Let's get digital - digital cable television - Statistical Data Included - Industry Overview

Brandweek, June 11, 2001 by Jim Cooper

The cable industry nears a turning point as new services finally start rolling out

Four years ago, over a now-famous dinner, Microsoft's Bill Gates was won over by Comcast chairman Brian Roberts' conviction that his upgraded cable plants could yield all sorts of revenue-getting goodies. Roberts has spent much of his time since then attempting to deliver on Gates' billion-dollar, 11 percent investment in his company.

As it turned out, Gates' then-eye-popping cable buy seems to have been as much an anointment as an investment. In short order, Gates' old Microsoft partner, Paul Allen, followed suit--he's now spent about $15 billion on cable systems since 1998 to fulfill his "wired world" vision. The Gates/Roberts hookup also inspired AT&T to first buy Tele-Communications Inc. in 1998 and then MediaOne for a combined total of more than $100 billion. It wasn't until the fourth quarter of last year, however, that it became fully evident that these cable execs were really on to something.

In the mid-1990s, Roberts and his peers at the other dominant cable companies began to realize that traditionally irascible cable customers could actually become giddy about spending in the neighborhood of $100 per month if they were provided a full menu of next-generation media services. These might include digital cable, high-speed Internet access, video-on-demand, interactive television and Internet Protocol (IP) telephony. The chunkier margins yielded by these new business lines would, in theory, improve the companies' then-flagging favor on Wall Street by boosting returns on investment and increasing cash flow.

But existing cable lines were a far cry from the state-of-the-art wires needed to deliver digital, and untold billions would have to be spent by cable companies, many of them family run, that were in the business of delivering analog programming. And so, for the most part, the industry's initial blue-sky optimism received only a tepid reception from both Wall Street and Washington. Cable stock prices languished for years as surplus cash flow was plowed back into infrastructure. Margins remained razor thin.

Worse yet, cable operators weren't doing any better on the PR front: Customers and, in turn, regulators generally regarded the companies as faceless utilities with poor customer service and excessive rates. To top off the bleak scenario, competition from the telcos and direct broadcast satellite companies, which deliver hundreds of channels in digital, were starting to menace market share.

Finally, though, the billions that have been spent on upgrading cable wires are starting to yield good news. Let's use Comcast as an example. The company has been one of the most aggressive in the cable industry as far as recasting its image as a new-media services company. And it has some impressive cash-flow margins to show for its efforts: Comcast's 1.4 million digital-TV customers generated $100 million of revenue at the end of 2000. The $10 monthly charge for the service represents an operating margin of more than 80 percent. Comcast is aiming this year to increase its digital subscriber base to more than 2 million, about 25 percent of its total, which would generate roughly $200 million in incremental cash flow in 2001.

The story on the data-delivery side is also compelling. Comcast finished 2000 with 400,000 Comcast@Home customers, enough to hover around the break-even point. The company expects to have 750,000 customers, each paying $40 per month, by the end of the year, with revenue reaching about $875 million.

These kinds of figures are finally helping cable's image on Wall Street. "The bottom line for the cable companies is that their best defense is an upgraded plant," says Kavir Dhar, media analyst for Jefferies & Co. "As soon as they get their plants upgraded, the competition tends to abate."

The best defense is also a good offense. And with the success of direct broadcast satellite, cable companies will need a good offense. DBS has pulled enough subscribers away from cable that it is now one of the largest multichannel service providers in the U.S., with 15 million customers out of a universe of 85 million.

Cable covered 80 percent of that universe in 2000 (68 million homes), according to research released last month by PricewaterhouseCoopers' Media Entertainment practice. In 2005, when that multichannel universe is forecast to grow to 97 million, cable is expected to cover only 68 percent to DBS' 27 percent.

Some major players see that growth and are eager for more satellite holdings. In late May, both Rupert Murdoch and EchoStar were in discussions with General Motors to acquire Hughes Electronics, parent of DirecTV. No. 2 player EchoStar is expected to aggressively add to its new-media offerings.

Even if cable operators can somehow beat back DBS' growth, they still won't be out of the woods. At any moment there is the risk of new technology sweeping in to change the face of the industry virtually overnight. Northpoint Technology, for instance, is developing a low-cost digital-transmission system that could double the capacity of the broadcast spectrum and challenge both DBS and cable for pay-TV customers. And the telcos have mounted an aggressive rollout of their own high-speed Internet product, DSL (digital subscriber lines).