Big Apple, Small Bite
Verizon Communications Inc. (NYSE: VZ) is understandably excited about winning a franchise to provide FiOS TV service in all five boroughs of New York City. (See Verizon Readies FiOS TV for NYC.)
So are New Yorkers, who will soon have an another choice for cable services. However, some cable investors are concerned about the prospect of Verizon taking aim at key service territories of Time Warner Cable Inc. (NYSE: TWC) and Cablevision Systems Corp. (NYSE: CVC). (See Time Warner Cable Faces FiOS Attack.)
A research bulletin from one Wall Street analyst argues such fears are overblown as the rollout of FiOS in the Big Apple will take a very small bite out of these MSOs' businesses.
Sanford C. Bernstein & Co. Inc. 's Craig Moffett explains that:
First, NYC represents approximately 10% of Time Warner Cable's footprint, and probably a similar amount of its EBITDA... NYC represents a much higher percentage of Cablevision's business (close to 50%)?
Second, Verizon will 'pass' about 30% of NYC by the end of this year, starting mostly with Staten Island (Time Warner Cable territory)…following more slowly with Manhattan (also TWC), and BQB (Brooklyn, Queens, and the Bronx, which are shared between CVC and TWC). Verizon will not complete the build-out of New York City until 2014...
Third, only a fraction of those homes 'passed' will be 'marketable' initially. Verizon must first negotiate building access rights…a reasonable guess might be that Verizon gains access to 25% of homes passed in any given year...
Fourth, Verizon will get a slice of market share, and perhaps even a large one. Let's say, 20% share right out of the gate?
So what's the net effect for Time Warner Cable and Cablevision?
Moffet shares two equations:
- Time Warner Cable = 10% x 30% x 25% x 20% = 0.15% (i.e., 15/100ths of 1%)
- Cablevision = 50% x 30% x 25% x 20% = 0.75% (i.e., 3/4ths of 1%)
— Michael Harris, Chief Analyst, Cable Digital News