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Cisco's Cable Crunch

2:25 PM -- Cisco Systems Inc. (Nasdaq: CSCO) reported weak cable sales in its fiscal first quarter, but there are several reasons for the drop-off, which included a surprising 40 percent year-on-year dip in its cable set-top business. (See Is Cisco's Q1 Contagious?)

According to Sanford C. Bernstein & Co. Inc. analyst Craig Moffett, there are three potential explanatory ingredients, and two of them are actually good news for Cisco's MSO customers.

The first, most obvious contributor -- the sad housing market -- is bad for both parties. It's contributing to cable's subscriber losses, and reducing demand for new set-tops.

The second -- digital video saturation -- helps out cable because it has to buy fewer set-tops, but that's not good for Cisco's bottom line. "Even demand for advanced set-top boxes is beginning to wane as HDTV and DVR penetration rates level off," Moffett notes.

Still, further out, it might turn out to be a downer for MSOs, too, because it will be hard to maintain and build a segment of the business that's traditionally been a growth area. In fact, Time Warner Cable Inc. (NYSE: TWC) and Cablevision Systems Corp. (NYSE: CVC) both lost some digital video subs in the third quarter, so it's already starting. (See Cablevision's Ready for Streaming & Slinging, TWC Posts Q3 , and Comcast Loses 275K Video Subscribers in Q3.)

Lastly, Moffett suggests that Cisco's poor set-top performance indicates cracks in the so-called set-top duopoly enjoyed by Cisco and Motorola Inc. (NYSE: MOT). How soon those cracks will expand to gaping fissures is difficult to tell, but Cisco acknowledged that it's getting pressured as lower-cost competitors begin the enter the market. (See Huawei Expands Its Cable CPE Universe and Cracks Emerge in the Moto-Cisco Duopoly .)

That's more help for the MSOs since they'll be spending less on the fewer number of boxes they will need to buy.

"It is impossible to say which of these three explanations is at work in Cisco's observed decline in orders," Moffett said, but noted that TWC's, Cisco's largest cable box customer, "is at the heart of the story."

— Jeff Baumgartner, Site Editor, Light Reading Cable

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shygye75 12/5/2012 | 4:18:51 PM
re: Cisco's Cable Crunch

Hey, Jeff -- What effect does the sad housing market have on cable subscriber losses? According to Nielsen, the number of U.S. households with TVs actually is up about 1 million from a year ago, to 115.9 million.

Jeff Baumgartner 12/5/2012 | 4:18:50 PM
re: Cisco's Cable Crunch

Hard to sell service to a house that is without any occupants, right? But in that sense that data and how the cable guys are protraying the issue are a bit conflicted. But to be fair on your point, it's not all about the housing market... competition from other SPs, with some cord-cutting, is taking its fair share too.

shygye75 12/5/2012 | 4:18:50 PM
re: Cisco's Cable Crunch

Nielsen is counting households with TVs. That number is going up, not down. Sad empty houses don't count. Based on Nielsen's data, the number of potential customers for TV service went up by 0.8% this year.

shygye75 12/5/2012 | 4:18:49 PM
re: Cisco's Cable Crunch

Thanks, D -- That conclusion is consistent with Heavy Reading's recent findings about pay TV price sensitivity in the U.S. market. For the most part, today's cord-cutters aren't ditching pay TV for OTT -- they're doing it to EAT. Could be an opportunity to jump in with a low-end alternative to set-tops: REAs (rabbit-ear antennas).

Duh! 12/5/2012 | 4:18:49 PM
re: Cisco's Cable Crunch

If you believe the article in the Wall St. Journal from earlier this week, it seems that a lot of households have simply decided that they can no longer afford to pay for television, at least in the form of expensive packages.  It's priced beyond what the market (or at least the lower part of the market) will bear. 

Jeff Baumgartner 12/5/2012 | 4:18:49 PM
re: Cisco's Cable Crunch

If that's the case, then cable's not winning much of what little TV HH growth that Nielsen is seeing. JB

Stevery 12/5/2012 | 4:18:48 PM
re: Cisco's Cable Crunch

>  For the most part, today's cord-cutters aren't ditching pay TV for OTT -- they're doing it to EAT.

I think this is right.  Lots of people have gone into turtle mode.

In fact, anyone who fails to take the macro situation into account right now (bail out for one or more of the PIIGS anyone?) is missing the story.  

Duh! 12/5/2012 | 4:18:46 PM
re: Cisco's Cable Crunch

I think it's a business model crisis.  Until now, content providers could sell bundles of content, insist it be all or none in basic digital, and the video distributors could just pass that on to their customers.  The dust-up between Cablevision and Fox a few weeks ago is just the escalation of a long struggle. 

Jeff Baumgartner 12/5/2012 | 4:18:45 PM
re: Cisco's Cable Crunch

Also, to be fair regarding what Craig M. mentioned in the research note, his first reason did factor in that consumer spending is weak, so I should have highlighted that along with the housing situation.  He didn't really give more weight to one or the other.  But agree that spending has alot to do with some of these trends.  Just wonder when cable will respond with less expensive digital packages. What's more important (to them) right now -- keeping subs or growing ARPU/revenue?  I'm guessing they remain concerned about the first (sub levels), but might not be as concerned if the other part was falling off too. JB


shygye75 12/5/2012 | 4:18:45 PM
re: Cisco's Cable Crunch

Business model crisis, indeed. Right now, we're looking at OTT video as a user-driven phenomenon. But the two biggest trends in pay TV economics -- rising content fees and steeper discounts for service prices -- will make current models unsustainable. When OTT video quality gets to the right point, operators may just decide to take the "big dumb pipe" approach and simply charge for access, rather than continue to subsidize content providers with carriage fees.

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