Telcos also heat high-speed 'Net challenge

It looks like another tough quarter for leading cable operators, with the sector this week expected to report basic cable customer losses as part of their second-quarter results.

According to research by JPMorgan, the top seven MSOs likely shed an aggregate of 47,000 basic cable subs in the past quarter, reversing a refreshing gain of 53,000 in the first quarter of 2003.

Otherwise, the industry has been weathering several quarters of basic subscriber losses over the past two years, largely on account of aggressive selling by DBS providers DirecTV and EchoStar and customer griping about rising costs.

While most cable sources concede the April-June quarter is a seasonally slow one for subscriber growth, the real concern, say analysts, is that year-over-year, digital net additions continue to decline as digital cable becomes a mature offering and operators start trimming their marketing budgets.

JPMorgan analyst Jason Bazinet expects the large ops to add 640,000 digital subs in the second quarter, down from more than 860,000 a year ago.

Equally troubling is the increased competitive pressure on the high-speed Internet front, the side of the business most cable companies are pitching as their cash cow and key marketing advantage over their one-way satellite rivals.

High-speed Net front

The baby bells — long slumbering from their own spending sprees — are starting to play hardball in the all-critical race for high-speed Internet connections.

Not surprisingly, cable stocks have been stuck in the doldrums in recent months, especially as the likelihood of an imminent value-inspiring Time Warner Cable IPO evaporated and DBS operator Hughes reported unexpectedly robust gains for its DirecTV service.

On top of that are the constant cloud of SEC investigations (AOL Time Warner, Charter and more recently Cablevision) and bankruptcy court (Adelphia).

Even Cablevision, which has enjoyed an impressive recovery in the past year, again has shareholders scratching their heads about its latest expensive adventure into launching a third national satellite service.

Most cable investors seem to have tried to see through the momentary headaches, at least until recently.

Most cablers, after years of net losses due to the hefty cost in upgrading infrastructure, are finally due to post free cash flows in 2004 along with reduced capital spending.

But that may prove to be a mixed blessing.

Of chief concern now is how cable will continue to perform in the high-speed Internet sweepstakes.

Price-cutting strategy

Telcos like Verizon and SBC have recently shown more willingness to price-cut their way to a bigger share of new customers. SBC has gone so far as to invest $500 million in a video tie-up with EchoStar to gain an advantage in marketing a single bill for video, voice and data.

Time Warner Cable, which released second-quarter results last week, stunned investors by posting significantly lower high-speed Internet additions (170,000 compared with 260,000 the previous quarter) than expected, sparking concerns about DSL’s sudden incursion into the market.

Comcast has chosen one way around the competitive threat by making its own branded high-speed Internet service available over DSL as well through a cable modem.

Comcast on a roll

In fact, Comcast is on a roll since its merger with AT&T Broadband. The company has moved quickly to tidy up its balance sheet and exert its considerable distribution pressure on programmers as it works to reduce costs.

Cash flow and basic subscriber growth are expected to come in at the high end of analysts’ expectations when the company reports on Thursday.

Having sold QVC for a pile of dough ($7.9 billion), the op now even has the chance to browse the Vivendi Universal dataroom to see whether it could make a play for content, logically in a partnership with someone like John Malone.

The sheer size of the overall cable distribution footprint (21.3 million subscriber homes) and its shrewd ability to tighten operating and programming costs, logically points the way to the future of the sector: yet another round of consolidation.

AOL Time Warner CEO Richard Parsons last week reiterated his interest in owning a larger piece of the cable pie, with most speculation focused on Cablevision.

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