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U.S. Cable & Satellite
Broadcasting
Craig Moffett craig@moffettnathanson.com
(212) 519-0021
CableFAX Boot Camp
March 2014
The Last Ten Years: The “Cable as Infrastructure” bull case has
emerged as a broadly embraced consensus
The Three Tenets
1) The TelCos will not overbuild cable with fiber on a large scale
2) Wireless will not emerge as an economically viable substitute to wired broadband
3) Usage-based pricing
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Tenet 1: Cable will emerge as dominant terrestrial infrastructure
Cumulative Distribution and Achievable Speeds of U.S. Broadband Service
Source: FCC, MoffettNathanson estimates and analysis
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...and that advantage only grows as the availability/demand for
higher broadband speeds increases
Nielsen’s Law: Maximum Download Speed Permitted
Source: Jakob Nielsen, MoffettNathanson estimates and analysis
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Tenet 2: Wireless is not an economically viable substitute
Three Arguments
1) Wireless capacity was constrained at 3G; the step up to 4G is a ~3-5x
improvement in capacity… at a time when data demand is doubling every year and new gen networks come once every ten years
2) Wireless usage caps kick in at usage levels that are ~1/15th those of terrestrial… and usage fees are the cornerstone of wireless growth case
3) Math: 300K towers for 300M subscribers, @ 2.3 persons per household, with 20 MHz per tower in three 120° arcs, equals 0.15 MHz per household… versus Cable at 750 MHz and ~10x better spectral efficiency (~50,000x difference)
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Tenet 3: Usage-Based Pricing
A Brief Background
Preservation of “transport function” even if and when video shifts to Internet-based delivery… not just an ARPU boost, an insurance policy
Promised as “inevitable” as early as ten years ago Expressly endorsed in 2010 Open Internet Order at FCC
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“Video margins” have declined… but the “video transport charge”
has remained roughly constant
Cable Video Gross Profit Margins (%),
2007 to Present
Cable Video Transport Margin per
Subscriber ($), 2007 to Present
Source: Company reports, MoffettNathanson estimates and analysis Source: Company reports, MoffettNathanson estimates and analysis
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The comfortable consensus… a simple growth model
Contributors of Cable Gross Profit Growth
Source: Company reports, MoffettNathanson estimates and analysis
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But… programming costs are rising at an unsustainable rate
Cablevision: Programming
Cost per Subscriber
DirecTV U.S.: Programming
Cost per Subscriber
Time Warner Cable:
Programming Cost per
Subscriber
Source: Company reports, MoffettNathanson estimates and analysis
Past three years CAGR = 10.5% Past three years CAGR = 7.7% Past three years CAGR = 6.7%
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Sustaining ARPU growth rates sufficient for transport revenue
stability is increasingly challenging
DirecTV U.S.: ARPU Growth Required to Sustain Transport Revenue per Subscriber
Given a Level of Programming Cost Growth
Source: Company reports, MoffettNathanson estimates and analysis
10
Pay TV penetration is falling faster than the new household
formation is rising
Changes in Pay TV Subscribership Attributable to Household Formation and Pay
TV Penetration
Source: Company reports, MoffettNathanson estimates and analysis
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Broadband growth is now slowing
Broadband Subscriber Growth
Source: Company reports, MoffettNathanson estimates and analysis
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Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
Cable
439 156 287 341 433 187 297 379
227 72 98 89 143 21 (9) 56
147 37 78 61 108 52 98 105
32 23 19 (12) 23 1 (13) 6
Other cable 366 100 193 166 282 77 187 240
1,211 388 675 645 989 338 560 786
6.1% 6.2% 6.3% 6.0% 5.4% 5.3% 5.0% 5.2%
103 (96) (42) (2) 124 (63) (26) (2)
104 2 (8) 27 99 45 56 20
Other TelCo 115 31 62 47 96 13 51 64
322 (63) 12 72 319 (5) 81 82
1.9% 1.5% 1.2% 1.0% 1.0% 1.1% 1.3% 1.4%
1,533 326 687 718 1,308 333 641 868
YoY subscriber growth 4.3% 4.2% 4.2% 3.9% 3.6% 3.6% 3.5% 3.6%
Verizon
Total
YoY subscriber growth
Total
Net additions
Total
YoY subscriber growth
TelCo
AT&T
Comcast
Time Warner Cable
Charter
Cablevision
Broadband penetration growth will be much harder to come by
Broadband Penetration and Broadband Penetration of Homes with Computers
Based on Income Cohort (2012)
Source: Leichtman Research Group
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Here’s what happens when retail pricing can’t keep pace with
programming cost inflation
Cablevision: Cable Gross Profit Growth Drivers, 4Q12-3Q13
Source: Company reports, MoffettNathanson estimates and analysis
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Portion of Contribution
gross contribution Price Volume Growth rate to growth
Video 49% -11.1% + -2.7% = -13.5% -6.6%
Broadband 32% 6.1% + 1.3% = 7.5% 2.4%
Voice 16% -2.0% + 1.6% = -0.4% -0.1%
Advertising 3% N/A + N/A = 3.5% 0.1%
100% Total growth -4.2%
Usage Based Pricing is (was?) the outlet valve… but the window
may have closed
The Timing Problem
The pro argument • UBP increases fairness, and aligns interests of distributors with online
providers (no longer have an incentive to resist)
The con argument • UBP would naturally suppress demand for OTT due to higher effective prices
1) UBP before a mass market online substitute would slow adoption (and,
ironically, would protect satellite as well)
2) UBP after a mass market online substitute would crush competition… and invite regulatory intervention
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The all-important regulatory backdrop for 2014
Three Milestones
1) DC Circuit has vacated “non-discrimination,” but has affirmed broad (if amorphous) FCC authority…
2) …leaving a void where Net Neutrality used to be… and inviting a backlash from Google, Netflix, and others
3) Reauthorization of STELA (Satellite Television Extension and Localism Act), with potential actions on Aereo, retrans, and who knows what else
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Comcast/TWC deal opens door to regulatory conditions
Who Will Ask for What?
