Cable's Growth Worries Take a New Twist

In the cable TV business, holding onto basic video subscribers has become like running on a treadmill gone out of control. You have to work harder and harder just to stay in the same place.

That's what some people in the investment community are concluding after looking at basic subscriber figures over the past two years.

As investors have already noted, the growth in households subscribing to basic cable has slowed and even reversed in recent years. But behind that well-known problem is a lesser-known one that's equally troublesome or even more so for cable's future, says one short-seller.

That second problem is the decline in basic cable penetration -- the percentage of households in areas served by a cable operator that subscribe to the multichannel TV service. Because a shrinking percentage of households in a given area are subscribing to cable, operators must keep expanding their system into new neighborhoods in order to maintain subscriber growth or stave off losses, says the short-seller, speaking on condition of anonymity.

The deterioration of penetration -- which dogs even top-tier operators like Comcast (CMCSK) and Cox Communications (COX) -- eats away at cable companies' ability to get a return on the billions of dollars they've borrowed and invested over the past few years to upgrade their systems and offer advanced services. In the wake of the high-profile failure of Adelphia Communications (ADELQ), cable investors have grown less certain that returns on these upgrades will be around the corner as promised.

The De-Penetration of Cable Basic Cable Customers as a Percentage of Homes Passed by Cable Operators

Source: Company press releases. 2001 figures are pro forma, unless noted otherwise * Actual, not pro forma Note: 3Q 2002 figures not available for Cablevision and Charter.

Outstripping

Similar red flags about the falloff in penetration are raised in a report from J.P. Morgan analyst Jason Bazinet subtitled, "Why Basic Sub Growth May Be Worse Than You Think." In the August report, Bazinet asserts that cable operators are masking the basic subscriber problem by building up their systems faster than the natural rate of new household formation.