Economy’s Pinching Cable, Too

A trio of cable operators descended on the Grand Hyatt hotel here last week for the three-day UBS Media and Communications conference, attempting in part to ease investor fears about the economy’s effect on the industry. For the most part, MSOs were cautiously optimistic — stating that there has been no great impact on subscribers or operations so far, but warning that the full brunt of the recession hasn’t been felt yet.

Time Warner Cable CEO Glenn Britt was first out of the blocks, presenting last Monday and painting a somewhat gloomy picture.

Britt already said on TWC’s third-quarter conference call in November that the month of October was showing a significant decline in growth in revenue generating units. At the UBS conference, he said that trend was continuing into November.

“Our rate of growth in RGUs slowed dramatically in October from the year before. The new news is that has continued,” Britt said, although he declined to give guidance for the coming months. “Obviously we all have our own views of the economy and whatever. That is going to affect it a lot.”

At Comcast, executive vice president of operations Dave Watson said that while he would not issue any further guidance past the company’s third-quarter earnings call, when chief operating officer Steve Burke said that the company was experiencing slower growth.

“We are seeing pressure in the advertising business, seeing pressure in pay-per-view,” Watson said. “So those things obviously have not shifted.”

Watson also introduced new lower-priced triple play packaging aimed in part at customers who are experiencing some economic difficulty [see story, page 14].

One operator that hasn’t felt the pinch yet is Cablevision Systems. That may be in part because of Cablevision’s packaging strategy, said chief operating officer Tom Rutledge.

“We try to create real value in packaging, in the way we put our video products together, lots of services in each package so the value proposition of downgrading is very low,” Rutledge said. “If the customer is trying to make economic decisions about how to lower their total spend, where will they go? Ancillary video services? I think in some markets they might. Our strategy is to make that a difficult decision.”

And so far, it has worked. Cablevision has consistently outperformed its peers in practically every metric. And despite having the deepest penetration in digital (more than 90%), high-speed data (52%) and digital phone (nearly 40%) it is still the fastest growing MSO in the country.

While belt-tightening seemed to be on everyone’s mind in the early days of the conference, Britt came under some fire from one attendee who questioned whether it was still a good idea to borrow more than $10 billion for a cash dividend tied to its coming split with Time Warner Inc., given the economic climate and his prediction of slower growth.

Britt said that the split off is moving ahead as planned.

“When we first went public [in March 2007], everybody said two things: you’re float looks small and you’re underleveraged,” Britt said. “We think the transaction in place is good for all of the shareholders.”

Time Warner Cable has said in the past that although the dividend will tick up leverage to about 3.7 times estimated 2008 cash flow, that will decrease to three times or lower about a year after the deal is complete. And as a fully separated company, Time Warner Cable’s share float is expected to increase dramatically, which will allow more investors — including some additional institutions — to buy the stock.

And later in the week Time Warner Inc. CEO Jeff Bewkes said that the deal could be completed in the early part of 2009.

Britt said that the company is looking for ways to keep costs down, but admitted one area that will be troublesome is retransmission-consent demands from TV-station operators. Without giving specifics, Britt said that TWC may suggest that the government take another look at the regulations.

Britt said that television stations are under more pressure now that network-affiliate fees have all but dried up and the local advertising market has deteriorated. The overall structure of station groups have changed over the years, putting additional pressure on the companies, he added.

“The station groups are in really, really bad shape; they’re drowning, quite honestly,” Britt said. “The difference in this retransmission cycle from previous ones is they don’t have anywhere to go, so they are making big demands.

“It certainly seems counter to what’s going on in the economy generally. It is something we’re going to try to take up with the new Congress. The structure which may have made sense in the early 1990s probably doesn’t make sense at this point. But that is for later.”

Later in the conference, Nexstar Broadcasting CEO Perry Sook said his station group — which has about 50 stations and is one of the more aggressive negotiators for cash for retrans — expected to generate between $20 million and $21 million in cash in 2008 from retransmission agreements. That is about 20% higher than the $17.2 million the company generated in 2007.