Cable stocks' high-speed 'horse race'
Long term return depends on proper execution, demand
cbs.marketwatch.com
By Kristen Gerencher, CBS MarketWatch
Last Update: 3:23 PM ET Aug 4, 1999 Personal Finance News
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ENGLEWOOD, Colo. (CBS.MW) -- The pipe is in place and the race is on to see which company will be first to break into a much-awaited commercial holy trinity known as the voice, video and data market.
Cable and telecommunications companies are cannibalizing each other to boost their chances of winning their captive television and telephone customers. The question that lingers is whether these coveted consumers will want to pay for the new services, according to Ted Henderson, telecom analyst at Janco Partners.
He talked with CBS MarketWatch's Kristen Gerencher about why he's bullish on a sector that could transform the marketplace while having misgivings about demand and delivery of the goods in the near term.
What's going on with the sector right now?
" I think that consolidation will continue, and that ultimately you're going to have larger companies hunt and kill anything in their path."
Ted Henderson
Janco Partners
Henderson: I think that what you're seeing generally within the cable and distribution world is consolidation on all fronts. By that I mean in the direct broadcast satellite arena you've had consolidation at the EchoStar (DISH: news, msgs) and DirecTV levels as the two dominant providers, two players that can reach into every home in the country from a single satellite. They have consolidated the three conus slots that allow that single satellite to reach every home so that it covers the entire continental United States.
In the cable arena, you've obviously also had in that distribution form with AT&T (T: news, msgs) acquiring TCI and now going after MediaOne (UMG: news, msgs) and the Comcast (CMCSK: news, msgs) moves on Jones Intercable (JOINA: news, msgs) and Cox (COX: news, msgs) and Media General (MEG.A: news, msgs), Adelphia (ADLAC: news, msgs) growing aggressively with the acquisition of Century (CTYA: news, msgs). You've had continued consolidation within that marketplace to where Insight (ICCI: news, msgs), which just recently went public this past month -- and an IPO in the cable area hasn't happened in a while -- but they come out with about a million subscribers and are about the eighth largest operator.
What you have now is you have consolidation. You have valuations that have moved up aggressively in the face of consolidation, what everybody's been willing to pay for systems and pay for distribution. My point is you've got execution and deployment that needs to be done. We've made these promises and consolidated these entities to deliver on the promise of a variety of voice, video, and data choices into the home, and now you've got to execute on that.
So now it becomes market-driven.What does the consumer really want? What's the consumer willing to pay for? How ready is the consumer to change from their existing phone service to a cable-provided phone service or from their existing analog video service to upgrade to digital or basically to upgrade the quality of the speed with which data comes into their home through high-speed data access. These are very exciting products. The consolidation has been well-documented and highly publicized and it should be because you're talking about an arena in voice, video and data that is basically clamoring over three very utility-like revenue streams. There are very few businesses that have the opportunity to reach into every home in this country and pull out somewhere between $50 to $150 per service per month for services that consumers pretty much continue to look at and view as utility-like.
Are there any potential pitfalls down the road with anti-trust?
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Henderson: I think that the Telecommunications Act of 1996 really encouraged a lot of these combinations that you're seeing. No, I really don't see a lot of anti-trust issues down the road. I see issues with regard to the battle over the access to the pipe and that's being highly publicized right now.
What you have is you have a dominant provider in voice in the RBOCs (regional bell operating companies)and the long distance carriers. You have a dominant provider in video in cable operators and direct broadcast satellite operators... In each one of those markets where there's dominant players, you're going to have people knick and make inroads into those markets. That's what the Telecommunications Act insured, that there is going to be a horse race in this arena.
But the true battle right now is being fought over high-speed data into the home, and it's been well-documented the battles for access to cable's high-speed pipe. So I think that a lot of the Washington views will not be of an anti-trust nature, but more of there's two telecommunications pipes that pass every home in this country. One's treated one way and the other one's treated another way right now. That's what the RBOCs are clamoring about. The reality is the way those pipes were built and financed to pass those homes is entirely different also. All that has to be weighed and that creates a little bit of regulatory uncertainty at least that hovers over that high-speed data launch from the cable side. So you look and see what impact that has on the content players, etc.
