U.S. Cable & Satellite Broadcasting MoffettNathanson CableFax 201… · Comcast Time Warner Cable Charter Cablevision. Broadband penetration growth will be much harder to come by

U.S. Cable & Satellite

Broadcasting

Craig Moffett [email protected]

(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


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


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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


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Broadband growth is now slowing

Broadband Subscriber Growth


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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


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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


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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


Synergies 0.8 1.1 1.5 1.5


Capex

Comcast 8.5 8.3 8.1 8.0 8.2


Synergies (0.2) (0.3) (0.4) (0.4)


Free cash flow

Comcast 10.4 8.0 10.0 10.3 10.9


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


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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U.S. Cable & Satellite Broadcasting MoffettNathanson CableFax 201… · Comcast Time Warner Cable Charter Cablevision. Broadband penetration growth will be much harder to come by