Cable Industry Analysis

Team Peloton:
Steve Corley
Marty Taylor
Jason Shaub
Bala Selvakrishnan
Kal Patel
Objective & Background

‰ To give an overview of the cable industry.

‰ Illustrate the capital intensive nature of this

industry that has few competitors and limited
substitutes.

‰ Show how industry has adapted to becoming a

communications provider and not just a TV
provider.

‰ Overview of Comcast in this rapidly changing

marketplace.
Agenda
z Industry Analysis
z Description
z Market Structure, Size & Pricing
z Demand Factors
z Competitive environment
z Non-economic factors
z Firm Analysis (Comcast Corporation)
z Demand Factors
z Production/Cost Issues
z Market Power, Strategies and Goals
z Market Forecast & Projections
z Macro Environment Impact on Firm and Industry
z Summary
Doing an EMBA
forces us to read!
INDUSTRY
ANALYSIS
Cable TV History
z 1940’s & 50’s
z Began as a means to enhance TV reception
z In 1952 there were 70 systems and 14,000 subscribers

z 1960’s
z By 1962 there were 800 systems and 850,000 subscribers
z FCC expands jurisdiction and places restrictions
z Market ‘freeze’ occurs lasting through to mid-70’s

z 1970’s
z Gradual deregulation begins in 1972 increasing investment
z HBO and WTBS ‘Superstation’ begin as premium channels
z Decade ends with 16 million subscribers
Cable TV History
z 1980’s
z New 1984 deregulation act causes rapid growth
z $15 Billion invested in wiring over 8 year period
z Ended the decade with 53 million subscribers
z Price rises begin to fuel consumer concern

z 1990’s
z New regulations opened ‘exclusive’ programming to other
competitive technologies
z 70% market share retained by Cable TV providers
z Massive investment in ‘broadband’ begins in 1996

z 2000 and beyond

z Dramatic growth with Broadband services
z HDTV, VOD, VoIP
z Today Cable companies are a ‘Broadband Provider’
 Description of Industry

z US Television Households 112,275,000

z Cable TV Penetration 58%

z Annual Cable Revenues $75.2 Billion

z Advertising Revenues $26.9 Billion

z Franchise Fees Paid By Cable $ 3.0 Billion

Source: NCTA estimated Statistics

Market Structure
Cable Providers:

98% of homes
only have ONE
choice for their
cable provider

Satellite Providers:

Available
nationwide
Cable TV compared to DBS

70

60
Subscribers (Mil.)

50

40 Dish/Direct TV =30.2M
subscribers as of
30 September 2007

20

10

0
Cable TV Dish DirectTV
 Top 5 Cable Providers

25,000,000

Top 5 Cable Companies

represent 80% of the approx.
20,000,000
1,200 Cable operators

15,000,000

10,000,000

5,000,000

0
Comcast Time Warner Cox Charter Cablevision

Source: NCTA
 Cable Price to CPI
• 1986-’92 $15bn investment in wiring
• Legislation opens channels to Satellite 1996 to 2002 $65bn
16.0% providers investment in
broadband
14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
86

87

88

89
90

91

92

93

94

95

96

97

98

99

00
01

02

03

04

05

20 06

)
(e
19

19

19

19
19

19

19

19

19

19

19

19

19

19

20
20

20

20

20

20

20
07
Cable Price Change CPI All Items

Source: NCTA (Average Price for Expanded basic) and BLS for CPI statistics
 Cable Price to CPI
You now pay 48% more for Expanded Basic than you did in 1986*
260
1986 = 100
240

220

200

180

160

140

120

100
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05

07 6
)
(e
0
19
19
19
19
19
19
19
19
19
19
19

19
19
19
20
20
20
20
20
20
20
20
Cable CPI

Source: NCTA (Average Price for Expanded basic) and BLS for CPI statistics
Basic Cable Channels

Service Elements 1995 1999 2004

Basic $               ‐ $           12.47 $           13.80
Expanded $               ‐ $           16.93 $           27.24
Programming $               ‐ $           29.40 $           41.04
Equipment $               ‐ $             2.74 $             4.28
Total $           24.34 $           32.14 $           45.32
Channels 43.6 52.4 70.3
Price per Channel $          0.604 $          0.640 $          0.660

ƒExpanded Basic increased 9.3% per channel basis

ƒCPI increased by 16.4% during the same period

FCC (MM Docket No. 92.266) Feb 4th, 2005 (pg 20)
 Price to Amount of Subscribers

Time Period 1986 to 2007

Basic Cable to Subscribers

70

65

60
Subscribers

55

50 Subscribers peak in 2001

Price rises trend nearer to CPI
45

40

35

30
$10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00
Price

Source: NCTA
Industry Price Elasticity

z Basic cable prices are

inelastic due to these keys
reasons:
z There are currently a
lack of substitutes
z Cable is a natural
monopoly in nearly all
markets
z Difficulties associated
with change
z People will not forego
television
 Cost & Production Issues:
Industry Profitability

$0 0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006
-$1,000

-$2,000 -5

-$3,000

-$4,000 -10

-$5,000

-$6,000 -15

-$7,000

-$8,000 -20

-$9,000

-$10,000 -25

Net Income (Mil. $) Net Profit Margin (%)

Source: Economy.com
Production & Cost issues:
Capital Investment

Over $130 billion invested in the last 12 years!

