If it completes its acquisition of Cablevision Systems, Altice is expected to try to lower its costs, including programming costs.
In a research note, Morgan Stanley analyst Benjamin Swinburne said Altice did not explicitly mention content savings when talking about how it planned to operate Cablevision. "However, given Altice's track record of focusing on cost, we would expect its combined U.S. footprint (about 3.7 million video subs) will be used to push back on programming costs,” he said.
Swinburne added that Suddenlink, which Altice agreed to acquire earlier this year, “has already dropped Viacom's networks, a previously unprecedented move in the U.S. media business. For this reason, we view this transaction as a negative for the media business, where we have a Cautious industry view.”
In Europe, where Altice does business, cable operators have higher profit margins than in the U.S., partly because of content costs and competitive intensity, Swinburne says.
Analysts note that Altice faces a tough battle growing Cablevision. “We remain concerned with the potential for growth at the Cablevision Systems of both EBITDA and subscribers given the high level penetration of its existing customers into its footprint and the high exposure (53%) to Verizon’s FiOS, a chief competitor,” said Tom Eagan of the Telsey Advisory Group.
“Altice will face a high bar for cost reduction if they are going to make a go of paying north of 9 [times earnings for Cablevision],” said Craig Moffett of MoffettNathanson Research. “Altice is already guiding to $900M in synergies – slightly higher than the synergies expected to be produced by Charter and Time Warner Cable in a transaction that, by subscribers at least, will be roughly five times larger.”
Moffett said that kind of cost cutting will be difficult in New York while competing with FiOS. “It will mean slashing customer service; repair and maintenance, and sales and marketing (specifically, channel mix optimization, and back-office upgrades). It’s hard not to imagine that that might have at least some impact on market share,” he said.
Cablevision CEO James Dolan had previously warned that the MSO could lose big bundle video subscribers to cord cutters and over-the top.
“To offset that kind of loss of video revenues, Altice will need to grow broadband revenues dramatically. Unfortunately, Cablevision’s broadband subscriber base isn’t growing. So Altice will need to raise prices. A lot. Verizon’s FiOS brand managers must be licking their chops,” Moffett said.