Kagan’s Column: Cable vs. Satellite--Vive la Différence!

By Paul Kagan

Cable MSO stocks participated in the buoyant post-presidential debate rally at the start of this month, after a long year of underperformance sparked by surging satellite competition. Analysts and money managers likely were buoyed by MSO data and remarks presented at the Sept. 28 Merrill Lynch investor conference in Pasadena, Calif., and anticipated at the Oct. 5 annual Communacopia in New York, sponsored by Goldman Sachs. The battle among broadband platforms, heating up with the plans of telcos to get back into video, will create both value and volatility in the months and years ahead.

Rupert Murdoch, as usual, fueled the media fire with the Sept. 8 news that DirecTV is reconfiguring its Spaceway satellite project for a major expansion into local high definition in 2005-07.

Although it came as no surprise, the move officially ceded Internet-access territory to the cable modem and telco DSL. The rumble it did cause, however, was a new push by cable to stake out the video future, especially with VOD, the industry's highest-profile differentiator. Since Murdoch is after the same local HD turf that cable has claimed as its advantage, on-demand TV is rising rapidly up cable's marketing ladder.

Comcast's $4.1 billion/year content budget includes rights to show, on demand and for no per-program charge to the consumer, the schedules of Nickelodeon, Discovery Kids, Travel, CNN, NBA, NFL, TLC, Animal Planet, Cartoon, Comedy Central and C-SPAN. SVOD packages are available from Cinemax, HBO, Starz, Showtime and The Movie Channel. That's all besides VOD movies, including 400 box-office hits and 300 TV shows from the Sony/MGM library. Because of its 21.5 million subscriber base, audience data on VOD is getting huge.

Comcast subs downloaded 20 millionVOD program choices in January, 40 million in June and 50 million in July, against an activated base of only 5 million of the MSO's subs. In Philadelphia, subs are entering an average of 23 orders/month. The goal is to have 10-30,000 hours of content available within three years. There have been 15 million downloads of HBO On Demand and 600,000 downloads of the NFL Network in its first week on the air. This application is spectacular, because Comcast has discovered football's dirty little secret: Actual playing time, sans time outs, huddles, commercials and walking back and forth, is no more than 20 minutes. So VOD subs are calling up a showing of every actual play in one 20-minute highlight. Congratulations, Brian Roberts. To an NFL fan like me, this is better than your billion dollar sales pitch to Bill Gates!

Meanwhile, Time Warner Cable, first to roll out VOD, to two divisions in December 2001, has fully launched in its other 31 divisions. Q2 VOD movie revenue was +40%, and 50% of digital subs bought at least one film, up 48%. In Raleigh, N.C., VOD users are up 75% and monthly buys have doubled. Time Warner Cable has promoted DVRs, installing 591,000 (13% of 4.6 million digital subs) through Q2. For the history book: HD subs rose from 34,000 at September 2002 to 328,000 at June 2004, reaching 7% of digital subs. For that matter, digital subs in June were 43% of 10.9 million basics.

Even Charter, thought to be lagging because of financial challenges, had 43% digital penetration at June 30. Its 51,000 hi-def subs are growing at 3%/month, 24,000 DVR subs are rising at 1%/month and 1.2 million VOD subs (24% of ready homes) improved revenue 63% in the first half of '04. All this and more (hi-def, HSD, voice IP and interactivity) are important to cable companies and investors, because DBS providers continue to gobble market share.

DirecTV's 455,000 net new subs in Q2 was its largest-ever quarterly gain. New tricks on its plate for 2005 include Mosaic TV (four live channels on one screen) and ITV, including mosaics, games and fantasy football on NFL Ticket contests.

DirecTV had only 70,000 TiVo receivers in 2002; 355,000 last year. It expects to have 1 million by end '04 and a 2 million goal, plus its latest initiative: 1,500 local and 150+ national hi-def channels by 2007.

That's a lot of channels and a lot of data, but it's an easily--and necessarily--quantifiable battle. The future assures significant acceptance of innovative offerings, especially when the prices of devices come down to critical mass. Coming next: A leading consumer electronics manufacturer will sell, direct-to-home, a package of two HDTV 60-inch sets for under $1,000/set.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management Inc. of Carmel, Calif. He owns shares of Comcast, Time Warner and DirecTV. Information in his columns is not intended to be a recommendation to buy or sell securities.