 Broadband Deployment

Source: NCTA
Broadband Pro’s and Con’s
Non-Economic Factors

z Growth comes from added

services and market segments.
“TV is a mature market.”
z Customer perception of Cable
Companies (Customer Service)
z Government or FCC involvement
z Technology changes
z Added Competition
(AT&T/Verizon)
“Comcast will be the company to look to first for the
communications products and services that connect
people to what's important in their lives.”
 Demand Factors:
Additional Services
Revenue by Product and Total Average Revenue per Basic Subscriber

Merrill Lynch 3rd Quarter Media and Entertainment Conference Presentation 9/17/2007
Demand Factors:
Digital Enhancements

Merrill Lynch 3rd Quarter Media and Entertainment Conference Presentation 9/17/2007
Comcast Financial Performance

$25,000 z Comcast acquisition of

AT&T doubles the size
$20,000 of the company making
it the US largest cable
$15,000 provider (2002/2003).

$10,000
z Income growth through
$5,000
leveraging scale with
the addition of new
$0 services

-$5,000
2002 2003 2004 2005 2006
Sales $Mil $7,997 $17,330 $19,221 $21,075 $24,966
Operating Income $Mil $948 $1,938 $2,829 $3,521 $4,619
Net Income $Mil -$274 $3,240 $970 $928 $2,533
Production and Cost Issues
$ 2 5 ,0 0 0  
AT&T/Comcast
Merger
$ 2 0 ,0 0 0  

$ 1 5 ,0 0 0  
S
N
O
IL
LI
B
$ 1 0 ,0 0 0  

$ 5 ,0 0 0  

$‐
2002 2003 2004 2005 2006
To tal R e v e n u e $ 8 ,1 0 2   $ 1 8 ,3 4 8   $ 1 9 ,2 2 1   $ 2 1 ,0 7 5   $ 2 4 ,9 6 6  
C o st o f R e v e n u e , To tal $ 3 ,0 1 2   $ 7 ,0 4 1   $ 7 ,0 3 6   $ 7 ,5 1 3   $ 9 ,0 1 0  
S e llin g/G e n e r al/A d m in istr ativ e  
$ 2 ,2 5 4   $ 4 ,9 1 5   $ 5 ,0 0 5   $ 5 ,4 9 0   $ 6 ,5 1 4  
Ex p e n se s, To tal
D e p r e c iatio n /A m o r tizatio n $ 1 ,9 1 5   $ 4 ,4 3 8   $ 4 ,3 5 1   $ 4 ,5 5 1   $ 4 ,8 2 3  
 Comcast Capital investment

76% of 2006 Capital Spend is on new services

4.5

3.5

3
$ Billions

2.5

1.5

0.5

0
2004 2005 2006

Recurring Capital Projects Upgrading Cable Systems New Service Offering

Source: Comcast 2006 Annual Report

Comcast Subscriber Growth

30,000,000
AT&T Broadband
merger doubles
size of Company
25,000,000

Growth through
acquisition to
20,000,000 leverage
economies of
scale
15,000,000

10,000,000

Tupelo, MS
5,000,000

0
1963 1986 1988 1994 1995 1998 2000 2002 2005 2006 2007
Strategies & Goals

z Sustainable Double-Digit Growth

z Smart Capital/Expense Spending
z Greater Customer Focus
z Superior Products Powering Business
z Expand HD and VOD capabilities
z Super High Speed Internet (Docsis 3.0)
z Establishing New Growth Opportunities
z Commercial
z Interactive Advertising
FORECAST, PROJECTIONS,
RECOMMENDATIONS
Reduce Costs of Production

z Increase/Maximize SIK’s (self install kits) for

consumer products
z Focus on Customer Service
z Churn Reduction (keep what you have!)
z Satisfied Customers…”word of mouth”
z Increase efficiencies/decrease installation times
needed for technicians
z Reduce outsourcing
 Growth Opportunities

New Growth Opportunities

Business Services
¾Significant Opportunity within the Footprint
ƒSMB(1) : $12-$15Bn(2) ; 5MM Businesses
ƒ Goal: Capture 20% of the Market
¾Natural Extension of the current Network and Services
¾Proven Business Model with Strong Returns

Interactive Advertising
ƒUnique 2-Way Platform and Scale
ƒEstablishing Industry-wide Effort
ƒIncreasing cable’s share of $290Bn
(1)Estimates of 2006 revenue and businesses
(2)Excludes cellular backhaul

Merrill Lynch 3rd Quarter Media and Entertainment Conference Presentation 9/17/2007
MACRO ENVIRONMENT & THE
IMPACT ON FIRM & INDUSTRY
 Economic Factors:
Cable Industry to GDP
18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
1998 1999 2000 2001 2002 2003 2004 2005
% of GDP 0.43% 0.47% 0.51% 0.53% 0.58% 0.61% 0.63% 0.64%
GDP Growth 6.35% 7.66% 0.66% 1.52% 4.95% 7.97% 7.36%
Cable networks growth 16.03% 17.14% 4.18% 9.82% 11.62% 10.38% 9.06%

