Facing a squeeze
Industry looks to new services to offset higher cost of cash
John M. Higgins -- Broadcasting & Cable, 5/15/2000
Expressing frustration over plunging cable stock prices, cable and Wall Street executives said that accelerating deployment of new services would probably offset financial complications presented by the higher cost of raising cash.
Operators face the combined pinch of cable stocks' 40% to 50% slide and a two-percentage-point rise in interest rates. First, it means that capital will be harder and more expensive to raise. Second, it means that system valuations will be lower because investor demand for returns will rise.
Last year, cable operators raised $11 billion in equity, by going public, pitching secondary stock offerings or creatively "monetizing" assets, such as stock in companies like Sprint PCS. That cash is critical to operators' plans to deploy advanced services, because cash flow doesn't come close to paying for system rebuilds and the cost of digital set-top converters.
"Last year was a terrific year if you were a cable operator in search of equity," said Andrew Tisdale, a media investment banker with Morgan Stanley Dean Witter.
But the collapse of Internet stocks has left investors wary of merely listening to cable operators' stories. They want clear evidence that advanced service plans can be executed. "The market really needs to see that revenue-generating units are being added and being added each quarter," Tisdale said.
After trading for about eight times annual cash flow in 1997, cable stocks zoomed up to 18 times cash flow by May 1999. Today, they're trading at about 15.
Cable stocks started sliding even before the crash of the Nasdaq composite index hammered the market in March. Beginning in January, cable investors became acutely anxious about the threat of competition and operators' ability to sustain cash-flow growth.
CS First Boston media analyst Laura Martin retains her enthusiastic stance on the industry. "I want these companies spending as much money as they can," she said, noting that MSOs can generate 50% to 75% returns on capital spending to deploy new services. "It's 6% for basic cable, and their cost of capital 10%."
Operators contend that they are delivering on their promises. Comcast Corp. Treasurer John Alchin noted that, although telco Bell Atlantic Corp. keeps revising downward its forecast for high-speed phone service, Comcast keeps pushing its budgets up.
The company is looking to increase its Internet customer base to 350,000 by year-end and has revised its digital cable target from 1 million by year-end to 1.25 million.
Alchin said that advanced services are already helping Comcast in its fights against DBS. In markets where digital cable is available, he said, digital penetration has fallen to 5% or less, vs. 10% average DBS penetration.
Martin even finds a sunny side in the millions of cable subscribers who have defected to DBS. About 2.5 million to 3 million of the 10 million DBS subscribers hang on to broadcast basic cable service to get broadcast stations.
Even though "the cable operator went from having a $60-a-month guy to a $10-a-month guy," she argued, keeping the subscriber at all will be valuable when the system launches interactive services and high-speed Internet. "The operator knows who that $60-a-month subscriber is" and can pitch advanced services later.
Martin predicted that, by 2006, there will be only three cable companies: AT & T, AOL Time Warner and one other. With the top 10 operators' already controlling approximately 90% of all subscribers, the top three will be consolidators of the whole industry.
