The long-suffering cable TV sector staged its biggest Wall Street rally in almost four years Monday after software giant Microsoft Corp. confirmed plans to invest $1 billion in No. 4 cabler Comcast Corp.
The investment gives Microsoft a 12% nonvoting stake in Comcast. The move is aimed at encouraging the cable industry to accelerate system upgrades, to offer new services like Internet access, according to Microsoft chairman Bill Gates.
Wall Street interpreted it as a big vote of confidence in the future of cable, which for the past several years has appeared to be under threat from telcos and, more recently, satellite TV.
Every cabler stock jumped sharply on the news, led by Comcast Corp.’s $2.93 rise to $21.37, Time Warner’s $1 rise to $47.75 and Tele-Communications Inc.’s $1 increase to $16.06.
Reinforcing the rally was Cablevision Systems Corp.’s decision, also announced Monday, to buy TCI’s New York-area cable systems at the cut-priced $1 billion (see separate story) — a deal that sent Cablevision’s price soaring $9.75 to $44.37.
The deal highlights the benefits of clustering cable systems in geographic areas, a strategy followed by cablers for the past several years, analysts said.
But it was the Microsoft-Comcast deal that drew the most attention. The investment is a “ringing endorsement of cable” and its ability to provide new services to consumers, said Gordon Crawford, a senior VP with big media investor Capital Research & Management.
“I think we are finally at the end of a three-year correction” in the cable sector, Crawford added. Analysts said cable stocks had not rallied so much in a single day since Bell Atlantic announced it would buy TCI in October 1993, a deal that was later abandoned.
Comcast president Brian Roberts said that, despite developments in software and computer chips, “cable has been the slow part of the equation” in rolling out new services, because cablers were not sure which services would be attractive to customers.
He predicted the deal would “galvanize all of our colleagues in the cable industry” and would inspire “a reassessment by many others” of the prospects of the new services.
“I believe the demand for broadband infrastructure (industry jargon for systems upgraded to offer the new products) is greater than people expect,” Gates told a conference call for reporters.
He added that Microsoft had recently “made a big commitment in this area” with its $425 million acquisition of Web TV, which has developed technology that allows consumers to tap into the Internet using their TV sets.
Comcast will use the $1 billion to quicken the upgrade of its systems, about half of which have been modified so far, execs said. Analysts said Comcast is among the most advanced in upgrades, behind only Cox Communications, U.S. West’s Continental Cablevision and Time Warner.
Whether rival cablers will take Gates’ advice is not certain, judging by early reaction. Falcon Cable Marc Nathanson — chairman-CEO of Falcon Cable TV, the 12th largest cable operator in the U.S. — said he’s not going to accelerate the upgrade of his systems just because Gates is pouring $1 billion into Comcast.
Nathanson called the Gates investment “a positive move” but added, “Let’s not jump the gun until we see the results” of the Microsoft-Comcast deal.
Nathanson said cable operators need a lot more than $1 billion to help rebuild their infrastructures. “And DBS is still a threat to cable systems,” he said, referring to direct-broadcast satellite services like DirecTv and Primestar.
Nevertheless, analysts were enthusiastic. “It’s huge for Comcast,” said Lehman Bros. analyst Larry Petrella, who added that Microsoft is “trying to buy influence” with the cable industry’s decision-makers. Gates has done deals with TCI chairman John Malone in the past, and the investment now puts Microsoft in Comcast’s camp.
TCI and Comcast are big shareholders in the Internet services company At Home, which currently offers the Netscape browser software, but Petrella predicted At Home would eventually dump Netscape in favor of the Microsoft Explorer browser.
“The cable industry is alive and well,” said Chris Dixon, a media analyst at PaineWebber.
Ed Hatch, a media analyst for UBS Securities, said, “Bill Gates’ investment in Comcast should lift the gloom that had settled over the cable industry.”