The cable modem business may be down, but it's certainly not out.

With second-quarter earnings season pulling into view, sell-side cable television analysts are projecting sequential declines in high-speed Internet subscriber growth. Wall Streeters caution against reading too much into the quarter's soft results, though some observers suspect investors will end up doing just that.

The focus on second-quarter cable modem business reflects one of the key elements of the current cable TV investment thesis: After spending billions of dollars to upgrade their cable systems, operators must now reap increasing profits from advanced digital services, including high-speed Internet connections, expanded channel lineups and video-on-demand.

With so-called broadband connections the fastest-growing service nowadays, investors are reading every available tea leaf for signs of cable modems' popularity and cable operators' pricing power. That lookout for cable modems' strength or weakness has gotten especially pointed as regional Bell operating companies, notably

Verizon

(VZ) - Get Report

and

SBC

(SBC)

, have sought to increase their broadband Internet market share in part through recent price cuts in high-speed DSL service.

For their part, analysts blame the expected declines among major operators such as

Comcast

(CMCSA) - Get Report

and

Cox

(COX)

on the seasonal nature of the cable TV business, and not on high-speed Internet access competition from telcos. And despite the hiccup in these companies' Net business progress, they see little cause for alarm among the cable-industry shareholders who have seen their shares rally sharply from a year ago.

Breaking In

The specter of growing telecom competition, the expected net sequential subscriber declines and the particulars of the second-quarter reporting schedule will likely make the high-speed data numbers inconclusive yet market-moving, says one analyst.

"While Q2 seasonality is normal in the cable business," wrote Bear Stearns analyst Ray Katz in a report last month, "we believe it may be seized upon as evidence that DSL pricing is having some impact on cable data, an assumption that we believe is too aggressive this early in the game."

Shares of cable operators have climbed steadily from last year, when the bankruptcy of

Adelphia Communications

and investor skepticism sent industry stock into the doldrums. Comcast, which hit a 52-week low of $17.05 last fall, closed at $31.04 on Thursday, up 47 cents.

Cablevision

(CVC)

, which bottomed out at $4.67 last August, closed at $22, down 30 cents.

As an example of the declines in sequential broadband additions, Katz expects Comcast, the nation's biggest cable operator, to report 362,000 net additional high-speed data customers, down 13.2% from the 417,000 additions Comcast reported in the first quarter. By comparison, in 2002, Comcast reported 22.7% more additions in the second quarter than it did in the first quarter, though second-quarter additions, at 281,000, were well below this year's expected results.

Katz attributes last year's strong performance at Comcast to heavy marketing in the wake of the company's break with prior high-speed data provider

Excite@Home

, and to an increase in the number of homes to which Comcast could market data service. (Katz has a peer perform rating on Comcast and a year-end price target of $35; his firm hasn't done recent underwriting for Comcast.)

Weak in the Knees

Though Katz doesn't see the second quarter's expected performance at Comcast and elsewhere as a sign of weakness, he suspects that others will. The analyst says he's seen no indication that cable modem net additions have been affected by the telcos' aggressive promotion, starting in March, of DSL price cuts. The regional Bell operating companies will start reporting their second-quarter results July 23 -- a week before the cable operators he covers, says Katz.

"We believe cable stocks could be temporarily weak in the face of positive DSL additions and management spin," he writes. While he remains confident in cable, Katz says it's too early to tell whether DSL growth will eat into cable's market share or instead expand the size of the broadband business.

In a July 2 preview, Merrill Lynch analyst Jessica Reif Cohen made a similar point about the effect of the RBOCs' reporting before cable operators: "We believe the RBOCs' 2Q earnings ... will affect near-term cable share performance as investors focus on assessing the DSL pricing impact," says Cohen. "In our view," she adds later in the report, "the overall broadband market is still in a high-growth stage and is not yet remotely close to a zero-sum share battle."

Along the same lines, Kaufman Bros. analyst Mark May wrote last week, "Despite aggressive price discounting and DSL footprint expansion, we believe the

local telcos will only marginally move the broadband market share needle during Q203."