Friday, April 27, 2007

Specter Haunting Cable Companies?


“It’s all clicking, our business is on fire,” says Comcast CEO Brian Roberts. Maybe so. But we sometimes forget that the cable industry is in the same position as the telephone industry. Namely: its core business is under fire and will not drive growth in the future. So each industry is racing to create new business models where legacy revenue is half or less of total revenue in a few years.

About half of Comcast's subscribers will also use its phone and broadband services by 2010, Roberts says. Roberts believes that within two to three years, half of the company’s customer units will not be cable TV, but instead will come from Internet access, telephony and other services. At that point, he says, “half of Comcast is no longer just a TV company.”

With the caveat that a stock price isn't a complete proxy for the anticipated fortunes of a company or industry sector, U.S. cable operator prices have sagged of late. In Comcast's case, it is a bit hard to know why. Comcast added 75,000 basic cable subscribers in the quarter, 644,000 digital subscribers, 563,000 cable modem customers and 571,000 VoIP customers.

With 2.5 million VoIP subscribers, the company may now be bigger in Internet telephony than Vonage, which had 2.2 million customers as of the end of December.

The company repeated previous guidance that 2007 cable revenue growth will be at least 12 percent, with cable operating cash flow growth of at at least 14 percent.

To be sure, free cash flow is down. Comcast generated $442 million, versus $807 million a year ago.

So maybe investors are spooked by higher capital spending trends. Or maybe it is something else. Maybe the threat of over-the-top video finally is starting to register as another threat to the legacy cable business. Sometimes we all forget that cable is an incumbent. It has a legacy business that has gone into reverse after decades of sheer growth. And it also faces competitors able to innovate at Google speed. And might we add, Apple speed.

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