With Paramount Global’s stock price falling more than 15% since Tuesday, when Shari Redstone's National Amusements put the kibosh on a proposed sale of the studio to David Ellison's Skydance Media, research firm CreditSights is predicting that Moody’s will join S&P Global Ratings in downgrading Paramount’s credit rating to junk status by the end of 2024. 

Paramount was already downgraded in March by S&P, which cited the rationale of a debt load of around $14.6 billion, combined with declining distribution of linear networks and a subscription streaming platform, Paramount Plus, which lost $1.6 billion in 2023. 

In an update sent to investors Tuesday, Moody's also noted the same challenges. CreditSights analysts led by Hunter Martin and Davis Hebert interpreted the tone of this update to be “incredibly cautious,” stating their belief that the credit ratings firm will tighten up Paramount's leverage requirements and downgrade its credit rating by the end of the year. 

All of this bad news makes it even more challenging for Redstone and National Amusements to leverage their key stated goal of not selling Paramount to a suitor who would break the conglomerate into pieces. 

As Paramount “twists in the wind,“ startup showbiz trade The Ankler wondered aloud Thursday if the Biden administration might consider a bailout for Paramount — and more broadly, Hollywood — similar to how the federal government has stepped in to aid U.S. automakers and banks in the past. 

Citing a motion picture studio that has contributed The Godfather, Chinatown, Rosemary’s Baby, Psycho, Saving Private Ryan, Beverly Hills Cop, Top Gun, Ferris Bueller’s Day Off and Grease, and a broadcast TV network that has brought America Edward R. Murrow, Walter Cronkite and Norman Lear, The Ankler declared, “No company in history did more than Paramount to provide the masses with higher-class amusement.”

How can we, as a society, just let all that twist in the wind in an endless process? As with other debt-burdened industries before, the government needs to step in with a bailout in the way it has with automobiles and banks in this millennium. Hollywood may have a reputation as frivolous, but in terms of the jobs, the economy and America’s standing in the world, its health is essential.

Editor David Lidsky asks: “How can we, as a society, just let all that twist in the wind in an endless process? As with other debt-burdened industries before, the government needs to step in with a bailout in the way it has with automobiles and banks in this millennium. Hollywood may have a reputation as frivolous, but in terms of the jobs, the economy and America’s standing in the world, its health is essential.”

Sure, the debt loads currently being carried by Paramount, Disney ($39.5 billion) and Warner Bros. Discovery ($39.1 billion) are the “self-inflicted” ills of bad decision making. 

And nationalizing companies calls to mind “socialism” in today's political climate. (Editor's note: The populist and nationalist tide of today’s political climate probably would push back hard on another Detroit bailout. Do you really think Hollywood would fly well in focus group testing?)

Still, Lidsky points out, “The banks and carmakers were recklessly pursuing failing strategies, were similarly over-financialized, and in the case of the automakers quality had deteriorated significantly. For GM and Chrysler, 3 million jobs, many of them union labor, were at risk. Starting to sound familiar?“

The last Writers Guild of America strike back in 2007 lasted 100 days, and this latest typing stoppage, which began Monday evening, could very well end up spanning the same chasm, according to a report released Thursday by Moody’s Investors Service. 

Also read: Writers Guild Calls for Strike, Says Producers Are Trying To Force Scribes Into ‘Gig Economy’

“We believe this standstill could last three months or more, with the stakes being larger,” the firm said in its report.

While the still unknown specter of “new media” residuals was a big factor in 2007, streaming also looms large in this latest interruption, but in a much different way. 

“It is not just the share of the revenue pie at stake this time, but how compensation will change to address how distribution has evolved in the streaming entertainment ecosystem,” Moody’s said. “Also at stake is flexibility for studios, versus protections for union workers, in light of technological advancement such as artificial intelligence (AI).”

Moody’s estimates an improved three-year contract for writers “will ultimately cost media companies for which the firm offers credit ratings $250 million to $350 million per year to settle.” 

The strike isn't timed well, as summer is an active rewrite period for fall broadcast-TV season. Speaking more broadly, the studios are up their eyeballs trying to balance eroding linear platforms while spending enormously on streaming services to get them up to scale. 

Moody’s sees the major exhibition houses including AMC Entertainment and Cineworld — which have little financial flexibility — faring the worst if the stoppage is lengthy.

