Cable companies face tough market, skeptical investors

As the reality of delivering advanced digital services to connected consumers sets in, the cable industry is feeling a little defensive.

4 min read
LOS ANGELES--As the reality of delivering advanced digital services to connected consumers sets in, the cable industry is feeling a little defensive.

Saddled with large capital debts and slumping stock prices, many cable operators aren't enjoying the same crest of excitement as they did in the late 1990s when massive mergers and ambitious plans for new services were being announced. Stock prices skyrocketed then, and cable operators were the darlings of Wall Street.

Not anymore. Shares in some of the largest cable companies have fallen precipitously. AT&T stock is down close to 62 percent on the year, while Comcast has shed more than 21 percent since Jan. 1. Upgrading networks and testing new services and billing systems are now the mundane but necessary tasks at hand.

So when the cable industry's leaders gathered here this week for The Western Show, an annual industry convention, you would have to excuse them for being a tad edgy. It seems as if they've heard one too many criticisms about their low stock prices and slow launches of next-generation interactive services, such as high-speed Net access, interactive television and cable telephony.

"(Cable industry leaders) are sensitive to stock price. They always have been. It's the nature of the animal," said Michael Harris, president of Kinetic Strategies, a broadband market research firm.

"In terms of (Internet) services, cable is kicking butt. They've got about a 3-to-1 lead over DSL," Harris said. "Cable telephony is going slow, but no slower than anyone should have expected. If there's egg on the face, it's with interactive TV. I think it's been more difficult than the cable operators would have hoped."

In North America, Internet cable modems serve nearly 4.4 million customers while DSL has about 1.5 million residential users in North America, according to Kinetic Strategies research.

After years of promises wrapped in a glowing future of a connected home, cable industry executives continue to insist their vision will happen, but it'll take some time. Those words have been spoken before at conferences such as this, prompting a more defensive tone from a united front of the industry's elite thinkers at this week's gathering.

"There's a lot of impatience out there. It doesn't happen overnight. It's sneaking up. It's happening as we speak. This business is interactive," said Dan Somers, chief executive of AT&T Broadband.

Top executives and most analysts agree that cable is only being held back by its own ability to deliver services. Most cable-based services have traditionally required a technician to drive to a customer's home in order to physically activate an order, but cable operators are attempting to rectify that.

"Getting it out there is the only issue at this period," said Barry Diller, chief executive at USA Networks, a major TV programmer. "It takes times to roll this stuff out. It's near. It's almost there."

Clearly the future is dependent on investing heavily now, even though it means that some investors will grow weary.

"Our job is to gain market share now," Somers said. "Our job is to deploy it. Yes, it costs money. Yes, it takes capital."

Still, although capital certainly is not easy to come by, time may not be a luxury cable operators--and their partners and suppliers--have.

After all, the see story: Find a broadband providerBaby Bell local phone companies, slow at first in launching fast Net access over their phone systems, have escalated their efforts to install digital subscriber lines (DSL). Meanwhile, satellite TV providers, small competitive phone companies, and other technologies and competitors have plans of their own.

"I think cable is a better mousetrap if it can get to the customer first," said Liberty Media chairman John Malone. "If not, it'll be a divided landscape. This is a race."

In racing toward a broadband future, executives at the show acknowledged that sometimes there is a disparity between hype and reality. Admittedly, they're two different things.

"It starts with this great theory, and then the market gets all overheated about it," Malone said. "And it doesn't happen right away, so people get discouraged. But then it sneaks up on you."

The industry serves about 68 million basic cable subscribers, up from fewer than 20 million customers in 1980, according to Paul Kagan Associates, a cable market researcher.

Now the industry is hoping to sneak up on some other competitors, such as the Baby Bells, satellite service providers and others.

Already, AT&T and Cox Communications have done a nice job of installing cable-based local phone service. Time Warner and Canadian cable operators Shaw Communications and Rogers Cable have aggressively launched high-speed cable modem Internet services. Most major cable operators are testing interactive television or have signed similar technology deals.

"The three keys to success for the cable industry are maintaining a regulatory environment that encourages investment, executing properly on our strategy, and offering consumers competitively priced services and excellent customer service," said Robert Sachs, president of the National Cable Television Association, a lobbying and trade organization.

However, getting Wall Street to recognize the long-term potential is no easy task. "The market doesn't understand deferred gratification," Malone said.