New Comcast Has Capital Ideas

More than anything, Wall Street is hungry for growth, and Brian Roberts promises to deliver. Now that the Comcast chief has completed his $57.4 billion takeover of AT&T Broadband, Roberts assured an audience at last week's Broadband Plus Show in Anaheim that, in short order, he will restore moderate subscriber growth and huge earnings growth in the ailing AT&T operation.

In these dark times in the market, though, Wall Street is also riveted on something else: a company's ability to generate real, or "free," cash. On that point, Roberts cautioned against high expectations.

That's because the quickest way for a cable operator to spur free-cash flow is to slash capital spending on system upgrades, investment required to add advanced data, digital and video-on-demand services.

Cash flow takes back seat

And Roberts isn't willing to make quick sacrifices for what he sees as Comcast's long-term opportunity. "The cry for free-cash flow from Wall Street right now, which is fine and is appropriate at some level, should not impinge on technological development that this industry has the opportunity to grasp," he declared at the convention, formerly called the Western Show. "We will not pull back on capital spending. We are going to expand AT&T's plans dramatically."

His appearance at the show last Wednesday marked his debut as cable's most powerful executive. With 21.3 million subscribers, his portfolio is 50% larger than John Malone's at the zenith of his power and more than double the next-largest video distributor, DirecTV.

And, by tripling the size of Comcast's previous cable holdings, Roberts has at least tripled his headaches. He's hugely dependent on turning around AT&T's ailing operations to fund the $30 billion in debt Comcast has amassed with the takeover.

The traditional operating measure of cable has been operating cash flow, or EBITDA. That's earnings before
all sorts of things—most notably, interest and capital spending. Fattening free-cash flow requires much lower interest expense (not easy), much, much higher operating cash flow (a little easier), or substantial cuts in capital expenditures, which Roberts clearly thinks is the wrong road to travel.

Roberts acknowledged that all sorts of financial players are showering him with solicited and unsolicited financial advice, including reducing capital expenditures. "Never listen to all that advice. Do what you believe in your own heart what you believe is right," he observed.

While Comcast expects to generate a trickle of free-cash flow by the end of next year, Roberts believes that the fixes at AT&T are too huge to avoid. For weeks, he has been gentle in his public assessment of AT&T's management of the cable systems, not wanting to offend either his new employees or Comcast's new chairman, former AT&T CEO Mike Armstrong (a "non-executive chairman," Armstrong describes himself, reflexively, like a mantra).

But he delivered a harsh assessment on how AT&T neglected the core, profitable services while pouring money into telephone services.

"It is nothing short of just tragic that, in San Francisco, the Bay Area, we don't offer high-speed Internet to the most sophisticated Internet users," he said, drawing cheers from a crowd at what, after all, was a convention sponsored by the California Cable Telecommunications Association. "It is unfortunate that almost every other market is two-thirds to 70% complete, when they could be 100%"

He added that, "whether there is a good payback or bad payback, we have made the decision that we are going to rebuild all these systems and bring them up to industry norms, and that's job one."

When alerted that he has also characterized stopping the AT&T systems' huge subscriber losses and boosting their anemic cash flow as "job one," Roberts cheerfully admitted that "we have three job ones."

A different message

Roberts's message was different from the one the company has been delivering to Wall Street investors in some meetings, more heavily emphasizing Comcast's eventual path to free-cash flow. One Wall Street executive, however, minimized the conflict.

"It's really the right move given the opportunity," the executive said, noting that AT&T Broadband generates about 40% less cash flow per subscriber than Comcast systems do.

Roberts bristled at the suggestion that he is now "king of cable."

"I'm actually not comfortable with that phrase for a couple of obvious reasons," he said. "Most of all, I believe that we will succeed or fail as an industry."

With outsiders like telco AT&T and Internet giant AOL having different agendas from traditional cable companies, Roberts has privately remarked that the major MSOs weren't always on the same page. "For the past couple of years, we were going in too many separate directions. ... If there is one opportunity to come out of this deal—big, big picture—it is hopefully to reunify the cable team."