I think that even if common carrier status or open access were mandated that I can build an economic model where that still doesn't hurt your cable operators as much as it kind of puts things up for grabs in the content arena. So that will be interesting to watch and to see play, but no, I don't see the combinations with News Corp (NWS: news, msgs) and EchoStar in the direct broadcast satellite arena and DirecTV and PrimeStar or the tremendous cable consolidations that we've seen coming under a lot of anti-trust scrutiny. On the contrary, I think they're the type of combinations to encourage competition that the Telecommunications Act contemplated in 1996.
What are your picks now for a couple years out?
Henderson: If you're looking five years out, I think that you fly to quality in this arena, and by quality I mean scope and scale and management. So under that regime, shoot, I'm neutral relatively near term on these cable operators because they face tremendous execution and deployment challenges. Do I think they're up to these challenges, heck, yes... As long as you have a horizon that looks out over five years, you can see that Comcast, Cablevision (CVC: news, msgs), Time Warner (TWX: news, msgs), AT&T, Adelphia, Cox, the critical mass operators out there and there are about seven now.... Looking at those operators, it's hard for me not to believe they own the most powerful telecommunications pipe in the marketplace. In a long term horizon, they're going to get their share of those three utility-like revenue streams that we talked about.
From a near term standpoint, I love the content players. I love Liberty Media Group (LMG.A: news, msgs). (It) is my favorite pick right now. I think that as distribution shakes out, you'll be looking at people who are expanding distribution from video into the data arena, that the potential to leverage existing brands into new revenue opportunities is a tremendous opportunity. There's less execution and deployment issues that face the content players right now. They're waiting to watch it shake out. They're like the French. They'll sell to all comers basically, as they should.
Do you think (the content) will hold up over the long term?
" By definition there's risk because the consumer is always unpredictable."
Ted Henderson
Henderson: Oh, absolutely. We've also looked internationally at some of the international cable operators, especially in the U.K. and in Europe where the competitive model with regard to telecommunications bundling services and offering voice and video services is already playing out and is a little further ahead of the curve due to a more favorable regulatory environment than what you see here in the U.S. So from a shorter term standpoint, we've been looking at companies like NTL (NTLI: news, msgs) and Telewest (TWSTY: news, msgs) and United Global Communications (UCOMA: news, msgs).
But from a long term standpoint, if I look out over the hood of the car, there's continental shelf changes going on here in telecommunications. On some fronts, it almost makes it easier to look. There's a lot of companies clamoring to get pieces of this. I think that consolidation will continue, and that ultimately you're going to have larger companies hunt and kill anything in their path. With that kind of a mindset, you look and say who has the staying power to hang in there and survive in what will be a very competitive execution and deployment arena for these new services. If I step back and look at that, I see the cable operators having enough critical mass and having the technology and power of the pipe and existing customer base and video to leverage off and do quite well in that arena.
I think that the DSL (Digital Subscriber Line) providers and some of the RBOCs with their dominating position and the ability possibility to move into long distance as competition opens up in that arena. Let's face it, the RBOCs are not helpless within this arena. They will be a force in high-speed access, and people use phone lines for access to the Net right now. Cable's not really a player in that arena. They just crossed a million subscribers with cable modem access. That pales in comparison to what AOL (AOL: news, msgs) has through the telephone lines, etc.
The reason we formed our firm was because we believe in telecommunications long term. We believe in the consolidation in the future, of being able to offer multiple services through that single pipe... so I'm predisposed to be bullish on the group from a long term perspective.
But there are more factors than just multiples of cash flow and subscriber values that drive valuations in the market today. It's an expectation for these services to be launched and launched successfully. There's risk there from a near term standpoint. There's an expectation that the consumer is going to be willing to pay for these new services and want these new services. By definition there's risk there because the consumer is always unpredictable.
But is it a battle worth fighting? It's a battle for three utility-like revenue streams. Absolutely it's a battle worth fighting and these companies are at the forefront of it. That's the way we see the world.
Kristen Gerencher is a personal finance reporter for CBS MarketWatch.
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