business newsThe Cable Industry Should Rebrand Itself the Broadband Industry
By
Steve Birenberg
Sep 12, 2012 2:00 pm
Despite constant worry about the state of the video business, the cable industry investment story is increasingly focused on broadband.
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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.
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.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. CBS and Discovery Communications are widely held by Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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