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Katerina Semida

CVC AT A GLANCE

P/E ► -64.5   EV/EBITDA ► 7.96 AVG ROA ► 6.6% AVG Debt to Equity ► -2.95   Current Ratio ► 0.947 AVG Interest Coverage Ratio ► 0.811 AVG

 

 

 

 

 

 

The sixth largest cable company in the nation, Cablevision has over 3 million subscribers, primarily in the New York area. In addition to national and regional cable networks, Cablevision owns diverse assets including Madison Square Garden, the Clearview Cinemas movie theaters, and the New York Knicks team.

The company's cable television segment is its largest, thus making trends in the advertising industry--both total spending and the the growth of Internet advertising--key influences on financial performance. The industry's trend towards bundling telecommunication services such as cable TV, broadband access, landline phone services and Voip has helped fuel the company's growth, and it enjoys the highest revenue per customer in the cable TV industry, earning over $115 in monthly fees per customer in 2006.

Business Financials

Cablevision's revenues have grown steadily over the last five years, driven by a continuously expanding product lineup which now includes digital cable, high-speed internet access, and telephone services. Profitability has increased as well: operating income rose from approximately 4% of revenues in 2002 to over 10% in 2006.

Cablevision boasts the highest revenue per basic video customer in the cable industry. This amount has increased from $66 per customer five years ago to $115 in 2006, an implied compound annual growth rate of 11%.

The company owes its profitability to remarkably high penetration rates in its markets. Penetration refers to the number of homes serviced by the company relative to the number that could potentially be connected to its network without further extending transmission lines. For television service, this rate reached nearly 70% in 2006; for internet service, the penetration stood at 45% in the same year.

Key Trends, Risks and Forces

• Consumer Adoption of VoIP: Since Cablevision's penetration rates in television and internet services are very high, VoIP, or Voice over Internet Protocol, offers the most growth potential for the company. Subscribers to VoIP can use their broadband internet connection to make phone calls, substantially lowering costs without sacrificing call quality. VoIP is a rapidly growing market, expected to reach $10 billion by 2010 as businesses--only about a quarter of which currently use VoIP--join consumers in adopting the technology.^[4] As with any new technology, however, providers such as Cablevision must overcome initial mistrust and reluctance to change from customers to convince them to replace their landline phones.

• Shift of Advertising Dollars from Traditional Channels: The share of total U.S. advertising spending devoted to Internet advertising has increased rapidly over the past few years, growing at a rate of 18% annually from 2001-2006. Advertising on cable television grew only 10% annually in the same period. ^[5] The Internet offers advertisers a high level of flexibility in presenting their message to the consumer at a lower cost than traditional 30 second TV spots.^[6] Cablevision's television services segment, the company's largest with 46% of total revenues, depends heavily on proceeds from advertising. ^[7] The continued growth of online advertising at the expense of traditional media threatens Cablevision's profitability.

• Impact of an Economic Slowdown on Advertising Spending: Spending on advertising is highly correlated with general economic growth, which makes such macro factors as oil prices and the U.S. housing market key concerns for Cablevision. Advertising spend in 2007 grew less than 1% over the previous year due to weakness in the housing market and growing fears of a recession. With the effects of the subprime crisis continuing to spread, 2008 may be another weak year. ^[8] As Cablevision's penetration in television services is already very high, future revenue growth from new subscribers cannot continue at the same pace the company has seen over the past few years; thus, advertising will become an increasingly important source of revenue growth for the television segment.

• State and Local Regulatory Decisions Relating to Franchising Requirements: Cablevision is subject to strict regulation of most aspects of its business, ranging from the rates it may charge to the programming it is allowed to broadcast. A key area of regulation is franchising; in order to offer its services in a particular area, a cable provider must create a franchise with the local government, which then imposes franchise fees and certain administrative requirements on the company. Both the federal and state governments have considered relaxing such franchising requirements for telephone companies and other competitors of the cable industry. In 2006, Connecticut declared that franchising requirements did not apply to AT&T's video services, a decision currently being challenged in court by the cable industry. The outcome of this lawsuit and future legislation regarding franchising requirements for Cablevision's competitors could hurt the company's ability to compete effectively. ^[9]

Competition

Cablevision’s main service, the “triple play” combination of television, Internet access, and phone services, currently competes with similar bundles offered by Comcast and TimeWarner Cable. Telephone companies, such as AT&T and especially Verizon, are actively developing television and internet services to compete with Cablevision as well. Digital satellite TV providers such as Echostar and DirecTV compete with Cablevision’s cable offerings.

