by Nick Mitsis
Watching the ebb and flow of the various programming companies on Wall Street recently has provided a picture of the satellite industry’s validity and its long-term worth to financiers. From television to radio, satellite-enabled broadcasting services are definitely leaving their mark and everyone is noticing.
As this issue of Via Satellite went to press, the first quarter of 2005 was closing. Cable and Direct-To-Home (DTH) advancements in Europe maintained the attention of industry analysts; heated activity churned night and day throughout the executive halls of Voom’s headquarters; and radio rivals in the United States, XM Satellite Radio and Sirius Satellite Radio, remained strong in the eyes of financiers. Overall, the first quarter provided no rest for the weary.
Cable and Satellite TV Competition Heats Up
Changes in regulatory policy and the re-emergence from bankruptcy of two cable operators have increased competitive pressure for all players within the U.K. cable and satellite television arena. Some analysts predict this trend to continue through the end of the decade.
The U.K. TV market has changed dramatically throughout the past few years as the government pushed its digital agenda and sought to open programming distribution, while the two largest cable operators emerged from bankruptcy. For the PayTV providers, the regulatory changes have had mixed results. "The push toward digital cable has enhanced cable’s offering, making it more competitive with satellite," said Thom Eagan, vice president of Oppenheimer Subscription TV Research, in one of his first quarter equity reports. "But the increased competitive environment has led to pricing pressure. Perhaps more important was the appointment and support of Freeview as the country’s free, digital broadcast service. Freeview has enjoyed tremendous customer growth throughout the past several years, disrupting the current and, we expect, future market shares of PayTV providers."
According to those reports from Oppenheimer, the PayTV market share of TVHH will rise from 43 percent at EOY2004 to only 47 percent by EOY 2006 while multichannel TV will rise from 64 percent to 81 percent. Likewise, analog broadcast market share, according to Eagan, will fall from 34 percent to 17 percent during the same time frame. "The big beneficiary is free TV, largely comprised of Freeview, whose unduplicated share will rise from 21 percent to 33 percent by 2006," he added.
For the U.S. satellite broadcasting arena, some analysts expressed a more conservative view regarding this market. Douglas Shapiro, analyst with Banc of America Securities said in his reports that the U.S. cable market is fairing a bit better than its satellite colleagues.
"Cable stocks have rallied throughout the last few months [September 2004-January 2005], with Comcast and Cablevision up 27.8 percent and 35 percent, respectively, since the end of September, compared to 5.5 percent for the S&P 500," he notes. "We expect the stocks to retain solid momentum in the short term. We forecast good operational results and also expect that the continuing ramp of VoIP at Cablevision and initial VoIP results at Time Warner will solidify the growing belief in the market that the immediacy of the cable VoIP opportunity is far greater than the immediacy of the Bellfiber threat."
Shapiro, however, was more conservatively optimistic regarding DirecTV and EchoStar. He said that some investors remain concerned about the prospect that the cost structure will continue to rise and lately, "we have perceived more concerns about how DBS will compete as cable operators and Bells increasingly focus on selling bundles of service," he added.
Banc of America investors further say they will remain positive on the intermediate-term DBS investment case because, "We think the stocks are inexpensive, we believe it will take a long time before the Bells’ efforts to offer on-net video has any real impact on the market and we expect DBS companies to show a substantial earnings inflection before then."
Shapiro added that "Investors will remain focused on DirecTV’s guidance for signals about the direction of costs in 2005 and on any indications of whether EchoStar will continue to direct its excess debt capacity to shareholders."
Voom Survival in Question
One of the most interesting events within the broadcasting arena in the first quarter was the unfolding fate of Cablevision’s Rainbow DBS direct-to-home satellite television business. Voom has been a financial challenge on the company more or less since the service was launched back in October 2003, and earlier this year, Cablevision made the first move to step away from the financial burden when it sold Voom’s only in-orbit asset and some ground equipment to rival DTH service provider EchoStar Communications Corp.
Cablevision then announced February 10 that it signed a letter of intent to sell the remaining assets of Voom to Voom HD LLC, a new company formed by Cablevision Chairman Charles Dolan and Thomas Dolan, executive vice president of Cablevision Systems, if they were able to arrange financing. According to the terms, a deadline of February 28 was set for the two companies to reach a definitive agreement. The deadline came and went without an agreement. That is when the drama really began to unfold.
On February 28, Cablevision issued a press release acknowledging that it and Voom HD LLC ended discussions without reaching a definitive agreement regarding an acquisition by Voom HD of the business, assets and liabilities of the Voom service. Cablevision said in its announcement that Voom would close down at the end of March and the company would "seek to make the transition as smooth as possible for customers and [would] communicate directly with customers regarding those plans." Cablevision followed up the announcement by posting a message on the Voom Web site stating it was no longer taking new subscribers and would be closing down operations.
