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December 29, 2005

Continuing the Discussion of Cable Stocks

In response to my latest post on a la carte subscriptions in the cable industry, Rob Martorana, a colleague at StreetInsight.com, emailed me the following comment:

On a completely different note, isn't "on-demand" programming the ultimate form of a-la-carte pricing? And what happens when individual shows are available for $0.99 for one-time viewing? For those of us who don't record everything on TiVo, I would love to be able to browse through the libraries of some channels. In fact, I think their inventory is worth more on an a-la-carte basis than it is via the current cable TV model. It sure would be convenient to pick and choose among all of the old broadcasts of Saturday Night Live, The Twilight Zone, King of Queens, etc. It would be fun to have all of this at my fingertips without having to buy a bunch of DVDs.

Perhaps this is where we are ultimately heading, since convenience adds value to any content. This would turn current economic model upside down. All of the value would accrue to the creators of content, while the distributor is reduced to a "dumb pipe". This has already happened with the Internet distribution of content such as Real Money and Street Insight and other subscription services. It will eventually happen to TV and film, too, because this is what consumers want and I believe they will pay for it.

For my thoughts on Rob's comments, please follow the "Continue reading" link....

In general, I'd agree with Rob's comments. I think the recent deals to distribute TV content over iPods and other deals between cable and satellite companies and content providers are a signal that both industries see that technology is enabling "on demand" programming. These deals are all about getting out in front of the trend so that both content producers and distributors can gain maximum economic value out of the transition. The video industries have learned something from the experience of the music industry, and management's deserve credit for at least making an attempt.

The ultimate outcome is hard to predict as are winners and losers. Like Rob, I see the most value coming from content creators. However, I fear the technological advances driven by broadband will serve to depress the overall profit pie that is available to be split among the interested parties. I think this I partially what is happening to the newspaper industry as pricing collapses for classified and help wanted advertising when it shifts online.

I don’t think all is lost for distributors either. Look at iTunes. Apple Computer (AAPL) is gaining economic value as a distributor, even if most of the value comes through sale of hardware. A similar situation could occur for distributors like Comcast (CMCSK/A) or DirecTV (DTV) if they can be the gateway for downloading video. I am not that optimistic that current gateways will hold in the face of broadband internet but I do think that TV habits among American viewers are deeply engrained and the transition to on demand viewing will be slower than currently feared. I also think that these fears are incorporated into current historically low valuations for the stocks of distributors.

This is pretty much where I am trying to get mentally throughout all of media. Accept the negatives, accept the challenges, but remember that these are now accepted "facts" among investors. I take comfort from the fact that virtually all media stocks are trading near historically low multiples. I still don’t see the catalysts to get the stocks moving but I don’t care about catching the absolutely perfect buy price either. So I'll wait, watch, comment, and keep my media investments spread among the old -- Disney (DIS) – the new -- Yahoo! and the obscure -- Central European Media Enterprises (CETV).

Posted by Steve Birenberg at December 29, 2005 09:03 AM in Comcast/Cable TV