OK, maybe cable television programming costs aren't shooting up after all.
Four days after a J.P. Morgan analyst argued that
cable TV system operators will pay larger-than-expected fees for the TV channels they carry, Credit Suisse First Boston issued a follow-up report questioning those conclusions.
The contradictory outlooks suggest that the impact of programming costs will be a focal point for cable industry investors throughout the current earnings season and for the rest of the year. The disagreement, which centers on information revealed last month by
AOL Time Warner
about its cable operation, also spotlights an issue that has bedeviled the cable industry over the past year: Are setbacks suffered by a particular company -- be it
-owned AT&T Broadband -- specific to that operator? Or are any one company's troubles representative of larger trends in the industry?
Shares in most cable operators rebounded slightly Thursday, a counterpoint to Monday's widespread decline after J.P. Morgan's bearish report.
At the center of the debate is the high growth in programming costs reported by AOL Time Warner's Time Warner Cable subsidiary -- over 20% in 2002 and a projected 16% for 2003. Starting with that information, J.P. Morgan analyst Jason Bazinet used three different analyses of programming costs to arrive at a single conclusion: Programming costs for the cable industry will be rising at a rate of 18% to 20% annually, not the 10% to 12% rate currently expected.
If true, that would mean a riskier outlook for cable stocks, since each operator would be more dependent on high-margin advanced services to achieve financial targets.
On Thursday, however, CSFB analyst Lara Warner released research arguing that the programming cost threat is overblown.
In fact, says Warner, Time Warner Cable's programming expense growth is a company-specific issue. Programming cost growth for the rest of the industry, she says, will be in the range of 10% to 11% in 2003 and will trend even lower in the following two years.
In place of Bazinet's three arguments for why Time Warner Cable's programming challenges are generalizable to the rest of the industry, Warner has three of her own to support her thesis that the problems are company-specific.
One, she writes, is that Time Warner made a strategic decision to expand channel lineups in its basic tier to better compete with direct broadcast satellite services. Simply moving
Disney Channel from a digital tier to the basic tier, she estimates, accounted for 3.6 percentage points of the 21% 2002 programming cost growth. Three more channels will be moved to the basic tier in 2003, she says. Furthermore, a sampling of channel lineups at systems owned by Time Warner, Comcast and
indicates that Time Warner, on average, is carrying seven to nine more channels in its expanded basic tier than those other industry leaders. That, writes Warner, "would naturally drive higher programming expense."
A second factor that makes Time Warner atypical, says Warner, is that its carriage of the YES sports network in the New York metropolitan area in 2002 led to a $2 monthly cost for 1.2 million subscribers -- equivalent to 2.25 percentage points of the growth.
Third, says Warner, Time Warner offers video-on-demand in all its markets and is rolling out subscription VOD in 2003. VOD usage drives incremental programming costs at a higher rate than basic or digital tier content, she says.
Warner has outperform ratings on Comcast and Disney, neutral ratings on Cox, AOL Time Warner and Cablevision, and an underperform rating on Charter. CSFB has received investment banking compensation in the past 12 months from all of these companies other than Cablevision.
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