Broadband Jolts Cable Profits: EY

Cable operators are expected to be significantly more profitable than their media peers in 2014, primarily because of their high-margin broadband service, according to a just-released study by consulting giant EY (formerly Ernst & Young).

Cable operators are expected to report cash-flow margins of 41% in 2014, the highest level in fiour years, according to EY. Cable networks are a close second, with 37% margins, followed by satellite TV (26%); TV broadcasting (19%) and film and TV production (12%).

While the high margins would seem to run counter to cable’s complaints that high programming costs and retransmission consent are chipping away at its profitability, EY Global Media & Entertainment leader John Nendick said in an interview that the results are somewhat skewed by higher-margin data services and don’t account for capital expenditures, which can be high for companies upgrading their networks. EBITDA margins mainly measure capital efficiency, not revenue growth, he added.

“So it’s saying for every dollar of revenue you earn, what percent of that do you drive to the EBITDA margin line,” Nendick said in an interview. “It isn’t saying whether your revenues in entirety are going up or down; it’s saying for the revenue you have, how efficient are you at generating earnings or margin from those revenues? Cable operators and cable networks are both very efficient at that.”

While video has been under pressure from rising content costs and a declining subscriber base, the high-speed data customer base has grown significantly. Cable operators added about 1.2 million broadband customers in the first half of 2014, alone, according to Leichtman Research Group, ending the second quarter with 50.7 million customers. Cable high-speed data margins can be as high as 80% to 90%, some analysts have estimated.