“In a prolonged strike where new theatrical product is spread more thinly or runs dry, these companies could face a difficult time maintaining metrics commensurate with their ratings, particularly if they do not have sufficient committed liquidity or cash balances to withstand a long work stoppage,” Moody’s said. 

TV will take it on the chin, too. 

“Television will bear the brunt of a long strike as the implications of the writers’ strike will play out more noticeably for TV networks, stations, cable channels and streamers,” Moody’s said. “TV networks, particularly broadcast networks, consistently schedule new primetime shows to begin in the fall.”

Meanwhile, look for Netflix to fare well.

“Companies like Netflix, which have production footprints that are internationally diversified are better able to import much of that content if it is owned, or if they have broad licensing rights,” the firm said. 

Moody’s Investors Service said the cancellation of professional and college sporting events in the wake of the coronavirus pandemic could be tough on programmers, especially broadcasters, cable networks and regional sports networks that count on games to deliver eyeballs and ad revenue.

Over the past week the NCAA has canceled the March Madness men’s and women’s basketball tournaments, the NBA, NHL, MLS have all suspended their seasons, The Kentucky Derby and The French Open have been moved to September and Major League Baseball has invoked a two-week delay to Opening Day. But according to Moody’s, if the pandemic continues for months -- and it could -- “the loss will be a credit negative for a long list of US media companies.”

“Live sports is one of the few programming categories that still garners large, predictable, non-time shiftable live TV audiences and the effect on advertising revenue and engagement will be significant,” Moody’s said in its report. “...If the suspensions extend into the playoffs, which typically generate stronger viewership and engagement relative to the regular season, the pain will worsen for media companies and leave news as the primary remaining live anchor programming.

According to Johns Hopkins University, coronavirus cases in the U.S. have nearly tripled to 5,700 from 2,000 in the span of a few days. Globally, the number of confirmed cases has risen to 194,217 and the number of deaths to 7,864, according to Johns Hopkins.  In the U.S., President Trump admitted Monday that Americans may have to continue to work from home and avoid crowds into August.

Moody’s added that the impact may be greatest on regional sports networks, which unlike their broadcast and cable network counterparts don’t have substantial non-sports programming that could fill in the hole created by the lack of games.

“Standalone RSNs, along with Leagues and teams, face the most risk,” Moody’s said. “This is because they cannot easily replace the live game programming, nor lost revenue.”

Larger more diversified media like Disney and AT&T can offset the lack of games with other programming and not having to pay for the games that aren’t played. But Moody’s added replacement programming won’t have the same audience and networks could be forced to pay “make goods” to advertisers for missing ratings targets. In addition, they could face backlash from consumers that don’t want to pay for sports network subscriptions with little live programming, which could impact affiliate fees.”

Of the standalone RSNs, Diamond Sports, a partnership led by Sinclair Broadcast Group, faces the greatest exposure with 22 regional sports networks. Comcast has 8 RSNs, AT&T 4, Charter Communications 3 and Cox Communications 2.

After the RSNs, Moody’s estimates that Disney, which owns sports channel ESPN and broadcaster ABC, has the most exposure because of its ownership of rights to NBA and MLB. ESPN is also impacted because its flagship SportsCenter is a big provider of game highlights, and without games viewership could decline.

Comcast’s NBC network also faces some uncertainty come July, when it is supposed to air the Olympic Games in Japan. Comcast has said it has adequate insurance should the Games be canceled because of the coronavirus. And the International Olympic Committee said Tuesday that the Games are expected to go on as scheduled.

“The IOC remains fully committed to the Olympic Games Tokyo 2020, and with more than four months to go before the Games there is no need for any drastic decisions at this stage; and any speculation at this moment would be counter-productive,” the IOC said in a statement. 

Moody’s Investors Service placed a “credit positive” rating on Comcast Tuesday, calling its Peacock streaming service, set to debut in April, a needed addition to help stem cord cutting losses.

Comcast and NBCUniversal unveiled the Peacock service on Jan. 16, and the ad-supported direct-to-consumer offering will be available free to Comcast subscribers beginning on April 15. Customers outside the cable operator’s footprint will pay $4.99 per month for the ad-supported version, and $9.99 per month for an ad-free offering. 

In a research note, Moody’s said while Peacock is the third D2C streaming service to be launched in about a year -- Disney’s Disney+ and Apple’s Apple TV + were the others -- it addresses the need for distributors to pivot toward online content as cord cutting and cord shaving grow.

