New York – Influential Merrill Lynch media analyst Jessica Reif Cohen painted a somewhat gloomy picture for the overall economy at an industry conference today, but added that the downturn could present a big opportunity for cable companies.
At the OnScreen Media Summit here Tuesday, sponsored by Multichannel News and Broadcasting & Cable magazines, Reif Cohen said that Merrill’s own economists are bearish on the state of the economy, predicting that the recently-called recession could be “one of the longest and deepest in our lifetime.” And while those same economists are estimating that the country should brace itself for at least another four quarters of negative growth in the Gross Domestic Product, cable investors should find some solace in the fact that their holdings have already taken a big hit.
Reif Cohen pointed to the 28% decline in the cable sector in 2007.
“Entertainment and diversified media and cable stocks tend to go down a year before a recession,” Reif Cohen said. “The market was telling us a year ago what we now know.”
The good news, Reif Cohen added, is that cable stocks historically hit bottom faster than the overall market and in turn recover sooner. While stopping short of saying cable stocks are recession-proof – she said they were more recession resistant – she predicted the sector would outperform the rest of the market, turning in mid-single digit revenue, cash flow and free cash flow growth.
Reif Cohen said that the fundamentals for cable stocks continue to be strong – reflected somewhat in the stocks. Big cable operator stocks are down about 45% this year, while entertainment shares have fallen between 45% and 65% and broadcasters like CBS have plunged as much as 80%.
And some of the biggest fears of cable investors – mainly the competitive threat from satellite TV and telephone companies – are proving to be largely unfounded.
Reif Cohen said that while telcos like Verizon and AT&T have shown some initial inroads in their respective video offerings, that was to be expected. However, she was less optimistic over the long term for telco video.
“They are coming into a market that is very entrenched late,” Reif Cohen said, pointing out that video is the lowest margin business for cable operators.
On the satellite TV side, Reif Cohen said that despite some robust growth at DirecTV Group, satellite TV is “a one-trick pony,” adding that the upcoming digital transition represents an opportunity for cable operators to regain some of the subscriber losses of recent years.
The digital transition, she said is a huge opportunity for cable to market its triple play package to a customer base that has resisted subscribing to cable before. And she said that cable can take advantage of its low video margins by offering a bare-bones video service for free or for a nominal fee, offsetting that loss by selling broadband service (with 85% to 90% margins) and phone service (with 50%-plus margins).
On the retransmission-consent front, which has been a bane of cable operators for years, Reif Cohen said that the next big retrans test could be with Dish Network.
The analyst said that the next big battle will likely be with Spanish language broadcaster Univision Communications and that the distributor with the most exposure is Dish Network.
Dish, she said, has about 2.3 million Hispanic subscribers.
“The question is, does Univision just go for the jugular?” Reif Coehn asked. "The leverage in this case is with Univision.”
For more coverage of the OnScreen Media Summit, click here.