Happy Days?

Q1 Highs; Q2 Headwinds & ’09 Trends to Watch

 

If you listened to any of the Q1 financial report conference calls (well, all but one or two), you probably heard the hosannas in the background.
 
Subscribers up!  Capex down!  Financials solid!  Oh, happy days are ....

Well, maybe.

Of course, the news was undeniably good.  Overall, multiplatform players reported around 800,000 net new video subscribers in the first quarter of this year and MediaBiz Competitive Intelligence (a sister company to The BRIDGE) confirms that the good-news adds held for many smaller private multiplatform services.  Even better, subscriber acquisition costs generally held the line; churn appeared reasonable; and revenues were strong.

In the face of a national and global economic meltdown, this news almost seemed too good to be true.  Those who believe in TV as a sure fire recession beater were buoyed and investors turned cautiously optimistic on some multiplatform issues.

Whether this good news can continue is, of course, the question of the day.  And there are some definite storm clouds on the horizon.  We’ll get to those, and some key trends for 2009.  But first, a quick glance at some of the key results from the first quarter.

Cable Gets Its Mojo Back

 

“Inertia,” says MediaBiz CEO Paul Maxwell, “remains cable’s biggest asset.” 

The MSOs have used the force of inertia well, managing to hang on to the majority of multiplatform subscribers even as other technologies at least temporarily outstripped their own.

Still the companies took a beating in the last quarter of 2008.  The first quarter of ’09, however, reversed the trend as the MSOs blossomed with new digital growth.   Of course, losses on the analog video subscriber side remained the rule.  Still the overall losses for the quarter were relatively small (-0.23 percent) and three of the top 10 MSOs (Insight, Cable One and Time Warner Cable) recorded gains.  On the digital sub side, the subscriber gains were impressive.  In the broadband and voice areas gains also continued.

In the big-news-to-watch department, several items standout.  One is an unusual love letter from Wall Street, addressed to Comcast after its impressive first quarter gains. 

Sounding a bit like an eager-beaver PR novice, BernsteinResearch’s Craig Moffett wrote of advent of Project Calvary in Portland thusly (the italics are his):  As Comcast activates the project in Portland OR in early summer “Suddenly, their cable system will be awash in enough new capacity to offer as many as 200 channels of HD ... twice as many as DirecTV.  Enough capacity to offer 100Mbs of broadband ... ten times as fast as AT&T’s U-verse.  Enough capacity to offer simultaneous video on demand streams ... to everyone simultaneously.“And it all cost only $40 per subscriber.”

Wow. 

Next thing we know (say by the end of next year when Project Calvary is scheduled for completion in all Comcast systems), Brian Roberts will be walking on water.

Snarkiness aside, Moffett is not a PR novice; he’s a well respected analyst.   And except for some nitpicking (for example, the AT&T citation is a bit disingenuous as Comcast does not compete against the big T in Portland; they compete against the much stronger Verizon FiOS offering) we need to consider the implications of such a sweep-em-off-their-feet Comcast offering.  (A map showing how Comcast overlaps with the AT&T and Verizon offerings is available on the pdf version of this BRIDGE.  In addition, a map can be obtained by writing to editor@mediabiz.com.)

Clearly such a superior offering nationwide could put the Philadelphia-based MSO in an even stronger king-of-the-pack position.  The company already serves nearly a quarter of all multiplatform households and, in addition to its obvious competition with both DBS providers overlaps extensively with Verizon and AT&T.

Other top cable news for the first half of this year focuses on the “family” business of Cablevision and speculation over if, when and how it might spin-off some of its assets.  Prominent among these is Madison Square Garden whose proposed rehab has had analysts in near-convulsion mode for some time now.  Dubbed a “trophy asset” by Pali analyst Richard Greenfield, MSG is reportedly a favorite of Cablevision CEO James Dolan whose plans for distinctly high-end upgrades have been regarded as a potential black hole for company cash. 

Thus talk of a MSG spin-off (but, CVC  emphasizes, not a sale) have been greeted with a sigh of relief.  As for Dolan’s pronouncement that Cablevision is a “family” business and “the family will take a point of view that is more financially conservative than what a single owner would take” ...  we guess that one is open to many interpretations.

Eviscerating Elvis

DISH Hits Hard Times

 

On the satellite side of multiplatform, the news is ... well ... interesting.

To begin with, we have DISH.  And Elvis.  And the age-old adage of what-goes-around-comes-around. 

