Less in Wall Street's cable box

Telecom competition slows subscriber momentum, raises flag

With summer rapidly coming to a close, Wall Street has gotten back to business. In the case of cable stocks, some are wondering if they should be going back to the drawing board.

After all, second-quarter cable earnings reports this summer have raised investor concerns in recent weeks that high-speed Internet subscriber growth has peaked and video service subscriber momentum might be slowing again — after recent quarters of gains — amid competition from telecom firms.

Sure, the second quarter traditionally is cable's weakest because college students disconnect their service when they move home for the summer, and "snowbirds" — people who live in warm regions during winter — move North for the summer.

But observers are arguing that more fundamental trends were at work in the latest set of cable results, and slower user momentum is here to stay, which has affected already-sluggish cable stocks.

"One of the key factors driving cable's recent underperformance (down 13.4% since July 25) versus the S&P 500 (down 4.5%) was the industry's disappointing second-quarter broadband net additions (trend)," Bear Stearns analyst Spencer Wang recently said in a report.

In another recent report, he argued that second-quarter video subscriber net additions for cable and even for satellite TV "were generally disappointing" as well.

"Growth for telco video exaggerated what is traditionally a seasonally weak quarter," Wang wrote.

As a result, Cablevision Systems, for one, reined in its forecast for basic video user growth this year.

However, Wang shrugged off suggestions that the weak U.S. housing market is hurting cable. After all, housing sales have declined for the past year, and video subscriber gains "did not show a meaningful acceleration during the 2003-2005 time frame when the housing market was booming."

He also warned against overstating the situation, highlighting that Verizon and AT&T's video offers still represent less than 1% of multichannel video households.

Plus, Wang said that "astute" investors and analysts should have foreseen the slowing sub momentum. But given that at many investment banks, cable and telecom firms are covered by different analysts who don't always coordinate estimates, some on the Street might have been shocked, he said.

Meanwhile, sluggish second-quarter broadband user gains led a slew of observers to raise red flags.

Leichtman Research Group president Bruce Leichtman said that the major cable operators added 793,468 high-speed Web customers in the latest quarter, down from 918,427 a year ago, 866,100 in second-quarter 2005 and even below the 829,000 adds in 2004.

He said phone companies also signed up fewer broadband users. Overall, he suggested that there is no need to panic yet. "While net broadband additions may be beginning to wane slightly, tens of millions of consumers will add high-speed Internet over the next few years," he said.

Leichtman's strategy suggestion: "In a somewhat tighter market, broadband providers will need to be increasingly prudent in the subscribers that they acquire in order to help minimize churn."

Credit Suisse analyst Bryan Kraft took a more bearish position, predicting that broadband gains will continue to drop off during the second half and in each of the next three years.

"While disappointing second-quarter broadband results across the industry were certainly impacted by seasonality, there were other factors at work," his analysis concluded.

In the current third quarter, Kraft believes two trends will converge to push down high-speed customer adds: Neither incremental online penetration nor migration from narrowband to broadband usage will be enough to support growth anymore.

Telephone companies lauded in Part 1 of this report. Find it online at hollywoodreporter.com/business.
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