Industry continues to grow at a faster rate than GDP

Source: BEA.GOV by Industry GDP

 Economic Factors:
Real GDP
Cable Industry follows the GDP trend
5

4.5

3.5

2.5

1.5

0.5

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FC FC FC

Real GDP % Change

Source: Forecast of the Nation GSU Economic Forecasting Center

 Economic Factors:
Disposable Income
A reduction in disposable income impacts spend on Cable services

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FC FC FC

Real Disposable Income

Source: Forecast of the Nation GSU Economic Forecasting Center

 Economic Factors:
Housing Starts
A reduction in residential reduces the growth in RGU’s
15

10

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FC FC FC
-5

-10

-15

-20

Residential Construction

Source: Forecast of the Nation GSU Economic Forecasting Center

Economic Factors:
CPI – Cable CPI vs Channels
4

3.5

3
% change year to year

2.5

1.5

0.5

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FC FC FC

Consumer Price Index

2000 2001 2002 2003 2004 5‐Year Avg. Change*

CPI 181.3 186.2 190.3 191.8 194 2.10%
Cable CPI 267.3 279.7 297.3 303.6 315.2 4.60%
No. of Channels 56.3 59.4 ‐‐‐ 67.5 70.3 6.30%

FCC (MM Docket No. 92.266) Feb 4th, 2005 (pg 20)
Summary
z Highly capital intensive industry.
z Industry consolidation likely to continue due to high capital
requirements.
z Competition with satellite and new entrants (Fios/U-vers)
likely to challenge cable market share.
z New technologies could impact cable industry and shift focus.
z Comcast is a dominant player and IS profitable compared to
the industry.
z Cable is a “natural” monopoly due to entry costs.
z Industry is no longer solely TV, they are now an:
“Entertainment and Communication Provider”
Cable Industry Appendix
Modern Cable Infrastructure

HFC - Hybrid Fiber Coax

Interfaces to other networks

Master
Headend Regional
Regional Secondary
Primary Ring Headend
Headend Ring
Hub

Cluster of about CATV-Net

125 -2000 customers Optical Nodes
 Forecast & Projections
High Definition TV

Source: Third party research & Direct TV estimates

Power Increases with Their Size
z As cable companies have grown larger and increased their geographic
reach, they’ve gained more resources and power when they negotiate with
a single city or choose to raise prices

Enterprise Value
(as of March 2004) z Comcast is the largest of
the cable companies,
in billions
with an enterprise value
Time Warner $101
of $91 billion
Comcast $91
z Time Warner’s value
includes major non-cable
Cox $27
holdings such as AOL,
publishing, etc.
Charter $20

Enterprise value = total equity (a.k.a.

Adelphia $17
market cap) + the total debt and
measures the total capital of the company.
Cablevision $15
Franchise Rights Granted by
Municipalities Are Companies’ Most
Valuable Asset
z The franchise right is the Cable Company Assets
largest asset on a cable
company’s books
Franchise rights Goodwill &
z At Comcast, the franchise intangibles
right represents 43% of the 21%
43%
company’s assets.

17%
The franchise right the 20%
city grants is the most Plant, property
Cash, current assets, & equipment
important asset of the
other investments
cable company and the
city should insist on Source: Comcast financial statements, as of
12/31/03. Comcast’s asset distribution is typical.
fair value for it.
Cable Subscribers Are Valued at
$3,820 Each
z The average value per cable subscriber (total “enterprise value” divided by the
number of cable subscribers) is about $3,820.

Cable- Time
Adelphia Charter Comcast Cox
vision Warner*
Cable 21,468,00
5,100,000 2,960,000 6,537,000 8,400,000 4,300,000
Subscribers 0
Enterprise Value
$17.0 $15.3 $19.8 $90.9 $26.9 $100.95
(billions)
Not
Value per Sub $3,333 $5,169 $3,034 $4,236 $3,202
meaningful
*Figures are for all of Time Warner; separate financials for Time Warner Cable not available.

Weighted average value per sub: $3,820

z This is the value that company owns because the municipality has granted it the
franchise right.
 Consistent Growth in Cable

Cable Revenue, OCF, Growth Rates and Margins

(OCF & Revenue in billions) +11%

3Q05 3Q06 3Q07

(Green) OCF (Orange)Revenue OCF Margin

Comcast 3rd Quarter 2007 Results October 25, 2007 (Presentation)

Comcast Share Price History

Comcast has underperformed compared to all stocks on the NASDAQ

 Demand Factors:
Additional Products: Triple
Play Power
Bundled Packages
RGU Growth

Merrill Lynch 3rd Quarter Media and Entertainment Conference Presentation 9/17/2007
Demand Factors: Phone Service

Merrill Lynch 3rd Quarter Media and Entertainment Conference Presentation 9/17/2007
Demand Factors:
High Speed Internet