Cablevision Fans Eagerly Await Voom's Doom
George Mannes
09/15/04 - 07:07 AM EDT
Like
William Hung
singing "She Bangs,"
Cablevision's new satellite service just may be so bad it's good.
That's the theory being put forward by one analyst, who believes
that the worse the fledgling Voom operation performs, the better off investors in Cablevision will be.
"The prospects for the Voom business are sufficiently poor," says
Sanford C. Bernstein analyst Craig Moffett, "that it's unlikely that
that business will sustain itself long enough to do any lasting damage
to the asset values of the remainder of Cablevision."
Moffett upgraded Cablevision to an outperform rating on Friday,
and raised his target price for the stock from $21 to $24.
Any good news, however bad, would come as welcome relief to cable industry investors. Cablevision's shares, which have fallen from a 52-week high of
$27.70 in January to a low of $16.13 in August, rose 8.3% over the
past three trading days to close at $19.81 Tuesday.
Stomach Churning
In fact, Wall Street has lost its enthusiasm for the entire cable
sector in recent months. Shares in
Comcast have dropped 23% since January, and
Cox's fall has been reversed only by the
decision of its closely held majority shareholder,
Cox Enterprises, to
launch a buyout offer inspired by the depressed share price.
Weighing particularly on Cablevision's shares has been Voom, which
the company launched last fall as a service focusing on
high-definition television.
While Voom has gotten a nice reception in the consumer press -- a
columnist called Voom "like Christmas morning every day" for
cinemaphiles -- Wall Street has taken a dim view of the service's
ability to contend with the likes of
DirecTV (DTV) and
EchoStar (DISH), which have more than 21 million subscribers between them.
And as Cablevision has acknowledged, Voom has had plenty of
growing pains. As of August, Voom had 28,700 "activated customers,"
the company said in a recent
Securities and Exchange Commission
filing, and an additional 1,200 customers awaiting installation.
But the loyalty and the profitability of those customers is
unclear. Since Voom's inception last October, says Cablevision, 30% of
the customers who have signed on for the service subsequently dropped
it.
For purposes of comparison, EchoStar reported its service had an
average monthly churn, or customer-disconnect, rate of 1.71% in its
latest quarter. At that rate, EchoStar would have lost less than 19%
of customers since last October. DirecTV's churn rate is lower than
EchoStar's, and was even lower earlier in its history; the company
reported monthly churn of about one-half of 1% in 1996.
Furthermore, Cablevision says Voom has "a large number of
installed customers who have never made any payments to us or who are
otherwise not current in their payments to us," though it indicates
that it stopped counting as subscribers "customers who were
sufficiently delinquent in payment that they ceased to be considered
'subscribers' under our internal guidelines."
Fox, Henhouse, Hens
While Cablevision's unique selling proposition for Voom has depended on its HDTV content, it appears that that particular distinction will disappear in
the foreseeable future. DirecTV, now under control of Rupert Murdoch's
News Corp. , said last week it would launch four new satellites in the
coming years. Those launches would enable the broadcast of 500 local channels in HDTV in 2005 and an additional 1,000 local, and 150 national,
channels in 2007.
But bad news for Voom, argues Moffett, is good news for
Cablevision, which plans to shed Voom and other properties by the end of the month in a spun-off company known as Rainbow Media Enterprises.
Along with Voom in Rainbow -- a publicly traded company that will
be controlled by the same Dolan family that's in charge of Cablevision
-- will be three national programming services currently owned by
Cablevision: American Movie Classics, The Independent Film Channel and
WE: Women's Entertainment.
Moffett values the core networks at $1.4 billion, or at least $5
per Cablevision share. Post-spinoff, he values Cablevision at $19 per
share. The combined $24 per Cablevision share is more than 15% higher
than where Cablevision was trading Tuesday. One of the major weights
on Cablevision asset valuations, indicates Moffett, is Voom.
Like other outsiders, Moffett gives Voom little chance of
succeeding. DirecTV's announcement that it plans to launch four HDTV
satellites "should put to rest any delusions of competitive advantage
for Voom, and at the same time increase Voom's value to EchoStar,
which will now be pressured to respond with its own HDTV strategy,"
says Moffett.
"Any indication that Voom might be shuttered would immediately
unlock the full value of the networks," writes Moffett.
The likely failure of Voom to grow in popularity "will minimize
cash drains and lead to a relatively timely closure of the business,"
Moffett writes. But there's a major risk, he points out: The Dolans
may raise additional financing for Voom, "sustaining its losses and
preventing realization of value for the core networks."
Moffett isn't the only analyst to hint that Voom is more of a burden than an opportunity. In July, Fulcrum Global Partners
analyst Richard Greenfield noted that
financing covenants for Rainbow prevented the company from spending
more than $150 million annually on Voom and more than $600 million in
total, barring a new financing.
That agreement, wrote Greenfield, "prevents Voom from completely
destroying the value of the existing cable networks that are part of
the Rainbow/Voom spin-off."
