The showcase was Goldman Sach's annual Communacopia conference, where best pitches were made by senior executives from Comcast, Time Warner Cable, Cablevision, DirecTV, Liberty Global, Liberty Media and others. Everybody declared themselves the winner, with a strong, "under-levered" balance-sheet defense to the ongoing credit market turmoil.
None of the companies have seen any uptick in churn or bad debt, although their less-than-10% reliance on ad revenues could be negatively impacted by the overall pullback in local and national scatter ad spending. As a result, Pali Capital's Richard Greenfield is the most recent analyst to slightly reduce revenues and earnings estimates for Comcast this year and in 2009.
Things appear to be defiantly solid in multichannel land, where sliding ad revenues are offset by subscription revenues and service fees that--for now--are recession-proof. One looming threat to stability is Cablevision's potential ability to tend to its $1.7 billion in maturities coming due with its available cash and free cash flow. Borrowing or raising the funds through assets sales are no longer easy options.
A swell of new competition from unconventional providers of video on demand is a challenge that is cable's to lose. Cable is getting a run for its money from Apple's iTunes, Amazon's expanded TV and film services, the emergence of the Google Content Network, and growing alliances between hardware and software providers, such as LG's Blu-ray player streaming Netflix movies. The explosion of wireless as a result of brisk smart-phone sales and rising data and rich-media social networking will yield a $18 billion market by 2009.
Conversely, satellite companies continue to bottom feed on disenfranchised customers they can snare with more expansive, lower-priced content packages. Some analysts have suggested that cable may counter by utilizing its TV services as a loss leader by offering new customers basic cable for free for the initial first year if they also take broadband and voice services. That would be the height of promotional strategies amid the current marketing blitz in which cable and telco players are repositioning themselves for next year's digital transition.
Verizon's FiOS and AT&T's U-Verse are expected to more than double their collective net additions to 2 million this year. Despite an inability to provide bundled telephony and other interactive services, satellite companies DirecTV and EchoStar are expected to gain about 1.3 million net subscribers. Cable operators could collectively lose an estimated -1.4 million subscribers in 2008 in a scramble for multichannel customers just ahead of the digital shift. Cable operators are expected to convert as little as 10% of the 15 million homes in the U.S. who are unprepared for the digital transition.
Perhaps the most formidable longer-term threat is the ability of Comcast and Time Warner Cable to address a year-end funding hole of a long-awaited wireless joint venture with Sprint and Clearwire. The dominant cable operators were "noncommittal" in the belief that the entity will be "self-financed." At the same time, Sprint executives implied the cable operators' strong balance sheets to support the enterprise if credit markets remain weak. The companies were joined by Google, Intel and Brighthouse for an initial $3.2 billion wireless investment. Given credit markets' turmoil and minimal appetite to fund a WiMax buildout, the JV could face an uncertain future without being fully financed.
Since the credit crises and the economic weakness are expected to persist beyond the late 2008 scheduled wireless joint venture closing, the partners are likely to find themselves at odds with the financial resolution and further buildout. It wouldn't be the first time.
The fact is that long-term, wireless broadband is a "must have" for all sector players--the importance of which will eclipse subscription-driven strong earnings growth. And for all intents and purposes, the aggressive telcos have that covered; cable operators have underestimated the importance of digital mobility outside the home and ubiquitous interactivity.
The economic magnitude of these digital challenges taken collectively makes the expressed confidence of cable, telco and satellite executives seem a little unnerving, if not foolhardy. That explains Goldman's continuing "neutral" view of cable and satellite companies, whose strong balance sheets mean less in the absence of a clear wireless broadband strategy. Although the economy had relatively little effect on industry growth in 2007, the implosion of the U.S. residential real-estate market and commercial credit systems adversely impact multichannel players through 2009.
A possible upside for multichannel providers could be the lower costs and higher margins associated with digital media consumption, even when funneling through new content distribution Web sites, such as Hulu.com, MySpace-Amazon music store, iTunes and Google's YouTube.
In what could be a devastating move for transitioning broadcasters, the National Cable Television Association is lobbying to eliminate TV stations' ability to charge cable operators a monthly retrans fee. In a tieback to the credit crunch, cable operators contend that private equity and hedge funds that own TV station groups are looking for quick returns in faltering advertising and deal-making markets, with some increasing their retrans fees by more than five times previous levels.
In fact, that may be one of the subtle, but serious, ways in which the financial malaise may continue to reshape the fortunes of multichannel players in the coming 18 months.