1. Pounding the Cable on Capital Spending
We at the Five Dumbest Things Research Lab look at statistics the way a prison guard thinks about the inmates at a penitentiary.
We're very familiar with them. We may even respect them.
But when we're working with them, it always pays to be cautious.
Today's lesson in how you should never take authoritative-looking numbers for granted comes to you courtesy of the National Cable & Telecommunications Association -- the cable TV trade association whose members include
cable operations, and most every other cable operator you've heard of.
The figure in question debuted last year as $65 billion. That's how much money that the cable industry spent over the past few years to build interactive, digital, broadband systems, according to the NCTA.
It's a big figure. An impressive figure.
But, we suspect, it's a dubious figure, too.
First, though, let's put the number in context.
The first time we saw that $65 billion number, it came up in September 2002, when Michael Willner, chief executive of
and then-chairman of the NCTA, testified before the House Telecommunications Subcommittee on the subject of the cable industry's commitment to digital television.
"In the six years since the passage of the 1996 Telecommunications Act," Willner's testimony reads, "the cable industry has invested more than $65 billion -- or over $1,000 per upgraded cable customer -- to upgrade our plant to an interactive digital broadband platform."
Meanwhile, said Willner, local broadcasters got $70 billion worth of digital TV spectrum in what some called a "scandalous" giveaway. Willner's message was clear: Cable spends $65 billion. Broadcast gets a $70 billion freebie. Cable good. Broadcast bad.
And only this week, the NCTA launched a Washington, D.C.-area ad campaign -- targeted, presumably, at movers and shakers in the government -- designed to call attention to "cable companies investing $75 billion to upgrade cable's infrastructure and bring advanced broadband services to millions of consumers," according to an NCTA statement.
In sum, the cable capex number doesn't exist in a vacuum. When the cable industry waves it around, it wields it to advance a specific political agenda. It's a pawn -- maybe even a bishop or a rook -- in a regulatory chess game. Which is why we at the lab believe it should stand up under scrutiny.
The NCTA says it gets its capex numbers from the research firm Kagan World Media. Kagan, which has been around since we were toddlers, struck us as a credible expert witness. So we at the lab thought we'd just take a look at the Kagan numbers ourselves.
And here is what we found: As far as we can tell, that $65 billion number comes from Kagan's estimate of
cable industry capital expenditures over the past few years -- not just what companies spent "to upgrade our plant to an interactive digital broadband platform."
There's a difference here. The way we read the NCTA's characterization of the $65 billion (now $75 billion), what the organization is talking about is the cost to add the bells and whistles for new services like high-speed Internet access, HDTV, video on demand and cable telephony. We
interpret "upgrade" and "interactive digital broadband platform" as including the everyday expenditures you would need to keep a cable company going.
We'll Juice You Up
But the NCTA does, evidently. If some cable operator's truck breaks down, and the company goes out and buys a new one, that's upgrading a plant to an interactive digital broadband platform. Building out a system into a new neighborhood, or putting a cable drop in a new home? Though a cable operator would have spent money to do that even in a noninteractive, nondigital system, it counts as you-know-what. New office furniture? Again, that's upgrading a plant to an interactive digital broadband platform.
As to how much money we think is overstated -- well, that's tough to figure out for a couple of reasons. Six years and seven months after the Telecom Act's passage, Willner made reference to "the six years" since the passage of the Act. We're not sure how to harmonize that, and all we have from Kagan are calendar-year figures.
And though Kagan tries to divide capex into different categories, we do understand that these are, indeed, rough estimates. No cable guy drives around saying, "Well, I spent one hour this morning on maintenance, then an hour and a half on 'upgrade/rebuild,' and about 20 minutes on advanced services." It's all a blur.
But here goes. According to Kagan, in the seven years from 1996 through 2002, the cable industry spent $74.3 billion on capex. Of that figure, only $56.2 billion was spent on stuff that we would put under the category of upgrading to an interactive digital broadband platform -- laying new cable, buying advanced set-top boxes, cable modems and new equipment for central cable offices.
Or look at it another way: In the four years before the passage of the act, operators spent an average of $3.6 billion annually in capex. Had the industry kept spending at that rate from 1996 through 2002, post-Act capex on plain-vanilla systems would have totaled $25.1 billion -- and that's assuming zero subscriber growth. Given actual post-Act capex of $74.3 billion, the industry's incremental spending on advanced services in this scenario is $49.2 billion.
