Moffett: Cable Must Tough It Out
Sanford C. Bernstein Senior Analyst Sees Upside to Underperforming Cable Stocks
By Jon Hemingway -- Broadcasting & Cable, 1/5/2008 8:00:00 AM
As one of the foremost observers of the U.S. cable-television and satellite-broadcasting industries, Sanford C. Bernstein senior analyst Craig Moffett has offered his often-sought-after opinions from a Wall Street perspective since 2002.
Moffett sees an upside to the underperforming cable sector, has mixed views on satellite operators and sees telephone companies making inroads with their video services. He talked with B&C’s Jonathan Hemingway about cable’s need to better communicate with customers, FCC regulations and the wild card that is HD.
Q: Why are cable stocks down as far as they are?
A: We had a smorgasbord of bad news in 2007. You had a weakening economy and a rollover in the housing market that hurt basic-subscriber growth, a weak advertising market that sucked about 100 basis points or more out of the growth rate of these companies. You had a series of bullish announcements from AT&T and Verizon [Communications] about their video plans. You had DirecTV launching 100 channels of HDTV. In aggregate, it’s been death by 1,000 cuts.
Q: What are some critical challenges to watch for in cable in 2008?
A: The companies have to reconvince Wall Street that capital spending really will fall when growth decelerates. Their credibility on that score right now is very low.
Q: What do you expect to see from the Federal Communications Commission next year in terms of regulation?
A: Probably more of the same of what we saw in 2007, which is lots of smoke but not all that much fire. There were lots of nasty headlines in 2007 but, with the exception of making set-top boxes more expensive and possibly -- and I emphasize "possibly" -- abrogating MDU [multiple-dwelling-unit] contracts, not that much happened that has lasting import.
Q: How significant a role will the economy play in 2008?
A: Huge. It’s actually the economy more than anything else that accounts for cable’s reversal of fortunes. The drop in basic-video-subscriber growth from 2006 to 2007 isn’t a function of the telcos suddenly showing up and taking share -- it’s a function of slower housing growth sapping about 1% growth from the market. The issue is with the American consumer and, by all accounts, the American consumer looks stretched right now.
Q: How much of a wild card is HD in this mix?
A: It’s too early to say exactly how that will play out in crowning winners and losers. It’s tempting to say that DirecTV is the winner in HD over the near term. But DirecTV is far behind the rest of the industry in HD penetration, and it is going to be playing a game of catch-up as it upgrades its existing subscribers, and it’ll do that at very high cost and not inconsiderable disruption. The cable operators, Comcast in particular, are promoting a message of more HD "choices" that may or may not persuade consumers that Comcast is an equal or better solution to DirecTV. It’s just too early to say whether these messages are getting through to consumers.
Q: What impact do you expect the telcos to have in 2008?
A: The telcos are the real deal. Verizon, in particular, has a very good product. You can argue ad nauseam about whether or not they can earn a return on the capital they are investing in the business, but there is no debate that the product itself is a good one. It is time to put to rest the controversy as to whether or not AT&T’s U-verse [TV] actually works. But there is still a worthy debate about whether U-verse will remain competitive over the next five or so years given its inherent constraints of bandwidth.
Q: Do you believe cable prices are too high?
A: No. But cable has lost the high ground in the conversation with consumers about its own value proposition. Cable is charging 20 cents an hour for television viewing for the average household. That’s a pretty good deal compared to virtually any alternative. Cable’s competitors are raising prices even faster than cable. Cable actually has a decent story to tell with respect to pricing. But it hasn’t done a very good job of telling it.
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