Comcast, like its peers, have been hurt by the cord-cutting trend through a declining video subscriber base and an eroding base at its broadcast and cable networks. Moody’s said it expects the rate of pay TV subscriber losses to accelerate between the next 12 and 18 months as new entrants and viewing options emerge.

“This environment is creating an urgent need for a strategic pivot to capitalize on the changing media landscape,” Moody’s wrote, pointing out that consumers aren’t watching less TV, but that the value proposition of the bundle is eroding. Finding out what consumers value more is evident in the fact that Comcast lost 583,000 video customers in the first nine months of 2019, but added more than 1 million broadband subscribers.

Moody’s was also encouraged by Peacock’s ad-supported nature, which it said will leverage Comcast NBCU’s core ad relationships and capabilities.

Related: Peacock Shows Its Plumage 

“Peacock is capitalizing on what the company is calling “white space,” the free premium ad-supported content quadrant,” Moody’s wrote. “Comcast will be able to throw its weight around in the streaming wars given the breadth and avidity of NBCU’s largely existing content. The free and low-cost price points should be attractive enough for most consumers to explore the platform.”

Moody’s anticipates that lighter ad loads -- Peacock will have about five minutes of advertisements per hour, compared to 13 minutes per hour for broadcast TV and 16 minutes for cable networks -- which should mean that the ads will be highly targeted, and Comcast can charge more for them.

“We believe highly targeted advertising can provide as much as 250% higher returns for advertisers than traditional broad-based demographic advertising,” Moody’s wrote.”...The advertising opportunity for a scaled, inexpensive, premium DTC service can be very large and help the company monetize both new viewers and Xfinity video defectors and manage churn.”

Comcast has said it will invest about $2 billion over two years in content for the service, expecting the overall unit to reach break even by 2024. But Moody’s believes that may be a bit conservative.

Related: Analyst: Slow and Steady Wins the Streaming Race 

“Peacock already partnered with select advertising sponsors, bringing in hundreds of millions of initial advertising dollars at launch, which will help support the initial investment,” Moody’s wrote. “However, we believe the company can scale a lot quicker given the service’s price and the revenue potential from scalable, addressable and innovative ad formats we believe advertisers will find favorable.”

For more stories like this, visit our sister publication Next TV.

Moody’s Investor Service estimated that 5G wireless service, if adopted as widely as most pundits expect, could put a big dent in cable’s broadband’s subscriber base, resulting in diminished pricing power.

Moody‘s used Charter Communications as an example for its report, but it may have just as well used any major cable operator. And while most of those operators have already launched successful -- if money-losing for the moment -- wireless services, it may not be enough to stem the 5G tide.

Most of the major wireless carriers have announced plans to offer 5G services, all in various stages of completion. But if the technology lives up to the hype -- promising improved speed, capacity, and reliability -- and becomes a viable alternative to wireline broadband, Moody’s fears that cable operators will have to respond.

“If 5G becomes a viable substitute for wireline internet, by delivering the right combination of these features and becomes accessible at a motivational price point, Charter's base of wireline internet primary service units (PSU's) could be at risk if consumers view wireline internet and wireless broadband as overlapping services, eliminating wireline internet to consolidate their broadband spend,” Moody ‘s wrote. “If this happens, we expect Charter (and other cable operators) to lower prices to retain customers, on what is currently very high-margin wireline internet services.”

Charter’s wireline broadband customer base is about 1.5 times larger than that of video customers, according to Moody’s, and represents the biggest growth area in the business. While wireless service could be an effective hedge, it too could come under pricing pressure if 5G takes hold.

Related: Dish to Become Fourth National Wireless Carrier 

Moody’s noted that Charter could participate in Verizon’s 5G product through its MVNO agreement, but “steady-state wireless services could pressure margins.” Charter is moving toward offering 10Gbps wireline speeds in the future, which Moody’s added could take up some of the slack.

But mobile services have high costs which press on margins -- Moody’s estimated that MVNO agreements like the one Charter has with Verizon, usually produce cash flow margins of between 15% and 20%, substantially lower than 30% consolidated margins it says Charter now enjoys.

The solution may lie in renegotiating a better MVNO agreement -- which MoffettNathanson principal and senior analyst Craig Moffett advocated months ago -- or strike another deal with T-Mobile/Sprint, if that mega-merger materializes.

