Cable operators sneeze, cable-equipment manufacturers catch the flu. That's no surprise. It's seen among all sorts of ailing sectors of the economy.
Unlike in past down cycles, a recovery among operators may not revive Motorola, Scientific-Atlanta and other cable-hardware companies because MSOs plan sharp and permanent reductions in capital spending. That means less money for fiber, amplifiers, nodes, signal modulators and the like.
S-A Chairman James MacDonald expects a turnaround once the economy improves. "I don't think there's any question, when the economy got tired, that pressured the set-top volumes."
The rebound will also come, he added, as operators increasingly deploy products like video-on-demand, which generates tons of network traffic.
Operators' cutbacks were clearly visible in the recently announced results of equipment companies. Motorola's broadband communications division disclosed Tuesday that sales for the fourth quarter ended December dropped to $489 million. That's off 16% from $589 in 2001, off 55% from the $1.1 billion the cable division generated in 2000. Quarterly operating earnings have shrunk from $279 million two years ago to just $65 million.
S-A's sales of subscriber products for the quarter dropped 19% to $229 million, down from $422 million during the same period in 2000. Sales of transmission products—hardware deployed at a central headend and along the route of the cables—dropped 12% to $104 million, from $184 million two years ago.
It's not likely to get better soon. Certainly, some of the drop in sales can be blamed on financial troubles like those at Adelphia and Cablevision. But MSOs insist that they've completed rebuilds and won't have to invest as intensively again. They will be spending capital on hardware like digital set-tops and video servers, but the days of $18 billion in annual capital expenditures seen in 2001 are gone.
Morgan Stanley media analyst Richard Bilotti estimates that cap ex fell to $15.2 billion last year and will sink to an annual $11 billion-$12 billion after 2004. Comcast will be busy upgrading AT&T Broadband's systems, but that should be finished within two years. A rebound in international markets will help offset the U.S. slump but won't cure it.
Then there are pricing problems. Cable set-tops are becoming cheaper. Digital units priced at $350 each two years ago sell for $200-$250. Motorola has a limited-capacity unit that's just $170.
S-A has succeeded in pushing pricier units with personal video recorders or HDTV capability built in; Motorola is lagging.
New digital cable standards mean consumer-electronics manufacturers will build set-top functions into TVs and VCRs.