Los Angeles – While fears that disruptive technologies could erode the cable business have dogged the industry for years, the industry’s multi-billion investment in state of the art expandable infrastructure is proving to be the main differentiator, according to a panel of top Wall Street analysts at Cable Show 2014 here Tuesday.
The panel discussion entitled “Deal Me In: Financial Analysts on the Evolving Economics of Telecommunications was moderated by Cox Communications chief financial officer Mark Bowser.
“An awful lot of the technology going on right now, the advantage the cable operators have in their physical plant grows exponentially over the next couple of years,” said MoffettNathanson principal and senior analyst Craig Moffett. “I’m fairly skeptical that at this point there is enough time for the telcos to catch up. The cable industry is going to be gapping away.”
That includes Google, the search engine juggernaut that has grabbed headlines across the country with its Google Fiber ultra-high speed data service. Moffett said that while Google recognized about a decade ago that cable would be the only available high-capacity infrastructure in large parts of the country, which was part of the reasoning behind its decision to build out its network in several markets, he believes the ultimate motivation is different.
Moffett said that in building a second competing high capacity network Google runs the risk of being “the goldmine next to the monopoly railroad.”
But Moffett said Google’s real agenda could be something else.
“Plan A has been ‘How do you drive a regulatory agenda around cable?,’” Moffett said.
But the analyst doesn’t believe that regulatory focus will center on traditional points like net neutrality.
“Google, like a lot of the people in the internet community are starting to think of the edge battles and net neutrality as yesterday’s war,” Moffett said. “They are shifting their attention to the ingest points – interconnection, paid peering – which provides an even bigger area of regulatory focus for Google in the next 10 years.”
J.P. Morgan analyst Phil Cusick agreed.
“If I had a high-margin, low capital intensity business like Google, why would I want to be a telecom carrier?” Cusick said.
While cable’s infrastructure is providing ammo in the fight against high-speed data competitors, its cost structure has also helped to serve as a barrier to some over-the-top competitors. Moffett remembered a visit to Intel Corp.’s OnCue OTT service, shortly before the company decided to pull the plug on the endeavor. Moffett said that at the time, Intel admitted that it was paying about 20% more for programming than the average cable operators had to agree to disable fast-forward for its multi-room DVR service, and they expected to eventually have high transport costs and its network was subject to latency issues.
“It took a long time for pragmatism to assert itself,” Moffett said.
Morgan Stanley media analyst Ben Swinburne said the real OTT threat could end up being Dish Network, which has said it expects to launch a $30 per month OTT product in the summer.
“One thing we’re watching is what Dish would do with its new Disney agreement,” Swinburne said. “We don’t look at Netflix as competition to pay TV, but a $30 service could be a game changer.”
The analysts were split on their predictions for rising programming costs, with Moffett taking a contrarian view to the rest of the panelists, who believed that the current rate of increases is unsustainable.
Bank of America Merrill Lynch media analyst Jessica Reif Cohen said the model won't last, especially as cable operators get bigger.
Cusick added that smaller operators have been passing through increases directly to customers, believing that “of people leave, we’ll catch them with broadband.”
But Moffett reminded that the industry has been complaining of high programming costs for more than 10 years.
“Anybody can do the math and say the affordability problem is untenable,” Moffett said. “I’m pessimistic about a moderation in programming acceleration.”
The panelists were in agreement on the benefits of Comcast’s pending merger with Time Warner Cable. Reif Cohen noted that the union represents huge opportunities in business services, could finally jump-start interactive advertising and could help drive penetrations in traditional satellite TV markets like Los Angeles.
“If I was a satellite operator, I would be really nervous about this merger," Reif Cohen said.
