Cable Analysts Long to Be Ignored
“The RBOCs are the big pink elephant in the room, but they are slow to move -- it’s going to take them a few years to get their fiber networks in place,” says Morgan Stanley analyst Richard Bilotti.
Over the past five years, the analysts say, the cable industry has spent significant capex on building out its infrastructure for the delivery of high-definition television (HDTV). They believe that investment puts cable operators well ahead of the RBOCs, which are just beginning to rework their networks to deliver high-bandwidth service bundles to the home.
However, the analysts also noted that the cable industry must invest now in putting together the converged service offerings that consumers will embrace. For example, many cable operators have already made investments in their VOIP offerings, but they aren't moving as quickly to explore the requirements fulfilling the wireless aspect of the bundle.
“If the cable industry lets them [RBOCs] stay around long enough, they could really hurt some people when they finally fall over,” Bilotti says.
Bilotti says RBOCs are now locked in three-year labor agreements with the unions, which will prevent them from placing as much capital into their infrastructure builds. “You’ve got a three-year period to move,” Bilotti told the cable executives in the audience, “Now is the time to invest capex and put them to bed.”
Of course, while Wall Street seems to have all the answers, it is Wall Street that has kept the cable industry from investing as quickly as it could.
“Cable operators should forget about Wall Street for awhile and just focus on the future of the business,” says Sanford C. Bernstein & Co. Inc. analyst Craig Moffett, clearly taunting his firm's sales staff. Moffett agreed that cable operators could easily miss their opportunity if they do not continue investing aggressively now.
Some cable companies are clearly getting the message. Analysts expected some relief this year in cable operator capex spending, reasoning that the core infrastructure build was complete. But 2005 capex forecasts actually increased, proving analysts wrong. Through it all, cable stock prices remained steady, a nice vote of confidence from investors.
For the last five years, the cable companies have focused on satellite providers as their main foe. But with the emerging interest in digital services bundles, the analysts now see the RBOCs as main competitors.
The satellite players such as DirecTV Broadband Inc. and EchoStar Communications Corp. are having a difficult time winning more customers away from cable operators, Bernstein’s Moffett says. He estimates the satellite companies now pay a single-customer acquisition cost of roughly $700, which often comes in the form of free equipment and months of free service.
And service bundles, which the satellite guys don't do, are crucial. Moffett pointed to industry research showing that cable customers love the bundles, so long as they shave at least 20 percent off the bill.
Moffett points to the oft-cited case of Cablevision Systems Corp. (NYSE: CVC), which went to market with its bundle months ago when analysts were calling it a “suicidal pricing strategy,” and has done quite well.
Moffett says: “The industry has got to play to win, not just to ‘not lose.' ”
— Mark Sullivan, Reporter, Light Reading