Cable Talks, Wall Street Listens

After nearly three hours of fielding questions about new phone, data and
video services at the industry's annual trade show last week, Comcast CEO
Brian Roberts was surprised when he finally got a question on cash flow.

All through his talk on new voice-over-Internet-Protocol (VoIP)
telephone services, more-advanced video-on-demand services and the continued
successful rollout of cable modems, few listeners had any direct questions
about finances. It was only at the very end that one institutional investor
inquired, in effect, “Will these new services crunch cash-flow

“I think that's the first 'numbers' question to me,” Roberts
said. “That speaks volumes. People are coming to this show and trying to
'look out' a little bit, which is what we try to do as business

That is a dramatic change from only a year ago. At the 2004 convention,
Roberts declared Wall Street to be in “crazy mode.” Cable and other media
stocks were crashing, and investors spent the day hammering CEOs over downers
like the loss of subscribers to DBS and the high cost of introducing new

Now the momentum of technology is clearly on cable's side. To be sure,
Wall Street is still as skeptical as ever. But industry insiders—and, more
important, outsiders—are wowed by the success some operators are having with
lucrative VoIP telephone services, as well as with the wide rollout of
video-on-demand services. Analysts expect cable VoIP to grow from around $700
million in revenue this year to as much as $6 billion by 2009. VOD revenues are
expected to approach $1 billion this year and nearly $6 billion by 2013,
according to estimates. Fees for new digital video recorders could hit $1
billion by 2009.

$95 billion upgrade

Industry executives worked hard last week to keep that excitement
echoing off every wall of San Francisco's Moscone Center, which hosted the
National Cable & Telecommunications Association's National Show. The
fundamental theme: a $95 billion upgrade has made cable systems into a giant
computer network, enabling a rich array of products—from elaborate telephone
services to networked videogaming, in which players around the country can
assault each other.

For a convention hosted by and for cable operators, the spotlight also
went to outsiders: Google, Sprint PCS and Cisco, among others, emphasizing the
increasing power and flexibility of cable systems. “This year's show is
less about the cable industry talking to itself and more about having a real
dialogue with the leaders of many industries whose future will be intertwined
with ours,” said Steve Burke, chairman of the convention and COO of Comcast,
at the opening of the show.

Several ideas seemed to hook the imagination of panelists and attendees,
such as how cellular customers' ability to watch TV on their flip phones will
affect cable operators. One immediate need for many cable systems: a
Google-like search engine for video-on-demand, a simple way for viewers to
navigate through what could soon be a daunting array of 10,000 shows and
movies. Seagate Technology showcased its removable hard drives that attach to
set-top boxes to let video junkies offload shows recorded on their overloaded

But cable's technology boom doesn't mean everyone profits.
Programmers complain that the operators are obsessed with products that provide
no obvious way for them to make money but threaten to disrupt their existing
businesses. DVRs let viewers readily skip commercials. High-definition may be
great for operators catering to high-end customers, but it creates high costs
for programmers.

Moreover, operators want networks to give them VOD product for free, and
it could take years before both sides design an ad model that might
meaningfully offset losses as viewers turn away from the mother network. “You
can't put any food on the table now from VOD,” said Bob Wright, chairman
and CEO, NBC Universal.

VoIP: “A Huge home run”

“We ought to figure out a way to grow the opportunities faster than
the disruption hurts us,” says News Corp. President Peter Chernin.

But many programmers are exploiting the changes. Disney's ABC is
pushing its ABC News Now, which was designed to be distributed on digital
broadcast, Internet and even cellphones. “We're dealing with media
companies that have skin in the game on all platforms,” says ABC News
President David Westin.

Much to the delight of the biggest operators, the opportunities
overshadow—for now, at least—the kinds of issues investors were riveted on
a year ago: the threat of competition from DBS, and how telcos would
counterattack cable's push into the telephone business. Those threats still
exist but aren't as dominant.

The excitement over cable's technology is in many ways the upside of
Wall Street's love-hate relationship with cable; investors love the promise
of new technology but hate heavy spending to develop it.

Comcast, Insight Communications and Cablevision Systems have each jumped
by more than 20% since last year's National Show. Charter Communications and
Mediacom, however, have fallen because of significant operating problems.
Still, the cable sector is doing far better than TV and radio stocks, which
have dropped in the past year.

Perhaps the hottest product for cable operators is VoIP, which gives an
immediate financial kick. With the cost of Internet-phone technology dropping
and the quality rising, cable systems offering high-speed Internet can get into
the phone business for relatively little capital. Cablevision now offers VoIP
to all of its subscribers, and around 15% of them are expected to sign up by
year-end, says Morgan Stanley Media Analyst Richard Bilotti. Time Warner,
another company aggressively rolling out VoIP, should have similar penetration
by the end of next year. Cox Communications has been offering traditional
circuit-switched phone for six years and is expanding into VoIP. It should sell
into 25% of its subscribers homes by year-end.

Because the current pipeline is essentially built, the $35-$40 in
monthly revenue could be immensely profitable. Asked during a panel session
where he would invest money other than his own company, Mediacom CFO Mark
Stephan said, “I would invest in any cable company that's doing VoIP,
because I think it's going to be a huge home run.”

Operators are also riveted by VOD, because it's something they can do
on their advanced fiber networks but DBS rivals can't truly match. Comcast is
particularly aggressive, offering programs to digital subscribers for free. The
company is buying a piece of MGM to get VOD rights to older movies and is even
starting its own VOD networks. At the show, Comcast debuted on-demand service
PBS Kids Sprout, a joint venture with Sesame Workshop and HIT Entertainment
aimed at preschoolers.

Bilotti estimates that VOD services will be available in 25 million
homes by the end of 2007. But established programmers still don't see the
upside. They lose viewers from their main channels, but there's no way to
readily sell advertising into VOD, partly because there are no Nielsen ratings.
Says David Zaslav, president of NBC Universal Cable, “Right now, the question
is: What's the model?”

Cable's excitement over DVRs is also a competitive response to DBS.
The satellite companies have been marketing combo receivers and DVRs for more
than three years. Now that cable-equipment companies are supplying DVRs with
integrated cable tuners, operators are deploying them as quickly as box makers
Motorola and Scientific-Atlanta (S-A) can supply them.

Cable should have around 7.5 million DVRs deployed by 2008. That is just
12% of their subscriber base. Since they charge $8-$10 monthly, that is not a
huge financial kick, but it might keep DirecTV from stealing more

Manufacturers from S-A to Samsung see the cable DVR (which, after all,
is essentially a video computer) as the hub for a home-media network, using
cable wires to deliver video and music throughout the house—even uploading
movies to iPod-like devices.

Cable's broadband systems enable videogamers across the country to
face off and increasingly interact, yelling at each other through their Xboxes
while battling in a virtual martial-arts death match. Says Bing Gordon, chief
creative officer of videogame maker Electronic Arts, “You'll pay some money
to reach out and touch someone, but you'll pay a lot of money to reach out
and kill someone.”