Many analysts have pointed to Altice USA’s MVNO deal with Sprint as a model. According to that deal, Sprint is allowed to build small cells on Altice’s network. Sprint pays nothing to Altice — other than construction costs — and in turn the cable company gets to ride on those small cells for free.

The result has been Altice USA’s ability to price the service at $20 per month for existing customers (less than half what Comcast and Charter charge) and claims that the service will be profitable in 12 months. Comcast, which launched XFinity Mobile in 2017 and Charter, which launched Spectrum Mobile in 2018, have yet to turn a profit on the service.

“To the extent Charter can improve the economics of its MVNO, with better pricing or taking more ownership and control over the network infrastructure, profitability could improve which will drive incremental EBITDA at scale,” Moody’s wrote.

Moody’s added that Charter also could buy and deploy wireless infrastructure assets -- it already has said it plans to use its WiFi network in conjunction with additional unlicensed or licensed spectrum to better performance and expand capacity.

Charter has approximately 250 million WiFi hotspots in the U.S., according to Moody’s, but also is part of the CableWifi consortium -- with Comcast, Cox, and Altice USA -- which provides access to nearly 500 million hotspots. Charter also has experimental wireless licenses it is using to test next-generation mobile services around the country,” Moody’s said.

Redoing its MVNO relationship so that it owns more of the network would pay off for Charter and other cable operators. Moody’s pointed to Verizon -- which has facilities-based cash flow margins near 39% -- and Canadian companies like Bell Canada, Rogers Communications, TELUS, Shaw Communications and Quebecor Media, which have wireless margins near or above 40%.

While not ideal comparisons to Charter -- they have different geographies, demographics and markets -- “they do provide another relevant data point to consider the directional potential,” Moody’s said.

Moody’s Investors Service said its outlook for pay TV in 2019 is “positive,” with broadband demand and margin growth expected to outpace video subscriber losses.

“Growing broadband demand will drive more than 4% EBITDA growth among U.S. pay TV providers over the next 12 to 18 months, despite threats posed by consumers’ shift to OTT and 5G wireless broadband deployment," said Moody’s VP and senior credit officer Jason Cuomo in a statement.

For broadcasters, rising retransmission consent fees and increased M&A should help lessen the blow from ad revenue declines as advertisers shift their focus to digital. Moody’s said its outlook for broadcast TV in 2019 was “stable.”

Related: OTT Subscription Churn Rate Steady at 18%: Parks

In its report, Moody’s predicted that retrans revenue would rise 13.9% to nearly $5.5 billion in 2019, from $4.9 billion in 2018.

“Rising retransmission fees and incremental earnings generated by a strong 2018 political cycle will help offset weak advertising revenue for U.S. broadcasters, leading to 3.1% EBITDA growth in 2019," Cuomo said in a statement.

But the picture isn’t so bright for newspaper and magazine publishers. Revenue is expected to continue its downward trend in the sector as more and more consumers turn to alternative means to get their information. According to Moody’s VP and senior analyst Alina Khavulya, consolidation and cost rationalization will continue.

“U.S. newspaper and magazine publishers will continue to be challenged in 2019 by the persistent decline in ad demand, as reading habits continue to shift towards social media news sources, search engines and digital video," Khavulya said in a statement.

Moody’s Investors Service crunched the numbers on a possible Comcast-21 Century Fox combination, determining the deal would dramatically increase its debt load, making it the second highest leveraged company behind AT&T.

Comcast has made a formal offer for British satellite company Sky – of which Fox owns 39% -- for $31 billion, but it hasn’t done the same yet for Fox assets currently betrothed to The Walt Disney Co. Comcast is expected to crash that wedding only if AT&T’s pending $108.7 billion purchase of time Warner Inc. is approved by regulators.

But Comcast has been said to be lining up banks for a possible bid, and reports have estimated the cable giant will offer about $60 billion in cash for the Fox assets.

In a note Tuesday, Moody’s said a debt-financed (all-cash) bid for Fox would be a big departure from Comcast’s existing fiscal policy, ticking up its leverage ratio to about 4.1 times cash flow. Comcast’s current leverage ratio is about 3 times cash flow, but Moody’s said that a target of 2.75 times is more appropriate for its current rating.

“Adding a cash bid for Fox on top of the company's debt-financed $31 billion bid for Sky Plc, means pro forma consolidated debt would increase the company’s consolidated debt from just under $65 billion to a staggering $164 billion, pro forma for the acquisitions, excluding any cash flow that Comcast would generate before the transactions would close,” Moody’s wrote.

