CABLE REAPS THE REWARDS FROM BROADBAND BUSINESSES

'Traditional' business units still hamper AOL Time Warner and AT&T

The cable industry's strategy of pouring profits into improved operating plant paid off last week as three of the top six multiple system operators reported impressive quarterly results.

Ironically, results for the top two MSOs, AT&T Broadband and Time Warner Cable, were tempered by their parent companies' respective long-distance and Internet access businesses. A massive goodwill writedown on AOL Time Warner's America Online Internet business unit sparked the largest quarterly net loss in U.S. history — $54.2 billion — while AT&T's core long-distance unit reported an 8% decline in revenue.

AOL Time Warner's bombshell only obscured the Time Warner Cable success story. TWC posted a 19% increase in revenues, based partially on an 85% jump in the number of high-speed data subscribers last year. Cox Communications, the sixth-largest MSO, last week announced a plunge in operating profit related to an accounting change, but it also said it added more than 62,000 telephony customers and 117,700 data subscribers in the first quarter (see figure).

More important for the overall industry, all three MSOs have committed to more spending.

“That extra 40 bucks a month [cable modem fee] per subscriber is really hitting the cable operators in the right place,” said Ryan Jones, an analyst with The Yankee Group.

AT&T Broadband, in the midst of being acquired by Comcast, reestablished its system upgrade plans, committing more than $1.1 billion in construction funding for 2002, roughly two and a half times 2001's outlay.

Despite past gaffes with consumers and elected officials that led to industry regulation, cable operators have wised up and have fought off attempts to re-regulate. At the same time, telcos are slowing deregulating, said Jones. “It's a lesser of evils for them, and it's exactly what the folks in telephony want,” he said.

Cable's biggest opponents now are consumer groups opposing the AT&T/Comcast merger.

Speaking prior to a U.S. Senate Anti-Trust Subcommittee hearing on the merger last week, Ed Black, president and CEO of the Computer & Communications Industry Association, said a wide array of companies are apprehensive about cable's emerging monopoly and power to exert anti-competitive pressure.

Those arguments may force some merger concessions but seem unlikely to slow consolidation. AOL Time Warner, despite its record losses, hasn't stopped trying to get a bigger presence in the cable space.

“We're going to keep our eyes open,” said CEO-Elect Dick Parsons.

Several analysts have speculated that the largest MSO is eyeing Cox. However, Cox has its own acquisition agenda. “It's only prudent for us to pay attention to what's happening in the marketplace,” said Cox President and CEO Jim Robbins.