part of its
"Jones Impact" offering -- in several markets in 1998, and it has also started
to realign its channel lineups throughout its systems. The company, which has a 65
percent-penetration rate in its markets, believes that Jones Impact is a means to sign on
the other 35 percent who do not subscribe to cable.
While Jones focuses on attracting both high- and low-end
subscribers, total subscriber growth among its counterparts has been sluggish.
Subscriber growth in the third quarter of 1998 for the 10
largest MSOs, compared with the same period in 1997, ranged from less than 1 percent to
more than 3 percent, with Marcus Cable at the low end, posting a 0.2 percent increase.
Cox sowed a 3.3 percent increase in subscribers during the
period, followed by Cablevision Systems Corp. and Adelphia Communications Corp., each with
2.1 percent increases; Time Warner at 1.8 percent; TCI at 1.7 percent; and MediaOne Group
Inc. at 1.3 percent.
Farber said new services like digital television, telephony
and high-speed Internet access are what the stock market is focusing on when it comes to
cable companies -- not subscriber growth. And maybe that isn't such a good idea.
"If you go five years out, on a cash-flow basis,
[estimates are] for a one-third to two-thirds growth rate for a lot of these
companies," Farber said. "That's what the market is focusing on. Customer
growth is slowing, and maybe it should be an issue, but it isn't."
Analysts expect these new services to begin paying off this
year and next.
Some MSOs are already beginning to reap the benefits of new
services. For example, in the quarter ended Sept. 30, Adelphia saw new-service revenue
grow by more than 237 percent, from $593,000 to nearly $2 million.
TCI, which had one of the lowest increases in RPS during
the period, attributed that to its efforts to keep rate increases down and to the shifting
of some premium services to the basic tier.
TCI spokeswoman LaRae Marsik said rate increases for the
company were about 3.9 percent during 1998. That, coupled with moving Disney Channel from
the premium to the basic tier, hurt RPS levels .
"We've struck a very delicate balance, and it has
impacted RPS in certain ways." Marsik said.
Julie Goldsmith, vice president of investor relations for
TCI, said this was all part of TCI's strategy to increase shareholder value by
TCI president and chief operating officer Leo J. Hindery
Jr. "has said that we will not enhance shareholder value on the backs of
customers," Goldsmith said. "We are able to get enhanced services and bundled
services and increase shareholder value from that, instead of just from basic rates."