New York -- Forget cable-system valuations of $5,000 per
subscriber: According to research by Paul Kagan Associates Inc., the average American
household is worth more than $12,000 to entertainment and media companies.
The potential to grab a big piece of that revenue stream is
driving cable-system valuations, as well as cable stocks, according to a panel discussion
here last week at the Digital Household Summit II conference by Kagan Seminars Inc.
Kagan senior analyst Larry Gerbrandt said the $12,000
valuation was arrived at by totaling up consumer spending and ad billings for all media
services -- everything from truck pulls to opera nights -- which added up to about $502
billion per year.
The average value per household was derived by two methods:
by doubling the annual entertainment revenue of $502 billion and dividing by the total
number of households; and by assuming a 20 percent cash-flow margin, a 15-times cash-flow
multiple and dividing by 100 million.
Using those two methods, the average household was valued
at $10,000 and $15,000, respectively. "These two approaches sort of bracket the
$12,000," Gerbrandt said.
However, while agreeing that the entertainment revenue
stream coming out of American households was huge, analysts on the panel were cautious
about how much these households will actually spend.
Janco Partners cable analyst Ted Henderson stressed that
while the potential of new services is enormous, whether those offerings will win
wide-scale acceptance by consumers is still unproven.
"There is a [more] proven market for someone to put
their feet up and be passively entertained than to have a wide variety [of
telecommunications services] and be able to choose interactively," Henderson said.
"The rest of this is conjecture and projections. Is it going to happen? Absolutely.
I'm just saying it isn't going to happen overnight -- it's going to be a
little slower than everybody expects."
He argued that if traditional voice and data providers were
added into the mix, the per-household number would be higher than $12,000, adding that
given the current public valuations of cable companies, they are offering these services
to many more than just the 100 million homes in the United States.
"If you build these models out and put it all on one
piece of paper, I think you're providing service to probably closer to 500 million
homes than to 100 million homes," Henderson said. "In other words, I'm
saying that I think there is some risk in this market."
Henderson said there was great potential in the provision
of new services, but current valuations are being driven "not by operating
performance, not by what is currently being delivered to the house, but by consolidation
of the marketplace and the overall excitement of what the future holds."
That's why execution and deployment are going to be
critical in the coming years if cable is to live up to its lofty expectations, he added.
"I can tell you right now that there are no homes
worth $12,000 based on the revenue streams that are coming out of those homes," he
Deutsche Bank Alex. Brown vice president Doug Shapiro
agreed that execution and deployment will be critical, adding that the success of new
services would be determined by three factors: pricing sustainability, the time available
for people in the home to use the services and cannibalization of other revenue streams.
"What happens with video-streaming?" he offered
as an example of cannibalization. "Say we get such high-quality video-streaming
technology that people eventually start moving away from subscribing to cable
Despite the fact that some new services could cut into
existing revenue, Wall Street appears comfortable with the current cable-stock multiples
of 15 times and above year-2000 cash flow.
"Everyone is accepting these valuations," Salomon
Smith Barney managing director John Reidy said. "You've got highly liquid,
well-traded stocks -- [they are] up 50 percent or 60 percent. Big companies are validating
it, investors continue to validate it and there's a lot better infrastructure out
there than there was two years ago."
Reidy added that although some feel that the current
trading multiples are high, there are several reasons why cable companies are hovering at
"[Cable] is still a monopoly -- there is no ease of
entry," Reidy said. "Cable is completing its two-way broadband build-out, which
will significantly increase revenue down the road -- digital, high-speed data and
telephony. And they still get multiple revenue streams from the old business of subscriber
fees, advertising and pay-per view."
Reidy said it was anybody's guess whether a cash-flow
multiple of 16 was too high, especially when the average multiple was about 10 times cash
flow not too long ago.
However, he added, what the current multiples show him is
that investors and the industry in general are confident that meaningful revenue streams
will come from new services.