That $164 billion obligation would be second only to AT&T’s potential $185.3 billion debt load after the Time Warner deal closes. And Moody’s said the Comcast leverage is after about $3 billion in cost synergies are considered. To get back to the recommended 2.75 times mark suggested for its investment grade A3 debt rating, Moody's says Comcast would have to pay off about $50 billion in debt. Given it is expected to generate about $10 billion to $11 billion in free cash flow annually, that could take more than four years.

Moody’s noted that Comcast has been consistent in its approach to debt in past acquisitions – its purchase of the remainder of NBC Universal from General Electric briefly stretched debt metrics. But it agreed to purchase Time Warner Cable with all-stock (a deal that was scrapped over regulatory issues), and bought DreamWorks Animation and purchased stakes in its theme park ventures with cash on hand or minimal leverage.

“When assessing creditworthiness, we consider both the willingness of management and the company's ability to attain and sustain credit metrics as equally important,” Moody’s wrote. “… Sharp departures from past practice and stated commitments, particularly as companies move up the rating scale, create significant doubts about commitments in the future.” 

The slowing pace of broadband is having a big impact on Moody’s Investors Service’s latest cable metric – the Video Replacement Rate, or the pace at which new broadband customers replace lost video subscribers – driving the average VRR for cable operators in Q3 to new lows.

According to Moody’s, the average VRR in the cable sector dropped to 5.9 times in the third quarter, down from 7.3 times in the prior year. Declining broadband growth appears to be the biggest culprit. According to Moody’s broadband subscriber growth declined by 500 basis points in Q3 2017, driving the overall VRR down.

Comcast and Charter Communications, which together represent about 80% of Moody’s broadband universe, had a big influence on the decline, with their combined broadband growth down 0.6% from Q2, according to Moody’s.

According to Moody's, the VRR represents the absolute value of the change in broadband subscribers over the previous four quarters, divided by the change in video subscribers over the same period. Moody’s also calculates the ratio on a rolling four-quarter average to smooth out distortions.

The credit rating agency said that with average revenue per broadband customer at about half that for video subscribers and broadband profit margins at about three times video, the economic loss from a departing video customer can be neutralized by growing broadband subs at a fraction of the video unit loss. Moody’s estimates that a ratio of about 2 broadband subscribers added for every video customer loss should offset revenue losses, while a ratio of 0.67 times takes care of profit declines.

The downturn in the VRR also means that revenue and cash flow growth are falling, Moody’s said. Revenue growth was down 500 basis points to 4.9% in Q3 2017, and EBITDA (a measure of cash flow) growth dipped to 7% from 8.4% in the previous quarter.

“We project the VRR will approach 5 [times] at the end of 2018, suggesting revenues and EBITDA growth will come down further,” Moody’s wrote, adding that its current forecast puts total EBITDA growth at 6% over the next 12-to-18 months.

Credit rating agency Moody’s Investors Service predicts that mergers & acquisitions activity among telecom companies will continue as the industry seeks to offset low revenue potential and intensifying competition with deals.

Already the sector has seen AT&T announce a $108.7 billion deal with Time Warner in October and Century Link make a $34 billion offer for Level 3 Communications. Moody’s sees more deals ahead.

“Market saturation and tough competition have produced a stagnant US telecom market,” Moody’s said in its report. “Yet regulators remain unlikely to approve consolidation within the traditional telecom sector, especially for large incumbents, so they must look elsewhere for growth.”

Moody’s predicts that in the wake of those deals, Verizon Communications will likely accelerate its 5G mobile video strategy either through large scale M&A or partnerships.

“In our view, Verizon’s existing wholesale agreement to provide wireless infrastructure for several large US cable companies could be expanded upon for 5G in a mutually beneficial way,” Moody’s wrote.

In other possible deals, Sprint could make another attempt to merge with T-Mobile, but Moody’s believes regulators will probably squash that transaction again, unless they can prove combining the No. 3 and No. 4 wireless companies provides a public benefit by creating a company that can better compete with Verizon and AT&T.

While there has been great speculation recently regarding what Verizon will do in the M&A space, including a possible pairing with Charter, Moody’s said it doesn’t expect any blockbuster news from the phone company just yet.

“We don’t expect Verizon to pursue a mega-deal like AT&T, but think that Verizon could seek an alternative path to wireless product differentiation by leveraging partnerships to accelerate its 5G strategy,” Moody’s said, adding that it could expand its MVNO agreements with cable operators to include 5G.

