Cablevision Systems (NYSE:CVC) is the fifth largest largest cable operator in the United States based on the number of basic video subscribers. As of December 31, 2009, CVC served approximately 3.1 million basic video subscribers in and around the New York City metropolitan 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 2009, CVC earned a total of $7.77 billion in total revenues. This was a substantial increase from its 2008 total revenues of $7.23 billion in 2008. As a result, CVC's net income was positively affected by the increase in revenues. Between 2008 and 2009, CVC's net income increased from a net loss of $227 million in 2008 to a net profit of $285 million in 2009.
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 reaches nearly 70%; for internet service, the penetration stands at 45%.
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. 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.
The share of total U.S. advertising spending devoted to Internet advertising has increased rapidly over the past few years. Advertising on cable television grew only 10% annually in the same period. 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. Cablevision's television services segment, the company's largest with 46% of total revenues, depends heavily on proceeds from advertising, thereby putting a significant portion of CVC's future revenues at risk. The continued growth of online advertising at the expense of traditional media threatens Cablevision's profitability.
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. 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.
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.
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.
Although Cablevision is smaller than many of its competitors, 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. 
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.