Judging from two holiday-season forecasts, the cable industry in 2004 may look like Land of the Giants.
, the nation's largest operator of cable systems, last month predicted 16% operating cash flow growth in 2004. Meanwhile,
, one of the smaller publicly traded operators, issued numbers implying operating cash flow growth of about 5%.
That gap highlights a disparity industry analysts have been hammering on recently. Large operators such as Comcast are outperforming their smaller rivals -- a fact that has been borne out in stock prices as well as financial data. Over the course of 2003, Comcast has surged 40% behind sharp gains in cost management at its acquired properties. Meanwhile, Mediacom has just held steady in spite of a massive tech-stock rally during the second half of the year. On Tuesday, Comcast dropped 20 cents to $32.25, and Mediacom fell 14 cents to $8.66.
With cable TV facing increasing competition from both satellite TV operators and the larger telcos, big operators such as Comcast,
are just better positioned than smaller players such as Mediacom and
, observers say.
Competition from satellite is expected to be especially heated, now that Rupert Murdoch's
has effectively gained control of
, operator of DirecTV, the nation's largest home satellite service.
Given the apparently diverging fates of the bigger and smaller players, investors will have to be alert for changes to the story over the course of the year. As DirecTV -- no slouch competitor already -- operates under the News Corp. regime, how much more will it cost the larger players to fight back? Will the smaller cable operators have the money and the time to fight satellite's aggressive tactics? (Mediacom, for example, expects to offer voice over Internet protocol telephony in the second half of the year -- and telephony has proven to be a useful customer-retention tool for Cox.)
Now that cable operators have upgraded most of their systems to broadband, interactive networks capable of delivering numerous advanced services, they're trumpeting their ability to generate additional revenue amid declines in capital expenditures.
The capital expenditure issue may no longer trouble investors, but the customer-retention costs -- through promotions, advertising and new service introductions -- remain unknown.
But DirecTV and the other major satellite service,
Dish Network, promise further fighting for cable customers by introducing popular local broadcast TV packages in a growing number of communities, as well as pushing digital video recorders as part of their service.
Combine those issues with efforts by cable and satellite to gain the upper hand in high-definition television delivery -- not to mention operators' ongoing defense of their high-speed Internet business against telco incursion -- and it appears that cable operators still have to worry about revenue and operating expenses even though capital expenditures may be under control.
Comcast, with 21.4 million subscribers to its basic service, is a clear example of the benefits of size in the cable industry. The Philadelphia-based operator can launch new programming services with guaranteed distribution. The recently announced Comcast SportsNet Chicago, for example, will debut in 1.5 million Comcast homes in the Chicago area -- a hefty sized audience even before Comcast gets any other cable or satellite operators to agree to carry the service.
In addition, Comcast's vast audience gives it powerful leverage as it negotiates with other programmers over prices it has to pay to include their channels on Comcast's systems. In late December, Comcast announced a long-term programming agreement with
, an agreement that analysts believed incorporated price increases lower than their expected overall cost increases for 2004. (Whether that lower-than-average figure will offset the usually higher-than-average price increases for sports programming is unclear, however.) The deal, wrote UBS analyst Aryeh Bourkoff, "we view as a tribute to Comcast's size and negotiating skills, and the power of Comcast's wide distribution network." Bourkoff has a buy rating on Comcast's stock; his firm has done recent underwriting for the company.
Meanwhile, the smaller operators such as Mediacom -- which has 1.6 million basic cable subscribers -- don't seem to be enjoying such power. "Mediacom's small size leaves it vulnerable to programming rate increases in excess of revenue growth," wrote Friedman Billings Ramsey analyst Alan Bezoza in a recent note. Bezoza has an underperform rating on the stock.