“This potentially mutually beneficial arrangement would allow Verizon to leverage the cable operators’ dense backhaul assets in exchange for competitively priced wireless infrastructure,” Moody’s continued. “The cable operators would avoid very costly wireless investments and, at the same time, Verizon would prevent a new retail competitor to its wireless business. It would also place AT&T at a stark competitive disadvantage to Verizon for 5G wireless services.”

As over-the-top and subscription video on demand services like Netflix and Hulu continue to gain traction in the content business, networks must abandon the traditional linear TV model and migrate to an on-demand environment, according to a new report by Moody’s Investors Service.

But getting here won’t be easy. Moody’s says that shift will require that content providers unite to beat back the rivals they helped create by licensing their shows.

"The success of these OTTs has in large part been fueled by content licensed from the very industry heavyweights they are challenging," said Moody’s senior vice president Neil Begley in a statement. "This is emboldening them to invest heavily in original, exclusive programming, and eventually bid more aggressively for streaming rights to major league sports."

According to the report -- Pay TV and Television Networks -- US: OTT Invasion: Grand Bargain Required for Long-Term Sector and Credit Stability --to compete with OTT services and rapidly growing digital platforms for subscribers and advertising revenue, the networks must:

•  End their linear distribution model
• Offer all programming on-demand with full stacking rights
• Implement robust search and recommendation interfaces
• Implement real-time targeted ad placement focused on the viewer instead of the program.

Such a seismic shift is unlikely, however, unless all major content creation and distribution companies can lead a total overhaul to transform how the industry distributes content and advertising.

"Instead, based on the current trajectory, we believe that companies will go it alone, meaning change will be inconsistent, stability will erode as individual network churn rises, and operating performance will come under pressure for those that stumble," Begley said in a statement. "This could result in potential for rating pressure for many notable industry players that
cannot defend against the rising change."

Moody’s Investor’s Service said that Dish Network’s aggressive bidding in the AWS-3 wireless spectrum auctions could affect its credit ratings.

Dish actually bid about $13.3 billion for the licenses, but because it bid mostly through designated entities, it received a discount of 25%, putting it on the hook for about $10.4 billion.

While some FCC commissioners criticized Dish for using DE’s to bid on the licenses, Moody’s said that the sheer size of the bidding could result in lower credit ratings and therefor more expensive access to capital for the satellite giant.

In a statement, Moody’s senior vice president Neil Begley said depending on how Dish finances the bids; it could negatively impact its Ba3 Corporate Family rating and SGL-1 speculative grade liquidity rating.

Dish hasn’t said what its obligations are under the auction nor how it would fund its bids. Moody’s anticipates when anti-collusion rules expire in about 10 business days after the close of the auction; the company will announce its obligations and funding intentions.

"The company could move forward with a number of options, including selling or licensing the spectrum, independently launching its own wireless service and competing as the nation's fifth major player in the wireless telecommunications space or partnering with or acquiring or merging with another wireless carrier like T-Mobile," Begley said in a statement. "In our view, a tie-up with an existing wireless carrier or a company with significant capital resources is the only possible strategy that could give Dish a chance of success in the wireless arena, and management has publicly stated its desire to do so."

If Dish funds its AWS-3 spectrum purchase with cash on hand (which amounts to about $10 billion, including marketable securities), Moody’s believes uncertainty
surrounding strategic plans and future impact on its balance sheet will continue to weigh on Dish's credit ratings. Excluding any additional financing, Dish DBS's gross debt-to-EBITDA leverage, was 4.7x as of Sept. 30 (incorporating Moody's standard adjustments). The company's ratings would come under pressure if it engages in acquisitions and investments that increase gross leverage to more than 5.5 times.

Moody’s Investors Service upgraded the credit ratings for privately held cable operator Mediacom Communications, adding that the small-market MSO has improved its leverage ratio substantially since going private in 2011.

Moody’s upgraded Mediacom’s Corporate Family Rating (CFR) to Ba3 from B1 and its Probablility of Default Rating to Ba3-PD from B1-PD.  The credit rating agency also changed its outlook on the cable operator to stable from positive.

Improved credit ratings typically mean a company has greater access to cheaper capital.   

