HOLDING THE LINE ON THE BUNDLE WHILE HUNGER FOR MEDIA GROWS
Forty-six years ago last week (Aug. 5, 1957), Dick Clark’s American Bandstand made its debut on ABC-TV, causing yet more people to subscribe to that newfangled service called cable. Nearly three decades later (1985), ABC would sell out to Disney and 18 years after that (2003), Disney, via ESPN, would be jitterbugging intensely with cable over license fees. The anniversary is just a reminder that programmers and distributors (like movie studios and theater owners) are just a never-ending dance team. Even though collars got hot again over program prices at the CTAM Summit in Seattle, they weren’t the only cause of contention. Some operators were concerned about EchoStar’s July 21 alliance with SBC, giving the giant telco a video component for its voice and data bundle. SBC has already lowered DSL prices in a bid for high-speed market share, possibly setting up cable’s introduction of lower-priced data tiers. MSOs are clinging to higher rates (as much as $50/mo.) to test their strength against DSL, but to a consumer, “bundling” is a euphemism for discounting, so it’s inevitable that high-speed options will evolve. Smith Barney analysts Niraj Gupta (cable) and Michael Rollins (telecom) weighed in with their own view July 28. They call video for SBC “just another service to discount in the bundle,” with “payback over 30 months” because the telco pays the acquisition cost. They say “RBOCs are trading margins for bundle sell-through.” Cable ops, in my view, are holding onto price points to avoid that very problem. Still, the analysts think cable comes out the low-cost provider on data and voice. The Smith Barney projection: They used one MSO to illustrate the comparison against a higher-priced competitor, but, in general, Gupta and Rollins believe that “IRRs on a $70/mo. cable modem/VoIP bundle are highly attractive.” They expect cable phone “skirmishes” next year and “broader battles” in 2005, forecasting cable’s revenue mix to go from 83% video/14% data/3% voice in 2003 to 77/16/7 by 2008. To help explain where cable is coming from, CTAM’s Pulse Study — interviews of 1,018 adults and dubbed “A Moment in Time” — was released in Seattle with these relevant stats: Broadband penetration of U.S. homes up from 5% in ’01 to 16% in ’03 (63% using cable modem); digital cable up from 12% to 19% of all homes, 29% of cable subs; cable penetration at 66%. Notably, PC, cell phone and cable have all penetrated America about the same (about two-thirds) and DBS, digital cable, non-multichannel homes and broadband are also about the same (ranging from 20% down to 16%, in the order listed). I find the uniformity of the groupings significant. The American people are moving in lockstep toward more gadgets and more services. Media consumption, in more places, in more ways, across more hours, is exploding. The only group mentioned above whose penetration I expect to go down are the multichannel nonbelievers. By the way, Smith Barney believes aggregate residential spending on media and telecom will pass $200 bil. by 2006, with cable telephony the fastest growing (31% CAGR) followed by cable modem (15%) and DSL (13%). • • • If At First You Don’t Succeed Dept.: President George Bush will veto Congress’s latest media bill but Congress will override. Am I making a prediction about the reaction to Chairman Michael Powell’s TV station ownership ruling? Nope. Just reporting what happened in 1992 when the first Pres. Bush was in office, and Congress passed the Cable TV Act. Analyst Paul Kagan is an active investor and money manager and often owns securities mentioned in his columns. He may buy or sell before and after his columns are published, and his positions may change at any time. Information in his columns is not a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction.
