Brodsky: Fallacies Underlie Stock Declines

Cable legend and Comcast Corp. vice chairman Julian Brodsky downplayed the decline in cable-stock valuations in a panel discussion at the Western Show earlier this month, adding that investors who have bailed out of cable stocks don't fully understand the industry.

Kagan Capital Management Inc. chairman and CEO Paul Kagan, the panel host, said that the combined market capitalization of the nine publicly traded MSOs in 2000 topped $454 billion — and dropped to $75 billion in October of that same year, after the Internet bubble burst. MSO market caps rebounded to $103 billion as of Dec. 1, 2003, showing signs that investors are at least starting to regain some confidence in the cable sector.

Panelist Brodsky said that four common misperceptions are continuing to hold back the cable sector: the concept that basic subscribers are not growing at a robust rate; the perception that competition in the industry is greater than it is; the inability of cable operators to deliver new revenue sources; and the perception that capital expenditures for plant upgrades will never end.

On the first misperception, Brodsky was brief, adding that given cable's current 70% penetration rate, small basic customer losses are immaterial.

"We have competition," Brodsky said. "The satellite industry has 20 million subscribers, and they came from somewhere. But I don't think the fact that basic subscribers go up or down a half of a percent of 1% is earth-shattering news. It's a trivial, non-rounding calculation in the overall state of things."

More relevant, Brodsky said, are where total revenue is going, whether cable operators are increasing their operating margins and how much operating cash flow is increasing on a year-over-year basis.

On the competition front, Brodsky said that the focus has been on a small part of that competition — the perception that there will be a price war between cable and telephone companies concerning high-speed data service.

Brodsky said that the answer to that question lies in cable's performance. Despite price pressure from telcos, Comcast has increased its high-speed data subscriber guidance three times this year alone. And Cablevision Systems Corp. has consistently grown its high-speed-data customers, despite raising its own rates and being in the backyard of one of the more aggressive telcos in the country, Verizon Communications Inc.

"I don't know how significant we can take the threat of price competition of DSL service yet," Brodsky said.

Brodsky added that the misconception that cable cannot deliver new revenue sources is mainly driven by flat digital subscriber growth. That, he said, is an artificial measure.

"There has always been a natural ceiling on pay TV, it's somewhere around the 40% level of penetration, and no cable operator really has much more than that."