According to Moody’s, it took the action because Mediacom has lowered its debt-to-cash flow leverage ratio from about 6.7 times in 2011 when it completed plans to go private, to about 5.1 times in September 2014. Moody’s estimated that Mediacom would continue using its free cash flow to pay down debt and could bring that leverage ratio below 5 times this year. Since going private, Moody’s said Mediacom has repaid about $450 million in debt.      

Cash flow growth is expected to decelerate to between 2% and 3% for cable operators in 2015, down slightly from the 4% rise expected this year. But a continued focus on higher margin broadband and commercial services should keep profit margins fairly steady for the foreseeable future, according to credit ratings agency Moody’s Investor’s Service.

In its report, Broadband is the Game, Cable is Poised to Win, Moody ‘s estimates that cash flow margins will decline mainly because of the maturing video business. Video customer losses and higher content costs should continue to impact that segment of the business going forward. And though the broadband business has also shown some signs of maturation as subscriber growth has slowed down, Moody’s believes cable operators will see profits rise as customers upgrade their service to higher speed and higher costs tiers. Earlier this year, the broadband subscribers surpassed cable video customers for the first time.

“It’s the broadband business now, and speed upgrades make it cable’s game to win,” the Moody’s report said

Proposed over-the-top offerings from Sony, Verizon, Dish Network and DirecTV are expected to have some downward effect on pay TV subscribership, but Moody’s believes it will be minimal.

Moody’s doesn’t believe that content providers are going to want to rock the boat of affiliate fees and ad revenue from cable that hard, adding that it expects content providers to make content available to a degree and at a price that targets people outside that audience.”

While widespread adoption of odver-the-top services could throw a wrench in that strategy, Moody’s believes “programmers will tread lightly, limiting pressure over at least the next year or so.”

On the commercial services side, Moody’s expects cable to continue to gain market share – it pointed to the pending Comcast-Time Warner Cable merger, which would allow the combined entity to serve larger customers in major cities like Los Angeles  New York City and helping to build on the more than 20% annual revenue in that segment for both companies. Providing cellular backhaul services – essentially using their network to transmit information between cell towers, also is expected to be a healthy business – Moody’s projects 7% to 10% annual revenue and cash flow growth for that segment alone over the next three-to-four years.

“What’s good for the cell towers is good for the cable operators serving them,” Moody’s said.

WiFi could also prove to be a cash generator for cable operators in the future, Moody’s said. Currently used primarily as a retention tool – operators offer it as a free add-on to broadband service – WiFi is becoming increasingly important and could withstand a small monthly surcharge without a resultant subscriber loss, Moody said. The credit rating agency estimated that at Cablevision – which was a pioneer in offering WiFi service – could lose as much as 5% of its customer base before an additional $2 monthly charge would be uneconomical. A $3 monthly charge pushes that acceptable subscriber loss to 7%, according to Moody’s.

High-speed data customers will surpass video customers for cable companies by next year, according to debt rating agency Moody’s Investor’s Service, as cable operators concentrate more on selling higher-margin data services.

Already cable HSD and video customers are about even: Moody’s estimates that they both reached about 50 million subscribers in the first quarter of this year. As more and more customers consider broadband service an must-have product – a Pew Research Center study showed that 53% of adults said it would be “very hard or impossible” to give up their broadband service while just 35% said the same for TV – Moody’s predicts that cable operators will make it easier to unbundle broadband offerings.

Broadband has become an anchor product for most households and we believe a primary purchase decision for anyone moving into a new residence,” Moody’s wrote in a report by lead author and Moody’s vice president and senior analyst Karen Berckmann.

Cable operators have been aggressive on the broadband front, with many increasing speeds for free. That product leverage cold help cable operators charge more for standalone broadband service, which in turn could help make up for lost video revenue.

“Video is the lowest-margin product, so, all else being equal, fewer video subscribers mean higher margins,” Moody’s wrote.

That cushion could also help cable operators in their battle against rising programming fees.

Cable operators have long complained that rising video programming costs are hampering their ability to compete. Moody’s estimates that as those costs continue to climb, the case for emphasizing broadband service over video service becomes more appealing.

Some small cable operators are already doing just that. Moody’s pointed to Wave Broadband, a Seattle-based small operator that has about 24% video penetration, compared to about 40% for the rest of the industry.

While Wave is likely losing economies of scale because of its low video penetration rate, its overall cash flow margins are in line with the rest of the industry at about 40%, making the added focus on high-speed data “a reasonable trade-off,” Moody’s said.