Once upon a time, EchoStar (and DISH) CEO Charlie Ergen reigned supreme in multiplatform popularity.  Retailers, investors and Wall Streeters hung on his every word; gloried in his poker parties; and swooned over the latest deals of the CEO known ... only a bit derisively ... as “Elvis.”

Ergen’s financial acumen, tight-ship management style, low-cost services and early multi-cultural offerings propelled the DISH Network to a peak of 13.8 million subscribers.

But that was then.

For the past four quarters, DISH has been on a steady downward trend.  Today, the company is nearly a quarter of a million subs poorer than it was 12 months ago.  And the recent U.S. District court ruling in the TiVo deals a serious blow to the Englewood, CO-based company.

However, the company’s Q1 news wasn’t all bad as the company reported a loss of “only” 96,000 subscribers versus Wall Street’s expected -128,000.  And true to Ergen’s penny-pinching reputation, subscriber acquisition costs remained relatively low and Q1 earnings per share came in higher than expected.


But that has not cheered investors.  Reflecting a view held widely on the Street, Collins Stewart analyst Tom Eagan recently noted, “The DISH operating model is broken and we would avoid the shares.”  In a separate report, Bernstein’s Moffett wrote, DISH “revenue growth is now a truly scary 2.1 percent; it seems likely that they will be a negative growth company soon.”

In response to his company’s declining fortunes, Ergen recently announced a $9.99 introductory package, thus buttressing the company’s low-cost provider claims.  Whether this will prove a good idea, however, remains to be seen.  Says MediaBiz’s Maxwell of the move, “It looks to me like Charlie is doubling down on the downside.”  

Ergen’s other company, EchoStar, which holds the billionaire’s technological assets, has also had a tough run of late.

Due to “The lack of contract wins and continued lack of free cash flow .... We get fewer investors inquiries about EchoStar than we used to,” says Moffett.

In addition, Ergen’s litigious nature plus his reputation for sharp-elbow business dealings have lead other companies to regard his overtures warily.  In fact, one prized property, the Sling technology which lets users transfer their programming among devices, has received a cool reception among multiplatform players.

DirecTV Gets Golden

... And Up for Sale?

 

On the other side of the satellite platter we have DirecTV, a company on a roll.  Aimed squarely at high-end customers, DirecTV has gained an astonishing 1,046 million net new subscribers over the past 12 months, 460,000 of them in the past quarter.  In addition, the company boasts remarkably low churn and relatively low subscriber acquisition costs.  The only disappointment for analysts in DirecTV’s Q1 report were lower than expected revenues per customer.

Can DirecTV’s remarkable winning streak continue?

Most observers believe it can ... at least for the short term.  Over the longer term, DirecTV’s lack of a video/voice/data play could cripple its outlook.  

That said, the most interesting news on DirecTV of late is that the man who steered it to his current heights, Chase Carey, is jumping ship to take the No. 2 job at one-time DirecTV owner News Corp.  This, perversely, could prove a benefit for the DBS No. 1.  Many analysts believe that without Carey at the helm, current DirecTV owner, John Malone’s Liberty Corp, will be inclined to sell the company.  The most likely buyer would be AT&T, which already partners with DirecTV’s video service and has long lusted for the company.
 

Telcos Take to The Air

While Wireline Services Drag

 

This, of course, brings us to the telcos which have recently muscled their way into many U.S. multiplatform markets.  Most telcos in the video/voice/data game are relatively small community-based services, many of which have built sophisticated hybrid plants using everything from copper wire to fiber to wireless to serve their customers.  

The most watched of the telco multiplatform players are, of course, AT&T with its U-verse service and Verizon with its FiOS.  And, as with most other multiplatform players, they enjoyed  a banner first quarter.  For Verizon, first quarter highlights included gains of 299,000 customers for FiOS video services and 298,000 new customers for FiOS broadband.  On the wireless side, Verizon gained 1.3 million new subscribers.


 
The story is similar for AT&T’s U-verse:  Its first quarter report showed 284,000 new U-verse video subscribers, a total of nearly 17 million broadband subscribers (U-verse, DSL, 3G and satellite), wireless subscribers up by 1.2 million and net income of $3.1 billion, well above Wall Street’s estimates.

So what’s not to love?

In a word:  Wireline.

Both AT&T and Verizon continue to have major holdings in landline voice services and these services are shrinking fast.  Even if Verizon succeeds with plans to spin off a large chunk of its more rural assets (an estimated 4.8 million customers) to Frontier Communications, Bernstein’s Moffett notes that the company’s revenue base would remain predominately wired (58 percent).  

