The Faces of Fear: Welcome Back to the Early 1990s

Cable World, Oct 14, 2002

Byline: PAUL KAGAN

Walking around the halls of the Goldman Sachs media conference Oct. 1, you could see the face of fear up close. Sometimes it felt like every other one of the 1,500 delegates was a hedge fund manager short cable stocks. But even former cable bulls were talking "free cash flow" (the kind that comes after paying interest on debt) and serious satellite competition. When I rolled out my usual mantra - "it sounds like 1990-96" - they countered with "this time it's different."

Digging deep into different turned up concerns about growth rates, profit margins and over-leveraged balance sheets, intensified by such external worries as recession, unemployment and the three wars: Operation Cooked Books, Operation CEO Jail Time and Operation Get Saddam. The Iraq attack has a chance to get the market moving again, but the rally will be short if the other two wars are allowed to drag on.

Admittedly, there's a long-term difference if regulators and politicians, in changing the system, prevent valuations from rising. That's what will happen if they broaden their definition of "wrongdoer" to anyone whose numbers look good. I don't think that will happen, because the War Against Corporate Crime will have a finite life. How would it look if Congress created a watchdog agency called the CWC - Corporate Wrongdoing Commission? Shucks, they'd be out looking for evil every day and the newspapers would never pay attention to anyone legal.

Looking past the gloom at the Goldman meeting, I could see that some moguls were doing business at the same old stand. Like Brian Roberts of Comcast. His company will focus, in the coming two-year rebuild of AT&T Broadband, on maximizing video revenues.

The prospect of sacrificing two years of free cash flow for the Mother of All Upgrades cost Comcast 24% of its equity capitalization. The $5 price drop in its shares over the next seven trading days amounted to $5.1 billion. Modem sales will probably hold up, but the telephony rollout may be delayed. Cox, on the other hand, is pleased with its 40% phone margins in Omaha and Orange Co., CA. It collects $109/mo. from a sub that buys its triple-play. Cox Sr. VP/Marketing Joe Rooney described the Myths of Churn, noting that churn isn't really as high as it sounds and that competitors use more liberal definitions of the phenomenon.

Attendees at a luncheon speech by AOL Chmn. Steve Case expected a blunt comeback to that morning's P. 1 NY Times claim that Ted Turner is campaigning to have Case ousted from his post. But the veteran Case impressed money managers I talked to with his grasp of AOL's problems and challenges. Case confessed that it was "a mistake" to project $11 bil. in cash flow but looked ahead to "a compelling broadband network" to bring back the online flagship. Selling subscribers, not advertising, is AOL's primary problem, Case said.

I've attended well over 100 such conferences, but rarely have I heard a paradigm as important to the future of an industry - considering these volatile times - as this one from USA's Barry Diller: "You can't give people more information and more choice unless you give them a way to act on them. You must integrate information and choice with a transaction, and give it to them with scale." It is the kind of interactivity, of course, that his company does. But in the midst of this era's muddy confusion, and given the potential for cable in the transaction business, I thought it stood out like a beacon.

Analyst Paul Kagan writes exclusively for Cable World. He is an active money manager and investor and often owns shares of the companies mentioned in his columns. He owns shares of Comcast, AT&T, AOL Time Warner and Cox. He may buy or sell before and after his columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction. Kagan is vice-chairman of Primedia Ventures, an affiliate of the owner of Cable World.