Capital spending can be like cholesterol. Just the way cardiologists look at "good" cholesterol that helps your heart and "bad" cholesterol that hurts, cable operators want investors to distinguish between good and bad cable expenditures.
That's one major goal of the cable industry's introduction last week of new reporting standards for capital spending and counting of video, data and telephone subscribers. They will enable the 11 publicly traded operators to provide Wall Street more detail. Another goal is to make it easy to sweep away investor uncertainty that cropped up because different cable operators express some measures a little differently.
All of this is in response to the accounting scandal at Adelphia Communications, of course. The most highly publicized scandal involved charges that the Rigas family was using the company as a "personal piggy bank." But new executives that replaced Rigas family members in management found other accounting irregularities.
Suddenly, investors were riveted by such questions as "How does Cablevision capitalize its labor costs?"
"This is the result of the industry listening to you all saying we need a better understanding of the differences between these companies," said Michael Willner, CEO of Insight Communications and chairman of the National Cable & Telecommunications Association, told a meeting of securities analysts and investors in New York last Monday. He led the standards effort and was one of nine cable CEOs at the meeting.
Trouble is, it's a bit like grabbing a garden hose to fight a forest fire. Cable stocks have dropped 70% or so this year, with companies like Adelphia, Charter and AOL Time Warner ensnared in accounting scandals. It'll take a lot more than common accounting of high-speed modems to restore confidence in cable operators.
"In this market, I'll take a garden hose," said the CEO of one cable operator.
The details are numbing. Most of the effort has gone into agreeing on six categories of capital spending and what to put in them.
Capital expenditures are a huge concern of investors. Media analyst Richard Bilotti expects cable operators to spend $14 billion (or $200 per basic subscriber) this year rebuilding systems and buying video-on-demand servers and digital set-tops.
How huge are those investment demands? Capital spending will consume 77% of the $18 billion in operating cash flow that cable systems generate, according to Bilotti. That's actually a big improvement over 2001, when virtually every single dollar of cash flow went to capital expenditures. The companies generally have to borrow money each year to pay interest on existing debts.
So, the new bet is, capital spending will slow, cash flow from new products will surge, and MSOs will throw off lots of cash.
"None of this changes revenues, expenses, cash flow or others down the line," Comcast CEO Brian Roberts points out. "It's all about providing more data, not so much changing the data we already report."
The more immediate the revenue a particular item produces, the more investors like it. The labor and equipment required to lay a fiber-optic trunk in a system rebuild might not generate new revenue for two or three years. That's bad. But equipment in a customer's home, like digital converters or telephone "network interface units," isn't installed until the subscriber is ready to buy more services. That's good.
So customer-premises equipment, commercial accounts, scalable infrastructure (think video-on-demand servers) are good. Line extensions, upgrade/rebuild and support capital (trucks, PCs), while not really bad, don't generate immediate sales.
The companies wouldn't detail how their past spending fits the model. But even if they're spending the same per month per subscriber, companies that have a lot of rebuilding ahead (Charter, Mediacom) will look worse than companies spending more heavily on Internet and phone connections (Cox, AOL Time Warner).
The standards also detail subscriber counts. All companies will specify not just basic subs but "revenue-generating units." One sub buying basic, digital and data services equals three revenue-generating units. Some companies make the accounting distinction, but the goal is to standardize it, making companies readily comparable.