With wireline losses bleeding off the bottom line both AT&T and Verizon have their sights firmly set on what could be the defining trend for 2009: Wireless.

And not just wireless, but wireless video.

“Both internet and mobile video services are still more noise than reality,” Maxwell remarks.  “However, the bets that Verizon and AT&T wireless are making on netbooks could change that.  The reason is simply that for a cost of $300 to $500 people will get a mini-laptop with a watchable screen.  The telcos will market them like cellphones and that model makes a lot of sense.”

The Future of TV

Yet Another Paradigm Shift?

 

The TV-everywhere concept, on which the netbooks and many of newest multiplatform plans depend, portends a major shift in business models, Maxwell points out.  

“The critical point is that, to make the TV-everywhere idea work, multiplatform players will have to turn subscribers into individuals instead of households as is done now,” he says.    

And how fast could such a change this happen?

Says Maxwell, “If Apple builds an entertainment-oriented netbook with email, that could be a paradigm shifter.  And it could come quickly.”

Apple, of course, is notoriously close-mouthed about future plans, but AT&T and Verizon are both on record with major initiatives.  At the end of May, for example, AT&T unveiled plans to boost its wireless broadband plans to the max.

“We are investing as much in broadband infrastructure as I think is almost possible,” CEO Randall Stephenson told a recent investment conference.  “Everywhere else we’re reigning in the capital spending rather aggressively.”

The investment focuses on offering high speed services via the company’s 20,000 national WiFi hotspots and AT&T says it will boost the speed of its 3G wireless network to more than 20 megabits per second this year.  For the longer term, the company is has ambitious plans to build out its 4G/LTE service.  

Not surprisingly, AT&T also sees its U-verse service morphing to wireless.  The second phase of the U-verse rollout, Stephenson noted, plans to make the product mobile.  “(U-verse) is a very adaptable platform ... it integrates well with wireless.,” he said.  “That’s the key principle for me.”

Of course, cable has its own wireless plans.

“I think the future is in stuff like what Cablevision is doing with its free WiFi offer,” says Maxwell, “and Clearwire has a chance to be significant.”

Indeed, Clearwire, whose backers include Intel, Comcast, Sprint (the majority partner), Google, Time Warner Cable, and Bright House, currently offers its CLEAR™ 4G service to an undisclosed number of subscribers in two markets.  

Will that WiMAX based service, or the LTE network envisioned by AT&T, or whatever is in the works at Apple usher in a future of wireless multiplatform?  

In the end, it all boils down to questions of bandwidth capacity – and how subscribers will relate to that capacity.

“More capacity equals more content,” Maxwell notes.  “But a lot of the content we’re dealing with now doesn’t from from the big old content companies but from individuals.  And in looking at the future of multiplatform, we might wonder:  How long will this really last?”•

The Cable Center Bibliography

 

If you are interested in reading more about innovative programming, following is a selection of additional periodicals provided by The Cable Center’s Barco Library.  Dedicated to chronicling cable’s varied and colorful history, The Barco Library houses the largest collection of cable telecommunications equipment, photographs, and marketing and informational materials in the industry.  
 
Visit www.cablecenter.org for more information.

Farrell, Mike. “Cable Stages A Comeback” Multichannel News (May 4, 2009)

Farrell, Mike.  “Analysts: Slowdown Is Likely to Continue.”  Multichannel News (April 27, 2009)

Lafayette, Jon. “Fewer Ad Orders Seen Pulled in Q3; Buyers Expecting 1st-Quarter Levels.” Television Week (May 4, 2009)

Reedy, Sarah. “Time Warner Cable Puts Pressure Back on Telcos.” Telephony. (April 29, 2009)

Gorman, Bill. “Nickelodeon Finishes First Quarter as Top-Rated Basic Cable Network” (Posted March 31, 2009)

Tabakoff, Nick. “The Worst Is Over: Murdoch” The Australian, (May 8, 2009)

Lafayette, Jo. “Marking a Silver Year With Growth; New Shows at A&E, History, Biography” Television Week, (April 27, 2009) 

Farrell, Mike. “Economy Squeezes Content Providers” Multichannel News. (May 04, 2009)

Neel, K.C. “Cautious Optimism Despite Tough Quarter” Multichannel News (May 12, 2009)

Robuck, Mike. “Research: Pay-TV Subs Will Continue To Grow This Year” CED Magazine (May 6, 2009)

Condon, Stephanie “Cable Industry Stays Optimistic In Spite Of Economy” CNET.com (April 1, 2009)