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Local Cable Company Can Play With the Big Boys

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As of this writing, there are still more TVs out there in potential Internet-subscriber land than there are computers. With fewer than 100,000 cable modems (needed to get the Internet onto your TV) in use, there is a huge potential market of moms and pops who have yet to log onto Internet through their TV. As the big boys battle it out for world cable domination, a la




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, you might want to keep an eye on a nifty Canadian company:

Cogeco Cable


With more that 750,000 cable subscribers in the heavily populated Ontario/Quebec area, CCA (with a market cap of C$300 million) is the fourth-largest cable company in Canada. The company makes no bones that it is a niche player -- it sold off its Western Canadian operations earlier this year and bought 300,000 Central Canadian cable subscribers from

Rogers Communications


CCA trades at about C$13.50, which represents a price-to-earnings ratio of 17 times projected 1998 EPS of C$0.80 a share. EPS for 1999 is projected to be in the C$0.85-$0.95 range. It is the only cable company in Canada that shows a positive free cash flow: C$2.85 projected for 1998 and C$3.10 for 1999. Rumors abound that CCA will bid for


(VDO:Toronto) 100,000 northern Ontario subscribers, but as yet that hasn't happened.

Still, don't be surprised if Cogeco declines to snap up those Videotron subscribers. Louis Audet, CEO of Cogeco Cable, outlined his view of the cable world in a recent speech, and here is what he highlighted:

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It isn't absolutely necessary to be a giant to succeed, given that profitability primarily rests on the ability of communication companies to establish regional clusters.

It isn't necessary to be an international player to succeed, given that the principal competitive advantage of cable companies lies in the distribution network, something that cannot be more local.

It isn't obvious that all new competitors will be active in all sectors.

On top of its core cable business, Cogeco also offers free hookup (high speed) to schools in its market as part of a national program ( urging cable companies to provide access to educational institutions. There is always a place for social conscience in business.

Recent strategic moves have had a significant positive effect on revenues. From a level of C$153 million last year, revenue has increased to C$237 million on an annualized basis; operating income rose 56% over the same period -- from C$66 million to C$103 million. Moreover, Cogeco and other Canadian cable providers, representing 60% of all subscribers, just inked a deal with

Scientific Atlanta


to buy digital set-top boxes that will deliver signals for Web and digital TV, as well as high-speed PC access. SFA's Explorer 2000 set-top box is the only technology of its kind shipping this year.

Cogeco Cable's subscriber base represents a mere 1% of the North American cable market. However, the company has a 6% market share of the North American cable modem business. Given the exponential growth expected in this area of the market, CCA's experience and installed base, positive fundamentals and good management make the company well poised to exploit the growth.

The other large positive looming for CCA -- and indeed all cable companies -- is the deregulation of the local telephone market in Canada in 1998. Currently, that business is the fiefdom of

Bell Canada

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-- which just raised local rates to offset the pounding it took in the long-distance market when





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came to Canada a couple of years ago. Cable companies are in good position to compete locally for telephone company business. Cogeco Cable has not made its intentions known in this regard, but one suspects that local telephone markets within its niche will become a strong revenue plank for the company going forward.

Yes, there is always the specter of "pizza dish" satellite competition to cable companies. But any significant impact is years away, if ever. Indeed the pizza problem seems to be fading. And human nature being what it is, "mom and pop" will most probably stick with what they know. And that means the familiar cable-top box.

Bob Beaty writes about Canadian issues from the quiet confines of Bowen Island, British Columbia. He welcomes your feedback at