So, depending on how we look at it, the industry is overstating its upgrade spending by somewhere between 32% and 51%.
In a statement responding to our inquiry, the NCTA points out that average annual capex since the passage of the Act "represents a nearly three-fold increase in capital spending from 1992-95 when cable prices were subject to federal rate regulation."
The NCTA says it has consistently cited Kagan data as its source for cable capex, and it believes this data "accurately reflects the enormous investment that cable operators have made to bring advanced broadband services to millions of consumers."
Steve Effros, a consultant to the NCTA and the cable industry, says he thinks it's fair to count all capex as upgrade capex. "All of our capital expenditure, no matter what it's used for, is designed ultimately to make a very complicated infrastructure work, and allow it to provide all sorts of new services, as well as the existing ones," says Effros.
Meanwhile, the National Association of Broadcasters -- a trade group comprising local TV stations -- doesn't seem to care that cablers might be inflating their upgrade capex stats, even though the NAB is one of the cable industry's archenemies in Washington. From the NAB's point of view, the more the cable industry spends on capex, the better. "That investment," says an NAB spokesman, "is coming at the expense of rate gouging on the backs of customers."
Would You Give Candy to These Two?
2. Excuse Me While I Fix My Mask Error
It happens every year: For Halloween, you want to dress up as your favorite stock-market pundit. But you can never find just the right costume.
Well, here's your chance.
Just go to your local costume store -- you know, the place that stocks masks licensed by
World Wrestling Entertainment
-- and buy one of their "Stone Cold Steve Austin" models.
We have no opinion as to whether the mask actually resembles Steve Austin. But we do think it looks a heck of a lot like James Cramer, a columnist for the online publisher of this and other Web sites,
, and a commentator for
I mean, can you tell the difference? We can't.
3. Let's Clean Up This Messier
As you may recall,
a few weeks ago we tried to figure out what Jean-Marie Messier, Jean-Rene Fourtou, and other executives at
meant when they talked about "perimeter."
We didn't get too far.
But since then, luckily, we received some correspondence on the subject from Marc Huberty, a Paris-based equity analyst.
"As you seem confused by the word 'perimeter' beloved by Mr. Fourtou, I just wanted to step in," writes Huberty. "'Perimetre' is the French equivalent of scope (in the business world), so as you correctly guessed, a change in perimeter means M&A activity.
"In Continental Europe a lot of emphasis is put on 'organic' or constant-scope results, more so than in the US I'd say. European companies almost always publish like-for-like sales growth (constant currency, constant 'perimeter') as well as actual figures."
4. No! Not the Vulcanized Death Grip!
Goodyear Tire & Rubber
this week disclosed that, because of problems with accounting and billing systems, it understated net losses over the past five and a half years.
In other words, as we feel helplessly, inexorably, inevitably compelled to point out, Goodyear's results were overinflated.
No doubt they've heard snide remarks like this all too often at Goodyear. They must find this tiresome.
5. The Wailing Wal-Mart
Finally, we at the lab are feeling a little sorry for
On Thursday, the feds raided the discount chain's headquarters and 60 of its stores, arresting 300 employees of outside contractors who clean certain Wal-Mart stores. The workers were illegal immigrants from Eastern Europe, and Wal-Mart executives were well aware of their illegal status, according to anonymous law enforcement sources cited by the Associated Press.
These allegations are only the latest piece of unflattering publicity about Wal-Mart's labor practices. They follow reports of the hurdles that low-level Wal-Mart employees face in getting health insurance through the company, and a
New York Times
story about workers being forced to keep working after they've punched out.
One might almost get the feeling that Wal-Mart's everyday low prices are gouged off the back of the company's hourly workers.
Wal-Mart Wings It
Anyway, we suppose someone inside Wal-Mart is steaming about the unfairness of it all. Computer companies like
outsource work to call centers in India, and people write all sorts of cute features about it. But, lo, someone linked to Wal-Mart tries outsourcing work -- allegedly -- to Eastern Europe, and people start getting arrested! It's just not fair.
Out of sympathy for Wal-Mart, we at the lab are working on a solution. The way we envision it, after each Wal-Mart closes for the night, we airlift the entire store to Eastern Europe on the back of a surplus Concorde. There it gets cleaned legally, then sent back to the U.S. in time for the next morning. As with all outsourcing schemes, we figure the increased transportation costs are more than offset by the lower labor costs.
If that doesn't work, the fallback plan is using orphans from the workhouse to clean the store. That one, at least, has the force of history behind it.