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The Cable Industry Should Rebrand Itself the Broadband Industry


Despite constant worry about the state of the video business, the cable industry investment story is increasingly focused on broadband.

Cable stocks continue to act fairly well. A mid-August pause and slight correction has given way to moves back to 2012 highs. As noted prior columns, I think investors are finding the group attractive primarily because the business is 100% domestic and the companies are aggressively allocating capital in favor of shareholders with rising dividends and ever larger share repurchase programs. In addition, cable is viewed as a recession-resistant business. A final positive for the bull case for cable stocks is that despite a lot of high profile worry, cord cutting does not appear to be material or accelerating.

While the stocks act well, investor concern about the core video business remains high. If cord cutting concerns have eased, worry about rising programming expense has risen. SNL Kagan's Tony Lenoir recently noted that per subscriber programming rose three times faster than video ARPU in the second quarter of 2012. Programming costs overall were up 7% year over year, the faster pace since 2009. Programming costs per subs rose a faster 9.6%, while video ARPU was up just 3.5%. Clearly, the video business is under some pressure with margins contracting and sub growth slightly negative.

Often forgotten and largely explaining the resilience of the entire cable business model is the fact that broadband is moving to be the lead product for the industry. According to BofA-Merrill Lynch analyst Jessica Reif Cohen, the cable industry captured 118% of total broadband net adds in the second quarter of 2012, continuing a long string of market share gains at the expense of the wireline telcos.

In the second quarter, Comcast (CMCSA) earned 24% of its cable revenue from high speed data, up from 23% a year ago. Video revenue was 51% of revenue in 2012 and down from almost 53% in the second quarter of 2011. Clearly, video is becoming less important on the top line.

It is also becoming less important on the operating cash flow line. Broadband is a very high margin product, comfortably above the mid 30% to low 40% profit margin for the industry as a whole. Broadband requires high fixed investment, but that same investment allows upgrades of the video product, the existence of the telephony product, and new service offerings to small and mid-sized businesses and residential home security and monitoring.
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