Facing a competitive wave that big-market operators suffered a few years ago, Medicom is showing wear as DBS rivals expand their carriage of small-market broadcast TV stations.
Mediacom's stock dropped 20% last week after the Middletown, N.Y.-based cable operator disclosed deeper subscriber losses than investors expected. The MSO lost about 24,000 subscribers in the second quarter and its 1.6 million-subscriber base has shrunk 1.4% over the past 12 months. The losses and price cuts aimed at combating them prompted the company to trim guidance for the year.
The numbers may seem small, but a percentage point or two of revenue and earnings growth makes a huge difference to the way investors value cable stocks.
The problem stems from DirecTV and EchoStar. As an operator who started by scooping up rural and small-town systems and upgrading them, Medicom CEO Rocco Commisso is well schooled in battling DBS's fat lineup of cable networks and sports packages. But one of his big advantages is that his systems could deliver the signals of local (usually regional) broadcast stations that non-subscribers often couldn't clearly receive otherwise.
But DBS services are expanding their "local-into-local" offerings, retransmitting ABC and CBS affiliates via satellite. They initially allocated their satellite capacity to carry signals in the biggest markets. Now, they're starting to encroach on the turf of Mediacom.
Merrill Lynch media analyst Jessica Reif Cohen said that DBS services delivered local broadcast signals in only 15% of Mediacom's footprint a year ago. That grew to 34% by June, and she estimates it could hit 62% by January.
As the DBS service roll out broadcast stations, they pepper the market with price promotions and discounts. "The reality is that a significant portion of our customer base is basic media only, and may be swayed by aggressive promotional offerings, even if they have a temporary nature," Commisso said. "We are responding … but also think that a lot of what we see out there is irrational and unsustainable."
Mediacom now expects 2003 revenues to grow 8.5%-9% instead of the 10%-11% as previously expected. Operating cash flow should only increase 8%-9% instead of 11.3%-12.3%. Basic-subscriber guidance was lowered from flat to a 1%-2% decline.
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