Updated from 7 a.m. EDT
Analysts continue to question the prospects of cable TV operators -- even the best of them.
The latest doubt to nag the future of cable industry growth arrived Wednesday, as Credit Suisse First Boston analyst Lara Warner said she had turned pessimistic about the extent to which
will generate money from offering local telephone service over its cable TV systems.
Warner's uncertainty is particularly significant for two reasons: One, amid the
-intensified distaste that investors have had for cable stocks this year, the relatively unleveraged Cox has emerged as one of the bluest chips in the cable industry. Two, Cox has been at the forefront of offering telephony as one of high-end services cable operators will use to generate free cash flow in 2003 and beyond. By June 30, Cox had more than 578,000 households subscribing to its phone service, amounting to 9% of its basic cable subscribers.
Cox's shares fell 40 cents Thursday to trade at $26.05. The operator's shares are down 38% from their 52-week high -- not bad compared with other cable industry victims, such as
, which is down 77%.
In her note published Wednesday, Warner says that increased competition in the local telephone market has negative implications for Cox's long-term growth prospects. More specifically, she says, telephony subscriber growth will be lower than expected through 2010, and average revenue per subscriber will decline at a greater rate.
Previously, says Warner, she believed that Cox and other cable companies offering local phone service, such as
AT&T Broadband and
, would face only one competitor each market in which they operated: the incumbent local telephone carrier.
But it appears that long-distance carriers -- AT&T in areas where it doesn't offer cable, and
-- will be a force in local markets as well, says Warner, reselling the service of regional Bell operating companies under an arrangement known as UNE-P (for "unbundled network elements -- platform"). While UNE-P has been around for some time, says Warner, the long-distance carriers' use of UNE-P to has picked up speed of late. That, she says, raises the prospect of up to four competitors in each local market, and greater pricing pressure than she had previously believed.
Warner rates Cox a neutral; CSFB has done banking for Cox over the past year.
Cox says it's aware of the threat from AT&T and WorldCom's MCI consumer business. "We recognize the strength of MCI and AT&T's brands," says Cox spokeswoman Laura Oberhelman. But though those companies' UNE-P-based local service launched over six months ago, she says Cox continues to enjoy record monthly net gains in telephone service customers.
"Instead of making investments in competitive technology platforms and customer service," adds Oberhelman, "the incumbent local exchange carriers and the long distance companies appear to be choosing
investor relations and regulatory avenues to compete."
Despite the new threat that Warner perceives, the analyst isn't changing her estimates for Cox. Previously unexpected price hikes in Cox's high-speed Internet service, she says, will offset telephony's lower contribution to revenue and earnings before interest, taxes, depreciation and amortization, a common cable industry financial yardstick.
Another argument for Cox investors to keep their chin up comes from Mike Smith, managing director of research for the telecommunications consulting firm Stratecast Partners. Smith acknowledges that AT&T and WorldCom have been successful in using UNE-P to win phone lines from the regional bell operating companies, hitting the rate of about a million customers per quarter. But, he predicts, the RBOCs, well aware of the danger they face, will fight back in the regulatory arena -- and win. "The RBOCs do not lose regulatory battles," he says.
As for the long-term success of cable operators in the local telephony market, that will come, says Smith, only after Cox and other cablers make the transition from the circuit-switched telephone technology they use to a voice-over-Internet-protocol technology. That will enable cable companies to offer services that RBOCs can't provide, such as the integration of voice mail and email, says Smith, whose firm doesn't do consulting for Cox.
"When that comes to fruition," says Smith, "is when, I feel, the
cable operators have a real opportunity on the local voice front."
Cox's Oberhelman says the company disagrees. "Cox is absolutely confident that based on our technology, customer service and operational efficiency, we'll be able to compete effectively on price," she says. "You cannot underestimate the advantage of being a facilities-based provider."