Wall Street Loves Cable … Still


Los Angeles — Despite the looming specter
of regulatory pricing scrutiny, a panel of top
cable analysts remain bullish on the industry,
pointing to its superior infrastructure
and broadband leadership, but warning that
potential weak spots remain in customer
service and shrinking consumer wallets.

Sanford Bernstein cable and satellite
analyst Craig Moffett, who created a bit of a
firestorm with his downgrading of the entire
cable sector on May 10 — which some believe
helped lead to a major sell-off in the stocks —
defended his decision in a panel last Wednesday
at The Cable Show here.

Moffett’s actions were in response to the Federal
Communications move to classify cable
broadband service as a Title II telecommunications
service. But what worried Moffett the
most was a clause in the ruling that gave the
commission the right to regulate rates. While
the FCC has said it will tread lightly, and Moffett
believes it will, there is still the threat that
rate regulation could come.

The problem is the core of Title II
includes language about just and
reasonable pricing,” Mofett said.
“This is not a, ‘We have the option
to opine on whether processes are just and
reasonable’; this is a, ‘We are compelled to
opine if prices are just and reasonable.’ All we
have raised, notwithstanding the promise of
forbearance, is the reasonable question about
the long-term flexibility of pricing.”

But Moffett stressed that he is still bullish
on the cable sector, pointing to its robust
infrastructure and leadership in the broadband

“I’ve had a clear view for years as to why I
have been a cable bull,” Moffett said. “In the
broadband wars, cable wins.”

UBS cable and telecom analyst John Hodulik,
who noted that the FCC has had pricing power
over the wireless industry for years and has not
enforced it, said any potential regulatory threat
does not change his view of the sector.

“The operating environment in cable is
better,” Hodulik said, adding that the competitive
threat may have reached a crest with
Verizon Communications announcing last
month that it would no longer build out new
FiOS markets and DirecTV being less aggressive
in new subscriber additions.

“The growth is there, and there is opportuopportunity
for margin expansion with the rebound
in advertising,” Hodulik said. “The environment
is good. It’s not a bad time to be investing
in utility-like companies like cable.”

Merrill Lynch media analyst Jessica Reif
Cohen was equally bullish on cable’s growth
prospects, adding that the move by many
MSOs to go all-digital could unlock additional
bandwidth for video on demand, HD,
additional ethnic programming and higherspeed
data service.

“Going all digital has and will have a huge
positive impact,” Reif Cohen said. “There
is an $8 billion [video] rental market that
should be cable’s.”

Despite the optimism, threats remain.
Citigroup media analyst Jason Bazinet said
that although cable has made big gains with
new services, it may have lost sight of its core
video business, adding that DirecTV has only
5 million fewer customers than Comcast,
Dish Network is larger than Time Warner Cable,
and the cable industry still ranks at the
bottom of customer satisfaction surveys.

“Take care of your customers,” Bazinet
said. “There is no reason you shouldn’t be able to grow basic subscribers and the Street
would look at [cable] as a healthier business
than it does today.”

And while the threat of customers cutting
the cable cord in favor of Internet video has
ebbed and fl owed over time, Moffett said the
mitigating factor is simpler.

“I don’t think the risk of over-the-top video is
some 24-year-old kid who has access to really
cool Boxee boxes,” Moffett said. “The driver of
disintermediation is going to be poverty.”

Moffett said that as programming
costs rise and cable bills inch
higher, there is a point where customers
just won’t be able to afford service.
And that day is approaching faster than the
industry may think.

Moffett estimated that after paying for
food, shelter and transportation, the average
U.S. household has about $100 left per
month to pay for everything else.

“The idea that $80 a month is OK for the
price of entry for video is potentially a very,
very dangerous expectation for this industry,”
Moff ett said. “…Cable is one of the few
industries that has to serve 100% of the population,
and the bottom quintile doesn’t have
any money.”

Moffett said the industry should work toward
developing programming packages
geared toward lower income families.