Cable fat and sassy, but not content

The annual convention of the National Cable & Telecommunications Association has always been the cable industry's big private party-a time when cable operators, which don't generally compete with each other, gather to talk about what's working and what's needed.

This year's event, now simply called The Cable Show, was chock full of self-congratulatory moments as the industry hailed its best year, 2006, and an even better first quarter for 2007. For all that success, cable executives maintain the best is yet to come.

The milestones that Pat Esser, the event co-chair and CEO of Cox Communications, announced in the opening minutes of The Cable Show were significant: The industry now serves 10 million digital phone customers and 30 million broadband Internet customers, while posting some of its best cable viewership numbers as well.

“A couple of our members reached 25% telephone penetration,” Esser said.

But as another notable CEO, Brian Roberts of Comcast, made clear the next day, cable is far from done. Roberts, who was also shown on film doing the first major demonstration of a cable modem in 1996, went on to demonstrate the potential of channel bonding to turn cable modem service into a 100 Mb pipe-or cable's logical answer to fiber-to-the-home technology.

Even FCC Chairman Kevin Martin got into the act. After admitting he was surprised to be invited to speak, given the fact “the NCTA heaps scorn on the FCC for policies it calls simplistic and misguided,” Martin said the cable industry “has done some remarkable things” by leading the U.S. in broadband deployment and introducing competition in residential phone service.

Where competition with telco companies is concerned, the cable execs appear unconcerned.

“For every video customer Bell takes, Cox is taking 50 broadband customers,” said Char Beales, president of the Cable & Telecommunications Association for Marketing.

At Comcast, which has to compete more with Verizon and its FiOS buildout, the number is more like one to 20, said Stephen Burke, chief operating officer for Comcast.

“Their ability to get our video subscribers is harder than our ability to get their voice customers,” Burke said.

Glenn Britt, CEO of Time Warner Cable, maintains that is because the cable industry didn't come into voice with a “me-too” product but something essentially different. “Our product is more consumer-friendly,” he said. “We offer flat-rate pricing, there is no five-page bill.”

Burke claims Comcast is wooing the telcos' DSL customers with higher-speed offerings. “This year, we will add more high-speed Internet customers than ever before, and 55% of the net adds are ex-DSL customers,” he said. “DSL is the new dial-up. People are coming off of a very discounted DSL service that is not as good as what we can give them. That is putting a lot of pressure on DSL numbers. Our triple play is having a big impact-it is a very important part of our business and is tremendously important in reducing churn.”

What it comes down to, said Tom Rutledge, chief operating officer for Cablevision Systems, is that cable offers a superior product: better video, better high-speed Internet and better voice.

Surprisingly, the cable execs also seem relatively unconcerned about the newer forms of video competition, including over-the-top Internet video and the threat of new entrants such as AppleTV and Google. Cable is adapting by creating its own on-demand TV packaging, including same-day releases of broadcast content from the major networks, and exploring ways to use their broadband offerings to deliver video as well.

“There is a huge opportunity for cable as you brand on-demand content to bind it into your high-speed data as well and reach the consumer over the PC, where you can add user-generated content and short form,” said Aryeh Bourkoff, managing director and vice chairman of the Telecom, Media and Technology Investment Banking Group for UBS.

“We are only in the second or third inning of how we use on-demand and relate it to the linear network,” Britt said in agreement. Time Warner Telecom is finding such success with its Start Over service and is expanding to include a “Catch-Up” offering that puts the last few episodes of a series on an on-demand server. As with Start Over, the new service will disable the fast-forward function “so the ad model isn't attacked,” he said. Britt maintained that customers are more interested in time-shifting content than in skipping ads.

“Consumers use it a lot,” he said. “The ones with [digital video recorders] used Start Over more than anyone else.”

Still to come, Burke said, are simultaneous releases to on-demand cable of major movies-timed to the theatrical release.

The key, the executives agreed, is giving consumers what they want, and the cable industry believes it is doing that.

The question remains whether cable is giving investors what they want. Britt and Burke, who both lead publicly traded companies, said their stock remains undervalued, leading to major efforts at both companies to buy back their stocks. Cablevision, like Cox, is pushing to go private.

“There is always a world of worry around cable-things are dire, there are concerns over competition and disintermediation from Apple and Google,” Bourkoff said. “Cable is still trading at 8.5 times EBITDA, which is the same as it was doing in 2004. You guys always outperform.”

“There are ways to capture value,” Britt said “As our EBITDA grows faster than our capex, we can buy back our own stock. If our multiples stay depressed, it affords us that opportunity. We see opportunity in our business model that investors don't see.”

Comcast has bought back 10% of its shares recently, Burke said, and continues to believe its stock is undervalued.

But cable is also poised to invest in newer markets, including wireless-where the execs agreed they want to again find some new offering-and small business services.

“There is a large segment of the [small and medium-sized business] market that is dying for an alternative [to the phone company] and don't have it,” Burke said.

TELEPHONY'S GUIDE TO IMS

Read this special report to learn more about IMS's role in fixed/mobile convergence and IPTV deployments.

Also, check out our IMS One-Stop for breaking news. www.telephonyonline.com/ims