One of the cable industry’s mantras has been the creation of long-term value for owners and shareholders. Ever since Dr. John Malone convinced analysts John Reidy and Paul Kagan about the wonders of valuations built off cash flow, as opposed to the old-fashioned concept of profit, the industry has invested and managed for the long run. Rightly so. It worked for a long, long time. After all, cable is the only industry that provides a near-universal service that was built entirely on investor-risked capital. Not roads. Not telephone. Nothing else. So allowing for capital to be continually reinvested in an almost never-ending spiral of upgrades that brought ever more services and, hence, more subscribers, turned out to be brilliant. However, the era of the dot-com threatened to change all of that. Industry consolidation accelerated the size and scope of the public participants in the cable industry. And the rising stock markets of the late ’80s through the turn of the century turned many a manager’s attention from the business to the stock price-something that hasn’t gone away with the coming of the dot-bomb and its aftereffects. Nor did the coming of the War on Terror and Afghanistan and Iraq (and who knows which country next) change that focus. The focus on meeting the Street’s consensus projection for quarterly results has turned into managing the expectations as much as the business. A dangerous thing. That focus-despite WorldCom, Enron, AOL, Tyco and other corporate scandals, including our own Rigas folly-hasn’t changed. A recent survey by Duke University and the University of Washington said "senior executives at public companies continue to feel intense pressure to meet earnings forecasts from Wall Street analysts." While outright accounting machinations have tended to disappear, many respondents to the survey acknowledged they postponed or abandoned spending on maintenance, R&D or even immediately profitable initiatives in order to meet the Street. That, as Professor Campbell Harvey of the Fuqua School of Business at Duke wrote, "is causing value to be destroyed." Aggressive accounting, because of increased scrutiny, is going away. But the willingness to sell assets, increase sales incentives or cut spending is ballooning. Professor Harvey on senior executives of public companies: "We got the impression that they are extremely risk-averse when it comes to doing anything with accounting. Yet, they felt OK in doing things that sacrifice long-term value." I hope no cable operator was among the 421 executives surveyed by e-mail, mail or over the phone. Cable wasn’t built by making short-term decisions. It could be destroyed that way.

The Daily


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