New York -- Early results from selling new services like
high-speed data, digital video and cable telephony continue to impress, cable operators
reported at a Kagan Seminars Inc. conference, Cable TV Values &
Finances, here last Tuesday.
Executives from companies like Cablevision Systems
Corp., Comcast Corp. and U S West Media Group (UMG)
cautioned that their numbers were based on relatively small launch markets. But senior
vice president John Alchin said Comcast's @Home Network subscriber count rose from 10,000
at year's end to 14,000 at the end of February, as installs have risen to between 700 and
1,000 per week -- even as Comcast remains cautious about accelerating the installation
pace for fear of doing them the wrong way.
Cablevision senior vice president Joe Cece said the MSO's
pitch of Optimum Telephone service to about 4,900 homes on Long Island, N.Y., achieved a
15 percent-penetration rate. What's more, Cablevision has discovered in the last two
months that door-to-door marketing of the phone service was far more effective than direct
mail or telemarketing. When representatives got in the door to make the offer, he said,
they closed a sale 42 percent of the time.
That information may make the MSO rethink how it markets
the service in Long Island and Connecticut, because consumer demand may be stronger than
originally expected, he added.
Cece acknowledged that Cablevision was behind the curve in
cable-modem service, since it is still in a trial mode some 14 months after launching
Optimum Online. Part of that is due to its transition to @Home, of which Cablevision
became an affiliate late last year. But part is due to the extra support, in the form of
"hand-holding of the customer," that the service requires, he said.
While the executives acknowledged that those were
preliminary results, on such slender threads are woven much of the bullish argument for
cable. Based on presenters at the Kagan seminar, the bulls remain the majority.
New revenue opportunities -- along with declining capital
expenditures as operators complete rebuilds and the savings achieved from ongoing
clustering moves -- had most stock analysts on Kagan panels issuing optimistic forecasts.
Some predicted that cable stocks would soon be, or at least should be, trading higher when
measured by multiples of cash flow.
"I still think that there's a long way to go" in
cable's bull market, said Merrill Lynch & Co. analyst Jessica Reif Cohen, a longtime
bull. Fundamentals, such as subscriber growth (around 2 percent) and rate increases, are
strong, and advertising revenue should grow at 20 percent or more, she said.
Then, there are the wild cards, including telephony, Cohen
said. She noted that Cox has reported 17 percent-penetration of the market in its Orange
County, Calif., launch, and Cablevision hit 15 percent of its Long Island sample.
"Those are numbers that none of us would use," she said, predicting that cable
stocks would rise to cash-flow multiples of 11 or 12 from her current estimate of about
10.
Dennis Leibowitz from Donaldson, Lufkin & Jenrette said
he calculated that cable stocks were trading at about 11 times 1998 cash flows, and he
wrote in late January that the stocks would rise to a 13 multiple.
The bear argument, though, came from Sandler Capital
managing partner John Kornreich, who was less optimistic about subscriber growth (1.5
percent or less) and who saw significant execution risk from new services. New-service
revenues are arriving, but they're a year behind schedule, he said.
And although the perception is that competition has been
subdued, direct-broadcast satellite has gotten off to a roaring start in 1998, and it will
probably add 2.3 million subscribers this year, or two-thirds of net multichannel-video
additions.
The fact that cable stocks are trading at multiples that
are similar to private-market sales of cable systems is another red flag, Kornreich said.
He added that he basically agreed with Marcus Cable, which is high on the cable business
and which is selling out. Marcus recently began exploring strategic alternatives,
including possibly selling the company.
Kornreich said the key to bumping up cable stocks may be to
see private-market sale prices rise. Watch the reaction by investors if Marcus sells for
more than 10 to 11 times current 12-month cash flows, he said. Prime Cable's Las Vegas
system, which is partly owned by Sandler, will probably sell for a record price as
measured by any multiple, he added. Even though Las Vegas is the fastest-growing area of
the country, such a high price could help stock prices, he said.
Other operators at the conference talked about the benefits
of clustering. All had agreed to combine systems in joint ventures with
Tele-Communications Inc., prompting Insight Communications Co. president Michael Willner
to dub them "the Leo legion," after TCI president and chief operating officer
Leo J. Hindery Jr.
TCA Cable TV Inc. chairman Fred Nichols, whose company
closed a joint-venture deal with TCI that brought to TCA such systems as its home base of
Tyler, Texas, said a key reason for the deal was to lower TCA's programming costs by using
TCI's volume-buying clout.
Century Communications Corp. chief financial officer Scott
Schneider said his company's 750,000-subscriber joint venture with TCI in the Los Angeles
area was "a defining moment." Among other benefits, Century can now pitch ad
time to regional retailers such as Circuit City. And more of those sales efforts can be
brought in-house, saving on outside commissions, he said.
