Don’t Count Cable Firms Out

by Hal Plotkin
Silicon Valley Correspondent

With wireless sector stocks such as red-hot QUALCOMM Inc. {QCOM} leading the market lately, investors might be tempted to think the time has come to count out old-fashioned, hard-wired cable operators.

Leading telecommunications analysts, however, say that would be a big mistake.

“Wireless appears poised to displace wired communications but will not,” Amanda McCarthy, an analyst at Forrester Research, based in Cambridge, Mass., wrote in a recent research report. “Wireless will only partly address business and consumer-service needs, complementing rather than replacing landline communications services.”

Investors, however, have been pretty lukewarm on cable stocks lately.

Charter Communications Inc. {CHTR}, for example, the nation’s fourth-largest cable operator, went public on Nov. 8, at $19 a share. The stock has bounced around a little since then but remains close to its offering price.

Post-IPO chart for Charter Communications

Analysts say there are several reasons investors have mostly overlooked cable stocks in their stampede to play the broadband telecom sector.

“Many cable companies like Charter carry a lot of debt,” says Bruce Kasral, senior analyst at Forrester Research. “It doesn’t look that great on the balance sheet when you know you have to pay it back.”

Last week, Charter, which is owned by Microsoft Corp. {MSFT} cofounder Paul Allen, announced plans to sell $900 million in junk bonds, the proceeds of which will be used to repay existing debt.

Even so, analysts say pure-play cable companies remain one of the best broadband bets around. Cable, they say, forms one of the strongest legs of a future telecom delivery system that includes wireless and hard-wired technologies offered by the cable industry’s arch rival, telephone companies, such as digital subscriber lines.

“We’re projecting four times as many consumers will be using cable modems vs. DSL by 2003,” says Lisa Pierce, director of telecom-services analysis at Giga Information Group, based in San Jose, Calif. “Cable has a very high viability. We’re starting to see cable users disconnecting from their local phone companies. That is obviously what the cable operators want to see.”

Cable modem service currently has a commanding lead in the race to bring high-speed Internet access to U.S. homes. By year-end 1999, an estimated 1.3 million U.S. homes had high-speed cable access, about five times more than the number of DSL subscribers, according to International Data Corp., based in San Jose, Calif. Wireless operators, by contrast, have yet to make serious inroads into the high-speed Internet-access market.

“Because of the pent-up demand for high-speed Internet access services, the market for cable-modem services will continue to exhibit strong growth through 2000,” wrote Amy Harris, an analyst at IDC, in a recent research report. “However, after 2000, cable-modem services will face impending competition from other high-speed technologies — particularly DSL. The success or failure of DSL network upgrades, marketing and service delivery will have a significant impact on the cable-modem market, and vice versa.”

“The next few years are going to be very dicey,” Pierce agrees. “It’s going to come down to which incumbent carriers do the best job of consumer service.”

Consumer surveys show that high-speed Internet access users are generally reluctant to switch providers if they’re getting good service at competitive prices. That gives cable companies an advantage because of their larger and rapidly growing installed base of high-speed Internet-access customers. It is, however, an advantage that can also be quickly squandered.

Pierce says one of the best ways to determine a cable company’s prospects moving forward is the most intuitive. “You want to know something about their local reputation,” she says. “If they have a good reputation for service and reliability, that would justify more faith in their stock.”

The pending initial public offering of the nation’s eighth-largest cable operator, Mediacom Communications Corp., will gives investors another way to play the cable broadband telecom revolution.

Mediacom, based in Middletown, N.Y., owns the cable that passes about 1.1 million homes across the nation and serves about 740,000 basic subscribers, mostly in non-metropolitan markets. The company is in the process of upgrading facilities to support broadband digital services, which are already available to more than 200,000 Mediacom subscribers.

“They could be an interesting company to watch,” Pierce says.

“They sound like an acquisition target to me,” Kasral says. “I think it’s quite possible that what we’ll eventually get is possibly three or four major cable carriers, and the rest will be really minor.” He says Mediacom’s installed base of customers will likely attract the attention of another, larger competitor before too long.

Kasral is reluctant to predict how the pending Mediacom IPO will fare. Like the other analysts, though, he says cable firms have gotten a bum rap in some quarters lately, a reputation that isn’t related to their prospects in the consumer marketplace.

“Overall, I’d rather be a cable company today,” Kasral says. “Super, super, long term, I’d rather be a wireless company. But for the foreseeable future, the cable operators have some advantages. The key thing is what they do with their data play, their telephony play. That’s what you should really pay attention to. But it would be a mistake to count them out, particularly over the next few years.”

No date has yet been set for the Mediacom IPO, which is expected sometime early this year.

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