Cable Comes Under Pressure to Roll Out Digital, Phone Services: Satellite Broadcasters Coming on Strong; Competing with Cable to Reach Consumers' Homes
February 7, 2000
Cable operators are said to be heading for a tougher time in 2000 than they had last year, when they shared the spotlight as one of the hottest sectors in high yield.
One of the big reasons for the somewhat bleaker outlook is that direct broadcast issuers have become more formidable opponents in the race to deliver television signals to consumers' homes.
Late last year, those satellite companies were first allowed to broadcast local signals, which eliminated the biggest remaining advantage that cable operators had over them. Previously, subscribers to satellite broadcasters couldn't pick up local news and other broadcasts from their own cities.
And this has greatly heightened the pressure on cable operators, some market observers say, to roll out digital and "cable telephonic" services faster than ever before. Buysiders should see cable operators moving faster to consolidate and cluster their markets, sources said.
A traditional cable TV subscriber is worth about $30 to $35 per month to the operator, but these other services are more lucrative, said Morgan Stanley Dean Witter cable analyst David Allen. A cable modem subscriber is worth an additional $40 per month, and if the cable company can tack on the phone bill, it would parlay into another $50 to $60 a month, Allen said.
The stock prices on cable companies have been pushed up over the past year, creating a windfall for investors and much of the increase has been based on the assumption that each subscriber was worth an ever-increasing amount of money to the company, Allen said.
In 1998, the typical valuation for one subscriber to a cable company was about $3,300 per year. In 1999, that amount had been pushed up to a typical $4,000 per year, he said.
Last year was a build up time for cable, Allen said, and now it's time to execute. "Cable has to move this year," he said.
The cable companies will have to move faster to offer enhanced services, others agreed, however it still offers a good way for the last mile connection.
And furthermore, cable also offers the only true two-way broadband connections, said a high yield portfolio manager. So if the customer is sitting at home trying to move large documents electronically, and he's on a satellite network, he will be moving on a speedy connection one way and a tradition phone line the other way.
Still, direct broadcasters came on strong in the latter part of 1999, Allen said, as was evidenced by their growth in market share. By year end, they has a collective 11 million homes in the U.S. Tiny compared to cable's penetration, to be sure, but still an increase from 8.7 million the year before.
One company that looks poised to gain from the newly charged battle is direct broadcaster EchoStar Communications. Its stock increased about 700% over the course of last year to $98 per share at year-end from $11 per share at year end 1998.
And the outstanding bonds tightened to 300 basis points over Treasurys from 425 basis points over the curve, traders said. And Morgan Stanley's Allen said he thinks the bonds could tighten another 100 basis points.
One warning sign for the cable sector was AT&T's recent annual earnings announcement, analysts said. Cash flow from AT&T's cable assets fell 6.1% in the fourth quarter compared to the year-ago period. And it fell 2.3% for the year.
AT&T chairman Michael Armstrong said in a conference call that those numbers are unacceptable, and that he was confident the numbers would improve going forward. Overall, AT&T posted a fourth quarter profit from operations of $1.65 billion, down from $1.8 billion the year before.