Is Cable A Value Trap?

Many value investors have loaded up on shares of the nation’s leading cable companies in recent years as share prices have lagged. The Dolan family even considered taking Cablevision (CVC) private, but then pulled the offer off of the table. While the stock of CVC and others such as Comcast (CMCSA) do look attractive by historical measures, the outlook for these operators has changed meaningfully, in my opinion, over the last few months.

The argument for the Comcasts of the world was pretty simple heading into 2005. The stocks were down big, investors were ignoring them, and cash flow was very strong, growing 10% per year. In addition, cable broadband access seemed to be maintaining its lead over the Baby Bells’ DSL offerings.

Since cable modems were faster than digital subscriber lines, and many voice customers were scrapping their landlines, the cable companies stood to benefit greatly by bundling digital cable television, high speed broadband access, and VOIP phone services. Throw in Tivo boxes and video on-demand movies and customers could get everything they needed, on one bill, for $100 to $125 per month.

The stocks have languished this year though, even as financial results have been pretty good. The three-pronged attack of bundling voice, data, and video has hit a snag. Some of these services are simple commodity businesses that anyone can offer. Vonage offers unlimited long distance, just as Comcast does. Since the service is the same, pricing will continue to fall.

Then things got even worse. Companies such as Skype began offering VOIP phone service for free. Rumors began swirling that Google (GOOG) was looking into offering free wireless Internet access in order to drive net traffic to its advertising-based sites.

While pricing for cable television will remain fairly flat, and VoD movie libraries could lead to Blockbuster (BBI) becoming extinct, it is entirely possible that wireless Internet access and VOIP long distance phone service are eventually offered for free. If that happens, the cable companies will be back to only offering one service, not bundling three through a single coaxial cable. If this happens, cable operator stocks will go down in history as a major value trap.

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

2 Thoughts on “Is Cable A Value Trap?

  1. Jack Miller on December 6, 2005 at 2:19 PM said:

    As usual, a good report!

    It is amazing how much the phone companies are spending on high speed fiber. It is like the railroads in the 1870’s, so many were built that none of them could make money. But, they sure did open up the country for commerce.

    Comcast and TWX still have content as their ace in the hole but they hold onto it so tight that it is not clear that they will ever realize the potential. The day when video content is available at an instant online will be a great day. It is going to happen with or without the cable company’s permission. The phone companies bluster about charging per transmission but that is like going back to cents per minute for long distance phone calls. The dyke has leaks. The flood is coming. The cable companies had better lead the way or get out of the way!

  2. NO DooDahs on December 6, 2005 at 3:09 PM said:

    I’ve gotta weigh in with some dittos on that. These companies would have to come up with some serious business model changes to attract my dollars, on top of correcting some serious problems with their fundies. IMO none of the companies mentioned are worth a glance.

    Three thumbs down, from the sound of it.

Post Navigation