NYC TV Week: Moffett: Cable Stocks Nearing Plateau

Analyst Says As Growth Runway Nears End, Dumb Pipe Could Be Best For Distributors

Cable stocks’ unprecedented run over the past two years could be nearing a plateau, MoffettNathanson Research partner and senior analyst Craig Moffett said at the Multichannel News/B&CNYC Television Week event Monday.

Cable stocks have had an unprecedented run in the past several years: Moffett cited research that showed the sector has been the second best performing sector in the world over the past 10 years (U.K. mining stocks were No. 1). But that the runway may be coming to an end.

“For years I was known as the cable bull,” Moffett said. “I loved the cable story for a decade. I’m less bullish now.”

Moffett pointed to several factors, including the threat of regulation, high programming costs and the increasing inability for consumers to pay for television.  

Moffett noted that while consolidation speculation has been a major catalyst for the stocks’ rise this year, he isn’t convinced that getting bigger will solve all of a distributors’ problems.

Moffett added that while there are real synergies in horizontal transactions “they are not as big as what people are projecting.” That, he said could lead to inflated prices for both acquirees and acquirors, which in turn could affect deals actually getting done.

“The expectations for some of these deals have made it harder to get these deals done,” Moffett said.

 The analyst also made a case for cable operators to solve the programming cost conundrum by getting out of the programming game altogether, providing a dumb pipe where shows could be distributed to via a direct financial relationship between content provider and viewer.

“Imagine a world where content was purchased directly by the consumer,” Moffett said. “Cable operators would be delighted to say ‘I don’t want to be in the position to negotiate with ESPN, I’d rather the customer had to negotiate with ESPN. The business that I’m in is not buying and selling content, the business that I’m in is delivering content. As long as I can charge for transport, I’m much better off not being in that position where I have to negotiate with ESPN every day.’ The best thing for the cable TV business is to kill the TV business.”

But Moffett said that model depends on cable’s ability to keep transport costs relatively stable. And that could mean moving to a usage-based broadband environment, which he doubts will come to fruition.

Moffett added that in the past he believed the cable business would eventually transition to a usage-based model for broadband, but he believes the window for doing that may have closed.

“I’m not entirely sure the window is open,” Moffett said. “If they started charging for transport now, Netflix would immediately argue [they] are disadvantaging their business.”

Speaking of Netflix, Moffett said that he sees a day coming when the over-the-top provider becomes a take-over target, most likely by online retailer Amazon, which has made its own forays into over the top video with Amazon Prime.

“They [Amazon] are the right ones to watch,” Moffett said. “Somebody will come along and buy Netflix, and if I had to guess who’s the most likely buyer, to me it’s probably Amazon. You at least have to pay attention to Amazon because they have tons of money, a very, very long term time horizon and therefore they can be  really disruptive.”