May 9, 2013
Over the years, cable companies have fallen in and out of favor with Wall Street. First came the threat of satellite operators eating up market share, followed by phone companies and worries about heavy network investment. More recently, rising content costs have pressured profit margins in cable's video business. But after several years of tracing many of the industry's ups and downs, John Hodulik, an analyst at UBS AG's UBS Investment Research unit, sees a fundamentally attractive business and investment opportunity in cable. And last year his faith was rewarded as cable operators like Comcast Corp. further proved that fast-growing revenue from broadband and commercial services can help offset a slowdown in the traditional video business.
"Video is only one piece of the story for the cable guys," says Mr. Hodulik, 44, whose employer is a unit of UBS AG. Since upgrading Comcast to a buy in 2009, the stock has more than doubled in value, thanks in part to the recent growth in commercial services and broadband revenue. For 2012 alone, the company returned more than 60%, according to FactSet. Meanwhile, as online video services like Netflix Inc. and Hulu begin to reshape how TV content is delivered, Mr. Hodulik says cable companies are uniquely positioned to take advantage of the rising demand for speedy broadband service. "It requires a lot of capital and a lot of terrestrial assets that the satellite guys don't have," Mr. Hodulik says. What's more, having an extra revenue cushion from broadband and commercial services can help cable companies digest the increasing cost of TV content, he says.
That helps explain Mr. Hodulik's decision to reduce DirecTV from buy to hold last year, a time when the company continued to focus aggressively on growing outside of its maturing U.S. market. Mr. Hodulik predicts that cable can ultimately regain about a third of the market share it lost over the years to satellite operators. He also sees the competitive threat posed by telecom services like Verizon Inc.'s FiOS and AT&T Inc.'s U-Verse as a bit of a flash in the pan. "When they enter a new market, they take over a lot of market share, but then the gains slow," he says.
Mr. Hodulik in November launched coverage on Charter Communications Inc. with a buy rating, a move that captured a 33.9% return through the end of the year. The stock has risen further this year in large part thanks to an agreement by John Malone's Liberty Media Corp. to buy a 25% stake in the company. Acquisition scenarios aside, Mr. Hodulik says he modeled his bullish take on Charter on the performance of another regional cable operator that has raised its profile in recent years: Suddenlink, a subsidiary of Cequel Communications Holdings LLC. His coverage hasn't been without its misses though. Mr. Hodulik says he moved too aggressively to downgrade Dish Network Corp. to hold from buy in 2010, a move he chalks up to uncertainty at the time about Chairman Charlie Ergen's plans to jump into the wireless business. Much of that uncertainty was lifted late last year when regulators granted Dish a waiver to use its vast holdings of spectrum to create a wireless network or partner with an existing carrier. However, Mr. Hodulik has maintained his hold rating. Wall Street Journal
The maverick wants to cook the TV industry's golden goose.
Sen. John McCain (R-Ariz.) is preparing to introduce legislation perhaps as early as Thursday that would dramatically overhaul the television business and will probably be met with strong opposition from the broadcast and cable industries if it ever gets off the ground. Specifically, McCain wants to require pay-TV distributors to give consumers the option to buy channels on an individual or a la carte basis instead of the current system in which they must buy large bundles of channels. He is also interested in protecting Aereo Inc., the start-up that delivers the signals of broadcast TV networks -- including CBS, Fox and ABC -- to consumers via the Internet. Broadcasters say Aereo's service violates copyright laws and are suing in an attempt to shut it down. Fox and CBS have even threatened to take their programming off broadcast TV and create cable channels if Aereo wins in the courts. Broadcasters are currently paid by cable and satellite operators for their channels, and they fear that if Aereo survives, it could threaten that revenue stream.
According to Washington insiders briefed on McCain's plans, the senator's proposed legislation would give the Federal Communications Commission the power to strip the licenses of any broadcaster that moves to a cable model. Many of the details of McCain's proposed bill are still sketchy, and his office would only confirm that he is drafting a la carte legislation. This is not the first time McCain has tried to push a la carte on the television industry. A previous effort in 2006 failed to gain much momentum. The second time may not be the charm. McCain is no longer a member of the Senate Commerce Committee, which has oversight over the FCC and the media industry, and top lobbyists doubt he still has the juice to push the bill through. Next week, the Senate Commerce Committee is set to hold a hearing on the state of the industry, and top lobbyists from the cable and broadcast industries are scheduled to testify. McCain's office is scrambling to have proposed legislation ready.