Later that same day, Voom HD issued its own press release saying it was prepared to finance the continued expansion of the Voom satellite service and that it had advised Cablevision that it would continue to be interested in completing a transaction on the terms and conditions of the Letter of Intent. In that release, Thomas Dolan said, "We are more than ever convinced of the viability of the Voom service. We believe our offer to Cablevision is in the best interest of Cablevision’s shareholders and Voom’s 46,000 subscribers across the nation."
As the two companies traded conflicting messages on Voom’s survival via press releases and the Internet, Charles Dolan took further action by altering the makeup of the Cablevision board of directors.
Cablevision announced it had reached an agreement to keep its Rainbow DBS direct-to-home satellite business alive.
The news was met with some positive reaction on Wall Street for Cablevision but came with some mixed reaction regarding the future of Voom. Speculation about how Voom would be funded also followed the announcement of Cablevision.
Alan Bezoza, analyst with Friedman Billings Ramsey said in a March 9 equity research report, "With Chuck Dolan picking up the tab for the incremental expenses, we view this as a positive resolution for both Cablevision shareholders and all 46,000 die-hard Voom subscribers."
In a March 9 research report, Oppenheimer analyst Thomas Eagan called the latest development "a mild positive for Cablevision because it is a step toward Voom’s final deconsolidation from Cablevision. This is important because we expect that Voom’s cash flow losses will continue to drag the company’s cash flow generation. In 2004, Cablevision’s cash flow would have grown 37 percent (instead of a reported 15 percent) excluding Voom’s $367 million in cash flow losses."
But while Eagan painted a slightly positive picture for the future of Cablevision, his optimism did not extend to the future of Voom. In the report, Eagan noted that questions linger regarding how Charles Dolan will fund the Voom acquisition and its operations in the long term. Eagan added that questions as to where Voom HD will secure the capacity it needs to maintain operations also remain unanswered for the moment, as Cablevision has already agreed to sell the Rainbow-1 satellite to EchoStar Communications Corp. He added, "Unfortunately for Voom, EchoStar needs the satellite’s capacity to transmit high-definition programming to compete with DirecTV and the latest cable HD packages.
It would seem to us, therefore, that Voom’s future looks bleak."
Others on Wall Street are viewing the Voom situation as a possible prelude to someone taking over Cablevision, as Charles Dolan would likely have to sell off a potentially large portion of his holdings in Cablevision to fund Voom.
Richard Greenfield, analyst with Fulcrum Global Partners, noted in a March 10 equity report that the schedule 13-D disclosure "illustrates Chuck Dolan’s willingness to sell Cablevision to fund Voom." He added, "Voom has substantial near-term losses and even selling the whole Cablevision company does not raise immediate capital as a cable transaction usually takes 12 months to close (due to regulatory hurdles)." Greenfield added that the only way Voom will be able to be funded on the long term is if Cablevision is put up for sale.
XM And Sirius Remain Strong
In what is a continuation of its trend to build a strong content offering, Sirius Satellite Radio announced that it signed an agreement giving the company exclusive North American satellite radio rights to broadcast Nascar racing and events beginning in 2007, taking the broadcasting rights fees away from competitor XM Satellite Radio. Under the terms of the agreement, Sirius will pay Nascar $107.5 million in rights fees throughout the five-year term of the agreement, with the highest payments being made in the final years of the contract. Sirius said it would broadcast every race in Nascar’s three top racing circuits. Sirius also gains the right to sell all advertising time on the channel, including during race broadcasts.
The move was met with some concerns from Wall Street analysts, particularly on how the price paid will affect future content acquisitions.
"When satellite radio first started, both providers were able to secure branded content on mostly revenue-share structures with very small fixed payments," Alden Mahabir, analyst with Vintage Research, said in a recent equity research report. "We naturally wonder, given the big-ticket prices of the National Football League, Major League Baseball, Howard Stern and even Nascar, if other content providers will be encouraged to ask for more given these mounting precedents. We cannot help but wonder if undue competition will ultimately spell problems for both XM and Sirius."
Needless to say, the first quarter 2005 satellite activities kept Wall Street’s attention. The rest of the year not only will keep these companies under the magnifying glass, but may also introduce new carrier companies into the mix. Time will tell.
Nick Mitsis is the editor of Via Satellite magazine. He also sits on the board of SSPI’s Mid-Atlantic chapter. Greg Twachtman, Editor of Satellite News, contributed to this article.
