Kagan’s Column: We’ve Seen This Before

Folk singer Pete Seeger used to ask, "Where have all the flowers gone? Long time passing." The answer is plants are cyclical. They’re all blooming again. Cable’s the same way. History repeats itself. To see how, let’s take a nostalgic trip back 10 years—to Feb.8, 1996—when President Clinton signed the Telecommunications Act. An RBOC—US West—bought the third-largest MSO, Continental Cablevision, paying $2,140 for each of 4.2 million subs. At the time, Comcast had 3.4 million subs. Two other RBOCs—Bell Atlantic and Nynex—were arranging a merger. (Thus was born Verizon.) Cable operators were learning to spell "modem," but they wouldn’t see a digital box until the Western Show in December. AT&T, confined to long distance by Judge Harold Green 12 years before, was plotting its reentry into local loops via wireless and cable networks, a plan that would result in its acquisition of cable’s biggest MSO—TCI—two years later. (That marriage lasted only four years.) Hybrid telco-video players, later called CLECs, were appearing. (Most are gone.) Satellite video was moving slowly, fractionalized by competition, including cable’s Primestar (acquired by DirecTV). The big story was the Telecom Act that envisioned wide-open video, voice and data competition between telcos and cable. (It happened.) In March 1996, I put telco and cable execs on a panel at the Park Lane in New York for a gentle boasting contest. Bell Atlantic dreamed of supplying video to its 8 million homes by now (2006), and eventually driving fiber directly to the home. (It’s happening, but much later than planned.) Cablevision, its area competitor, was already a CLEC, selling telephony to businesses and planning residential incursion. Spurred by Congress, everyone was talking about attacking someone else’s turf. (They still are. Congress got its lower prices, but cell phones, ringtones and Internet access have ballooned household expenditures.) A month later, analysts at the NCTA convention had mixed emotions about cable’s recovery from the regulatory onslaught of 1994-95, due to the telco/satellite threat. But Merrill Lynch’s Jessica Reif (now Reif Cohen) predicted 90% U.S. multichannel penetration by 2005. (She came close enough.) Comcast’s Julian Brodsky celebrated a new era after "three years of hell," while moaning about public MSOs trading at 6.5-8x cash flow. (That’s where they are today.) Things got better…much better. Exactly one year later (March 1997), cable stocks were still reeling, this time from the threatened launch of ASkyB, Rupert Murdoch’s supposed "death star," the latest in a line of would-be satellite assassins. That bird never flew, Murdoch made long-term deals with cable operators for his program networks and, less than three years later, MSO stocks were seven times more valuable, trading at 12-16x cash flow and as high as $6,000/sub. (Cable valuations peaked in January 2000.) One moral of the story is that everything the government does has unintended consequences. Another: tech evolution takes time (except for the iPod). And again: History has a way of repeating. Analyst/investor Paul Kagan is chairman/CEO of PK Worldmedia, Inc. in Carmel, CA. He owns shares in Comcast and Cablevision and he owned shares in Continental prior to its acquisition. Information in this column is not intended to be a recommendation to buy or sell securities.