UBS managing director and senior analyst Aryeh Bourkoff usually poses the questions, grilling cable execs each December during UBS’ Media Week. We turned the tables on Bourkoff and asked him the questions relating to how cable can remain strong in 2007. While he’s bullish, his main concern is that cable not get too comfortable. It should continue to roll out HD channels and increase bandwidth, he says.
WHAT’S THE TOP ISSUE THE CABLE INDUSTRY WILL FACE THIS YEAR?
Bourkoff: Cable really has the wind at its back in terms of its triple-play offering and the success that comes with it, with respect to driving other product lines. The real challenge for cable is not to get too comfortable, because while sentiment has gone a lot better for the industry from a very low point a year ago, competition is still coming. The RBOCs are still building their networks and Verizon’s FiOS TV offering will have greater scale during 2007 and could have some impact against the existing cable/DBS equation. AT&T’s U-verse offering is going at a slower pace, but ultimately could partner with a satellite provider and get into a deeper quad-play bundle. This is cable’s race to win, but the industry cannot get complacent.
HOW DOES THE INDUSTRY AVOID COMPLACENCY?
Bourkoff: Continue to roll out a greater level of high-definition TV channels and a higher level of bandwidth for its product suite. At the same time, be very focused on pricing packages, keeping them clear, and continue to drive digital phone as an acquisition tool for other products, versus creating a stand-alone voice business.
WILL WE SEE CABLE OPERATORS DRAMATICALLY UPGRADING THEIR BANDWIDTH?
Bourkoff: I think so, and the cable plant will be bolstered by some bandwidth strategies such as reclaiming analog channels and other spectrum efficiency techniques. There will not be a major rebuild coming, but it’s important to the industry to get better compression technology to drive HD, and also better broadband capacity to meet more sophisticated online customer demands.
IF ADDING MORE SERVICES WHILE INCREASING BANDWIDTH IS THE BEST WAY FOR OPERATORS TO FIGHT COMPLACENCY, WHAT’S THE SECOND-BEST WAY?
Bourkoff: Sizing up the commercial market opportunity. For example, in 2007 you won’t see a lot of revenue growth from commercial services [targeting] small/medium-size enterprises. But you will see a positioning of that business for growth in 2008 and thereafter. That will require some capital and operating expenditures this year to get ready for this commercial growth, but it’s important for the industry to appropriately size the market, find out where there’s a niche that the major telephone companies aren’t in already and if it can be a good add-on feature to existing strategy.
WHAT DO YOU EXPECT FROM CABLE OPERATORS THIS YEAR IN TERMS OF OPERATING PERFORMANCE?
Bourkoff: Cablevision Systems is housed on a pedestal, given its strong operating performance and its attractive, superior system cluster versus other cable operators. This could be the year where a lot of cable operators narrow the gap in performance metrics to Cablevision. I don’t believe that Cablevision’s properties are unique to the point where other operators cannot post similar results. Basic subscriber growth will be a key factor. Cablevision is doing about 4% subscriber growth year-over-year. The rest of the industry is not, except for a few operators like Insight Communications, which is doing about 3.8% subscriber growth. If companies like Comcast and Charter, which have low penetration rates, 45%-50%, can start growing basic subscribers, given the attraction of bundles led by voice, then there could be a different model projected by investors and analysts if there’s more near-term basic subscriber growth.
DO YOU EXPECT TO SEE OPERATORS INVOLVED IN MEDIA MERGERS?
Bourkoff: The industry, led by Comcast, always makes investors nervous with respect to looking outside of its industry for growth. While ultimately distribution and content companies could do well together, and the Liberty Media/DirecTV deal is a recent example of that, it’s not essential for a cable company to look outside of its core footprint for growth. There will be some consolidation among MSOs over the next two years, especially with Time Warner Cable having an appetite to narrow the gap between its size and Comcast’s size. But I don’t think there will be much action transpiring until the end of the year or 2008. Time Warner will focus now on the integration of the Adelphia systems and the growth of its own triple-play bundle.
HOW WILL GOOGLE’S ACQUISITION OF YOUTUBE AFFECT PROGRAMMERS?
Bourkoff: YouTube is posting content that is owned by the major media companies, and there has not been a material amount of litigation or resistance to this site. There will ultimately be a business transaction between media companies — content owners and technology companies, mainly Google — that will value that content. That will have long-term implications for the notion of content being king. If that content is not valued appropriately, and is not monetized appropriately, then the [financial] model of the programmers could be at risk.
DO YOU EXPECT GOOGLE, WHICH IS ALSO DEVELOPING AN INTERACTIVE TV SERVICE, TO STEP INTO CABLE THIS YEAR? YOUTUBE IS TALKING TO COMCAST ABOUT VOD EXPOSURE, FOR EXAMPLE.
Bourkoff: There are opportunities for Google and the cable companies to work together, as the industry tries hard to move some of its content out of the living room and online. There are opportunities for cable’s VOD platform to be leveraged by Google, and also opportunities for cable to move some of its content from TV to the computer, using Google as a distribution mechanism for that. Trying to become a more relevant online player is an issue for cable in 2007. There’s also opportunities to improve the search and guide programs/software for the cable set-top box, where you begin to search all the cable channels for the best programs, and that doesn’t exist today with any sort of sophistication.
WHAT MIGHT CABLE OPERATORS MISS ON THEIR RADAR SCREENS THIS YEAR?
Bourkoff: AT&T’s [U-verse] product is moving slower than Verizon’s FiOS and slower than initial projections. If AT&T doesn’t have confidence for its video offering in 2007, what will it do next? Our view is that AT&T will look toward a DBS player for deeper partnership and it may very well be DirecTV, even after its Liberty deal, even though people perceive that AT&T and Dish have a strong partnership.
If AT&T ends up partnering with DirecTV and Liberty, they would own a quad play with content that could sneak into the competitive landscape — in a formidable position — from where the market assumes they are today with U-verse. They will have a lot more aggressive approach on pricing and bundling than the industry is used to. We’re positive on the cable industry, and Comcast and Charter are two of our top picks, but we’re still mindful of the fact that competition is still coming, and Verizon and AT&T are not backing away.
Disclosure: A member of Aryeh Bourkoff’s family invests in Comcast, according to UBS.