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By Paul Kagan
Pillow Talk: I'm usually deeply rooted to the ground beneath me, but on March 24, I was blown away by an article in The New York Times on the government's official Consumer Price Index. It was about hotel rooms in particular, but you'll see in a moment how it relates to cable.
"Though businesses and government treat it as a hard number," wrote Virginia Postrel, "the Consumer Price Index is not a fact of nature like...the speed of light. It is a statistical construction that requires a lot of judgment calls."
Postrel quotes from the website of the Bureau of Labor Statistics, which compiles the CPI: "Suppose a hotel room selected previously now includes complimentary breakfast and dinner, has been renovated, and now includes a VCR. The price of the room has increased, and the price change is strictly due to these enhancements. This change in price, due to the change in quality of the services provided, would not be reflected in the index." Italics are mine. Postrel adds: "The `old' room disappears from the price index and the `new' room takes its place. The new, higher rate is treated as the inflation-neutral price of a more luxurious good."
The inflation-neutral price of a more luxurious good? Holy rate increase! How come the government can't see the similarity between a down pillow and a digital tier? Between ham & eggs and high definition? The secret is out. The CPI inherently states there's no free lunch. With its added channels and serial new technology, cable has been inflation-neutral for decades.
Postrel is the author of The Substance of Style: How the Rise of Aesthetic Value Is Remaking Commerce, Culture and Consciousness. I don't know her personally, and I don't own any Amazon stock, but this sounds like a textbook NCTA ought to mail to every FCC commissioner, member of Congress and municipal official. Heck, just the quote from the BLS would do the job.
The Emperor's Clothes: There was a quote in the March 28 Wall Street Journal that caught my eye. The FCC told the states (specifically Florida, Georgia, Louisiana and Kentucky) they can't force the telcos to offer "naked DSL" to customers of their voice competitors, including cell phone users. BellSouth regulatory VP Jonathan Banks said, "The ruling helps provide the regulatory assurance necessary to justify the levels of investment required to support the high-speed networks and services of tomorrow." Now there's a telco line the cable guys can use when trying to pick up customers. They also might slip it under the door of a few Supreme Court judges.
Cloudy Sky? The average cable MSO stock at the end of March was +2% for the year, the only positive media industry average (except for Tower's +1%). It's all due to event-driven Insight and Cablevision and the post-merger interest in Rogers taking over its cell phone wing. Otherwise, Wall Street continues to be hung up on satellite companies making inroads on terrestrial players (both in radio and TV). But not analyst Craig Moffett of Bernstein & Co. One of the more creative thinkers in the game, Moffett says rising sub acquisition costs (SAC) of nearly $700 per gross add mean satellite ops "run faster to stay in place. It's not a sustainable model. Their sub bases are growing but the value of their subs is falling." He favors Comcast's 18% annual cash flow growth (net of capital expenditures).
In Moffett's concise view, both satellite and cable share issues of churn, but DBS lives for more subs (which creates yet-higher churn) while cable is focused on RGUs, a more efficient business model. He does not see a DBS stock rally over the next three to six months, but he's telling clients to overweight cable.
Why is the RGU model so important? See Ken Belson's overdue piece in the March 31 Times about people forced to subscribe to both satellite and cable. I'd argue with some of the data, but it correctly points to the forbidden fruit of a "dearth of new subscribers." Belson notes that "with approximately 85% of American households already paying for some sort of television and the remaining 15% unlikely to sign up for any service, cable and satellite providers are increasingly chasing each other's subscribers."
Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. He owns shares of Insight, Cablevision, Rogers and Comcast. Information in his columns is not intended to be a recommendation to buy or sell securities.
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