1) Netflix: With paid peering deal in place, attention will turn to usage based pricing
2) Level 3 and Cogent: Netflix may have settled the paid peering issue… but Level 3 and Cogent haven’t
3) DirecTV and Dish: Bundling discounts for cable broadband disadvantage satellite and arbitration for sports nets and NBC retrans
4) Online video providers: Access to NBCU programming
5) Programmers: Restraints on negotiating leverage (arbitration?)
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How far will regulatory concessions reach?
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Broadband Video
Net Neutrality
Low cost broadband
Usage Based Pricing
Program access rules
NBCU arbitration
OTT program access
Retrans/ Peering rules Regional sports
Prohibition on two-sided
markets
Bandwidth caps
E-Rate/schools
Wi-Fi Network access unbundling
3M subscriber divestitures
Source: MoffettNathanson
Plug & play STBs/ IP outputs
Leverage would shift from pro-broadcaster to pro-distributor (I)
Comcast, TWC, and Pro-Forma versus Majors
(schematic)
Source: Nielsen, Moffettnathanson estimates and analysis
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TWC CMCSA Pro forma
Leverage would shift from pro-broadcaster to pro-distributor (II)
Comcast vs. Broadcasters TWC/Comcast vs. Broadcasters
Source: BIA/Kelsey, SNL Kagan, Company reports, Moffettnathanson estimates and analysis
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TWC vs. Broadcasters TWC/Comcast vs. Broadcasters
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Source: BIA/Kelsey, SNL Kagan, Company reports, Moffettnathanson estimates and analysis
Leverage would shift from pro-broadcaster to pro-distributor (III)
21st Century Fox and Time Warner both have deals coming up over
the next two years
Estimate Affiliate Fee Negotiation Schedule
Source: Company reports, MoffettNathanson estimates and analysis
22
Distributor 2010 2011 2012 2013 2014 2015
CMCSA CBS FOXA-RSNs DIS DISCA FOXA-YES TWX
SNI FOXA
VIAB
TWC DIS FOXA CBS FOXA-YES
DISCA TWX
VIAB
FCF accretion for TWC/Comcast depends on synergies and
repurchases
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Pro-Forma FCF per Share Pro-Forma Summary
Source: Company reports, MoffettNathanson estimates and analysis Source: Company reports, MoffettNathanson estimates and analysis
2014E 2015E 2016E 2017E 2018E
Revenue
Comcast 68.9 71.0 75.1 76.6 79.7
Time Warner Cable 23.1 24.0 25.4 26.7 28.2
Comcast pro forma 92.0 95.0 100.5 103.3 107.9
EBITDA
Comcast 22.6 23.3 24.6 25.3 26.4
Time Warner Cable 8.4 8.8 9.3 9.7 10.4
Synergies 0.8 1.1 1.5 1.5
Comcast pro forma 30.9 32.8 35.1 36.5 38.3
Capex
Comcast 8.5 8.3 8.1 8.0 8.2
Time Warner Cable 3.7 3.8 3.9 3.8 3.7
Synergies (0.2) (0.3) (0.4) (0.4)
Comcast pro forma 12.2 11.9 11.6 11.4 11.6
Free cash flow
Comcast 10.4 8.0 10.0 10.3 10.9
Time Warner Cable 2.6 2.4 2.9 3.4 3.7
Synergies 1.0 1.4 1.9 1.9
Synergy tax adjustments (0.3) (0.5) (0.7) (0.7)
Interest adjustments 0.0 0.0 0.0 0.0
Comcast pro forma 13.1 11.1 13.8 14.9 15.8
Repurchases, dividends, and leverage
Share repurchases 6.0 8.0 10.0 12.0
Dividends 3.5 4.0 4.3 4.4
Leverage 2.1x 1.9x 1.7x 1.6x 1.6x
($ billions)
Note: assumes a 12/31/14 deal close, and ignores divestitures and integration costs
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