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It's Still Nice to Be a Cable Company

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Remember how back in February, the Federal Communications Commission imposed new “open Internet” (aka net neutrality) rules on broadband providers? And how in April Comcast, facing opposition from the FCC and the Justice Department, dropped its plan to buy Time Warner Cable?

It felt like a turning point, an end to the vision, pursued most aggressively by Comcast, to remake the Internet in the image of cable television. One business columnist even declared that “the cable era is over.”

And, yes, an era does seem to be waning. In August it only took a few stray words on a Walt Disney Co. earnings call to send investors scurrying from Disney and other big owners of cable TV channels such as Discovery Communications, Time Warner, Twenty-First Century Fox and Viacom. The cable channels’ lucrative revenue mix of subscriber fees and advertising is showing the first signs of erosion as viewers cut the cord and get their TV through streaming services. The sudden realization of this occasioned a stock rout.

For the cable providers such as Comcast and Time Warner Cable, though, this year hasn’t been so bad at all:

The indexes used in the above chart are Bloomberg Intelligence North America Large Entertainment Content, which consists of the five cable-channel owners mentioned above plus CBS, and BI North America Cable MSOs , which includes Comcast, Time Warner Cable, Charter and Cablevision.

Cablevision, of course, just closed a $17.7 billion deal to be acquired by French cable billionaire Patrick Drahi’s Altice. Since Comcast dropped its bid for Time Warner, the rest of the cable providers have been engaged in a merger frenzy that is a large part of the explanation for why their stock prices are up. Still, they wouldn’t be buying each other if they thought the future of cable was hopeless. So what’s up?

One possibility is that they think net neutrality isn’t long for this world. Economist Hal Singer of the Progressive Policy Institute argues that falling capital expenditures by broadband providers (the cable companies plus AT&T and Verizon) since the Feb. 26 net neutrality decision are hurting the economy and will make it hard for the FCC to defend its ruling in court on cost-benefit grounds. But cable operators’ biggest capital expenditures are on the set-top TV boxes that they lease to customers. It makes sense that they would be buying fewer of those in light of both the changed regulatory situation and the rise in cord-cutting, but that isn’t exactly the same as signaling a big decline in investment in broadband infrastructure. In any case, it seems unlikely that cable companies would be making big merger bets just because they’re hoping for a favorable court decision down the road.

A likelier explanation seems to be that providing broadband connections remains a good business with potential for growth even if you don’t get to pick and choose who delivers TV, movies, games and other content over your pipes (which is what the FCC was trying to prevent with its net neutrality order). Bloomberg Intelligence analysts Geetha Ranganathan and Paul Sweeney calculate, using SNL Kagan data, that in the second quarter the number of triple-play subscribers who get TV, phone and broadband jumped 6 percent at the six biggest public cable companies from a year earlier. Fiber-optic offerings from AT&T, Verizon, Google and others provide competition in some cities, but in most of the U.S., cable is still the fastest way onto the Internet. Fast connections to the Internet are likely to keep growing in value. Which is why, even if the cable era is ending, cable operators still have a future.

  1. Stands for multiple-system operators.

  2. Today’s TVs are of course way too skinny to put boxes on top of them, but that’s the lingo.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net