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March 21, 2006

The Internet Won't Be Replacing Your Cable TV Anytime Soon

One of the blogs I read regularly belongs to Mark Cuban. In a post last week, Mark discusses his view that lack of capacity in the final mile to the home will limit the ability of consumers to bypass the traditional distributors of TV, cable and satellite companies, any time in the near future. Mark's article borrows heavily from research written by Sanford Bernstein analyst Craig Moffett and testimony that Craig gave before a Congressional Committee. I like the basic concept – the internet is not going to replace TV anytime soon. As I have repeated as nauseum since last summer, the near-term threat to cable EBITDA growth rates is being way overestimated leaving sentiment toward Comcast way too negative, and providing an opportunity for good profits as sentiment shifts to a more realistic view of the company's EBITDA and free cash flow growth over the next few years....

I guess it should have struck me when I was playing with the new Mac Mini Front Row software from Apple Computer (AAPL). Sure, I can hook up the Mini to my new flat panel HDTV and then from across the room I can use my Apple remote to launch iTunes, and watch any video I've downloaded. The question is how will I get enough video into iTunes to make me want to give up my cable (or satellite) TV subscription?

According to the work Moffett's work that Cuban quotes, Verizon will only reach 13% of US household with fiber in 2010. AT&T (T) might reach another 25% with a robust broadband product. That same research claims that to download a HD version of the 40 Year Old Virgin today on a typical DSL line would take 24 hours. So assuming you actually watch TV anywhere close to the typical American household, as of today, there is extremely limited network capability to download what you want to watch. Of course, there is virtually no first run TV content available anyhow.

I am not saying that Comcast is a five year gravy train. It might stop growing or be shrinking by then. I am saying that current sentiment bears little resemblance to the reality of the company's probable financial performance for the next few years. I think a couple of more quarters of double digit EBITDA growth and flat capital spending will shift the sentiment off extreme negative and provide 20% upside.

Posted by Steve Birenberg at March 21, 2006 11:49 AM in Comcast/Cable TV