The issue of selling cable channels in bundles has divided much of the media industry. Although many consumers blame the cable and satellite operators for how channels are sold, the reality is that it is often the programmers who dictate the terms. Big media companies such as Viacom, Walt Disney and News Corp. typically package their channels when they sell them to distributors such as Time Warner Cable and DirecTV. Programmers argue that this allows them to offer discounts on more popular channels. At the same time, though, it also gives programmers leverage to get unpopular channels carried, distributors say. In February, New York cable operator Cablevision Systems Corp. accused Viacom -- which owns MTV, Comedy Central and Nickelodeon - of using its muscle to force the carriage of smaller networks that customers don't want.
Consumer advocates argue that offering channels on an individual basis would save subscribers money. The pay-TV industry says that is not the case because if a network such as ESPN suddenly went from being in 100 million homes to 50 million homes, it would have to increase what it charges to distributors (who pass much of those costs on to consumers) in order to continue to afford its programming. Los Angeles Times
President Obama has picked a former telecommunications lobbyist and campaign fund-raiser to serve as chairman of the Federal Communications Commission, raising serious questions about his 2007 pledge that corporate lobbyists would not finance his campaign or run his administration. When Mr. Obama announced the nomination of Tom Wheeler last week, he said Mr. Wheeler's knowledge of the industry would help ensure that "we're staying at the cutting-edge of an industry that again and again we've revolutionized here in America." Some prominent former government officials have endorsed Mr. Wheeler and say he would make telecommunications more competitive.
There is no question that Mr. Wheeler, who was chief executive of the National Cable Television Association for five years and the Cellular Telecommunications and Internet Association for 12 years before becoming a venture capitalist, understands the industry. The question is whether his long career representing the interests of telecommunications companies would make it hard for him to be an independent and fair regulator when consumers have few choices and pay high prices for cellphone, cable TV and broadband services. He was also a big "bundler" for Mr. Obama in the 2008 and 2012 campaigns, which means that he raised hundreds of thousands of dollars in campaign donations from relatives, friends and business associates. Political campaigns disclose their donors, but they are not required to disclose which of them were recruited by bundlers like Mr. Wheeler. Given his background, it is almost certain that he raised money from people whose companies he would regulate, creating potential conflicts of interest.
Mr. Wheeler's supporters argue that he backed the modest net neutrality rules the F.C.C. adopted in 2010 to prevent Internet service providers from discriminating against content that competes with their own. (Verizon has challenged the regulation in court.) But he has also suggested that federal regulators should merely impose conditions on AT&T's 2011 bid to buy T-Mobile, which, thankfully, was blocked by the Obama administration because it would have left only three national cellphone companies. Before Mr. Wheeler is confirmed by the Senate, he and Mr. Obama's campaign should disclose how much money he raised from telecommunications executives and explain how he would make sure that those relationships would not influence his decisions at the F.C.C.
Among the agency's tasks is improving wireless and broadband services, which are dominated by a handful of companies. How would he, for instance, use auctions of electromagnetic airwaves, which are currently controlled by TV broadcasters, to get new and smaller companies to provide innovative Internet and video services? Surveys by the Organization for Economic Cooperation and Development show that a smaller proportion of Americans have high-speed Internet service at home and pay far more for it than consumers in nations like South Korea, France and Canada. Mr. Obama has said that he wants the United States to lead the world in telecommunications technology. The next chairman of the F.C.C. will need to have credibility and vision to carry that out. New York Times editorial; also see opinion in Washington Times
- Reuters: Viacom says Cablevision bundling lawsuit should be tossed
- Wall Street Journal: News Corp. Earnings: Profit Jumps, Helped by Cable Networks (registration may be required)
- Los Angeles Times: News Corp.'s Carey downplays threat to make Fox a cable channel
- Reuters: Dish Network profit drops 40 percent; subscription growth falls
- Philadelphia Inquirer: Customers won't see TV rebates for short hockey season
- Philadelphia Inquirer: Pa. high court upholds redistricting plan
- Scranton Times-Tribune: Corbett's job approval still stuck in the mud