Cable dips, but only marginally

Compared with other media businesses, MSOs aren't feeling much of a pinch
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Despite cable TV's supposed immunity to recessions, operators started to slip a bit during the second quarter. But the problems are far from the disaster brewing in other media-business sectors.

As MSOs wrapped up the reporting season for the quarter ended June, two—Cablevision and Mediacom—warned that revenue and cash flow would fall short of earlier forecasts, though just a couple of percentage points. A little more anxiety-inducing is the slowing pace at which many operators are selling digital cable and high-speed Internet service.

Investors have been crunching cable stocks. Cablevision has done the worst, dropping 20% in the past six weeks. Charter, despite producing the strongest growth, has fallen 13%. Comcast is off 14%, not too bad given its bid to take over AT&T Broadband. Medicom is off 12%; Cox, 7%. Meanwhile, the broader market indices are off just 3%-5%.

But analysts and MSO executives are not very worried. "Cable operations weren't as volatile as stock prices indicated," said UBS Warburg media analyst Tom Eagan. "The market seems to be picking on any weakness."

Still, cable operators are a bit defensive about the slowdown in adding digital and data subscribers. At the beginning of the year, AT&T Broadband had been adding 24,000 digital subscribers each week. In the second quarter, that dropped to 21,000. Charter's digital-connect rate fell from 21,000 to 18,000. Comcast kept its pace at 15,000 and was also strong in data.

MSO executives are throwing around the word "seasonality" almost as if they're suddenly in the toy business explaining why January sales fall after Christmas. But operators note that their second-quarter basic-subscriber growth has for years been affected by college students' moving to mom's for the summer and snowbirds' leaving Sunbelt winter homes.

"As more and more basic customers upgrade to digital and our digital footprint expansion slows down, our digital-customer base will begin to reflect seasonal trends," said Cox Communications CFO Jimmy Hayes. Cox's basic-subscriber growth totaled a mere 0.5%, half to a quarter the rate of other MSOs. Its digital-connect rate slipped from 9,100 weekly to 8,500; its Internet-connect rate, from 8,000 to 6,200. Average telephone installs dropped from 11,200 to 2,000.

Merrill Lynch analyst Oren Cohen said cable's woes are minor compared with other TV companies.' For example, he expects cash flow at Young Broadcasting to drop 30%-35% in the third quarter. Cablevision, by comparison, is cutting its cash-flow forecast for the year from 13%-15% to 11%-13%.

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