Becoming Dumb Could be Good for Business

In a research report this week, Sanford C. Bernstein & Co.'s Craig Moffett concluded that Wall Street fears about cable operators becoming relegated to 'dumb pipe' status -- that is, providing raw connectivity without participation in the upside from the direct delivery of video and voice services -- are vastly overstated. It is a particularly poignant analysis in the wake of the recent brouhaha about 'net neutrality.' Turning conventional wisdom on its head about operating only as a pipe provider, Moffet concludes 'the economics of such a scenario, as measured by purely financial metrics, are actually better than those of the business today.' Say what? In Moffet's modeling, revenue for an MSOs like Comcast would fall significantly, by as much as 41%. However, he notes, this lower revenue would come with lower costs. For MSOs that only provided raw connectivity, video programming costs would be paid directly by consumers, eliminating a massive expense line. Additionally, consumers would pick up the capital costs for set-top boxes and other devices in the home. Yes, 'dumb pipe' operators would see lower revenue and EBITDA than traditional cable providers, but their free cash flow would increase, as would returns on capital and equity. The report concludes: 'Even in a worst case scenario É the economic returns for a cable operator would be as attractive, or more so, than the business today.' As far as cable is concerned, sounds like being dumb might not be so bad after all.

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