• Comcast (CMCSA) The largest cable company in America, Comcast faces saturation in the video market, and is now focusing on marketing its triple play package to existing customers. The company introduced VoIP later than competitors; its penetration rates in that area are about 5%.
• Time Warner Cable Time Warner Cable, the second largest cable provider in the US, serves 13.5 million customers in 33 states. The first in the industry to offer customers new services such as VoIP, caller ID on television, and web clips on television, Time Warner's commitment to continuous technological innovation is a threat to Cablevision. ^[10]
• AT&T (T) & Verizon Communications (VZ) Threatened by Cablevision’s VoIP offerings, AT&T and Verizon are actively investing in fiber networks in order to provide a similar triple-play bundle of services. The companies already offer VoIP and Internet service, and face a favorable regulatory environment as they prepare to launch their video services. Verizon especially is a threat, as the company has traditionally provided telephone service in the New York metropolitan area. Currently, Verizon’s existing infrastructure makes it possible for the company’s television services to reach 20% of Cablevision customers; this number projected to grow in the future. ^[11]
• The DirecTV Group (DTV) and EchoStar Communications (DISH) DirecTV and EchoStar are the two primary digital satellite television providers in the U.S.; they account for 27% of the total market for multichannel television programming services. Due to a wider content offering (over 300 channels and exclusive arrangements such as DirecTV’s partnership with the NFL) and less strict regulation, these companies are formidable competitors to Cablevision. ^[12]

Although Cablevision is smaller than many of its competitors (see chart above), the company has been able to lead the industry on metrics such as revenue per customer and penetration. Cablevision’s foothold in the New York metropolitan area is an important competitive advantage, providing the company with one of the wealthiest and most technologically savvy customer bases in the nation. The New York market is also characterized by high population density, which allows Cablevision to reach customers with minimal infrastructure, keeping operating costs low. ^[13]

The company’s bundling strategy is key to its success. Bundling refers to offering customers several complementary services at a discounted price. For instance, two thirds of Cablevision’s video customers are also subscribers to its broadband Internet service, while over 40% of video customers use its telephone services; the industry averages for these metrics are approximately 50% and 12% respectively. Bundling also allows Cablevision to effectively compete with satellite television providers, who offer only television service, and telephone companies, who have not yet developed the capability to offer the triple-play combination.^[14]

Footnotes

1. ↑ CVC 2006 10-K Item 6 Selected Financial Data p. 38
2. ↑ CVC 2006 10-K Item 6 Selected Financial Data p. 42
3. ↑ CVC 2006 10-K Item 6 Selected Financial Data p. 42
4. ↑ "Us National Telecom - VoIP Market Continues Explosive Growth." Market News Publishing. 7 December 2007
5. ↑ Impact of Internet Advertising http://www.wikinvest.com/concept/Impact_of_Internet_Advertising
6. ↑ Kate Bulkley. "The digital persuaders." The Guardian 24 September 2007
7. ↑ CVC 2006 10-K Item 7 Management's Discussion and Analysis p. 44
8. ↑ Joshua Chaffin. "US advertising faces 'another poor year'." Financial Times (FT.Com) December 4, 2007.
9. ↑ CVC 2006 10-K Item 1 Business p. 24
10. ↑ Time Warner Cable Corporate Website www.timewarnercable.com
11. ↑ CVC 2006 10-K Item 1 Business p. 13
12. ↑ CVC 2006 10-K Item 1 Business p. 13
13. ↑ CVC 2006 10-K Item 1 Business p. 12
14. ↑ CVC 2006 10-K Item 1 Business p. 13