It’s almost impossible believe, but there it is: the cable industry is actually outgrowing the wireless sector.
This stunning factoid comes courtesy of the latest Weekend Media Blast piece from Bernstein Research analyst Craig Moffett. He notes that in the U.S. wireless industry, subscriber growth over the last 12 months is up 5.3%, but revenue per subscriber is down 1.7%, producing just 3.6% revenue growth. The cable industry, by contrast, grew revenue per sub 4.1% over the same time period; combined with modest sub growth and you get industry growth of 5.3%.
Moffett says there are a number of reasons for this, not the least of which is that the wireless market is much, much more competitive. In wireless, there are five facilities-based carriers in most markets - AT&T (NYSE:T), Verizon Wireless (NYSE:VZ), Sprint (NYSE:S), T-Mobile and either Leap Wireless (LEAP) or Metro PCS (PCS). In some markets, there are also regional players, like U.S. Cellular. There are new entrants coming, with Cox building out a system what will compete in 10% of the country. There are resellers like Virgin Mobile and Tracfone. And there’s Clearwire (CLWR), which is trying to build out a national WiMax service.
Contrast that with the pay TV market, where in 75% of the country there are just three players - the cable company, DirecTV (DTV) and Dish Network (NASDAQ:DISH), and in 25% there are four, adding in Verizon’s FiOS service or AT&T U-Verse.
But where things really get good for the cable sector, he notes, is in broadband. In most markets, there are just two players - DSL from the phone company and cable. Thanks to high demand and the small number of competitors, pricing for broadband connectivity has actually increased over the last five years, defying expectations. Broadband, Moffett contends, “is quite simply a better business than either video or wireless.” He notes that the telcos are building out fiber to 40% of U.S. homes, but that for the other 60%, “cable modem service is looking more and more like it will be the only game in town.”
“Like it or not, cable wins this game,” Moffett writes. “They got there first with a truly high capacity pipe into the home, and in the majority of America they will remain almost unchallenged.” The analyst notes that structural advantage of this variety is rare, and translates into “above-market growth, latent pricing power and sustained economic returns in excess of the cost of capital.”
Moffett writes that structural advantage is why he likes the cable stocks more than the telcos. “Structural considerations - not nuances of who might be marginally better at marketing, whose management team might or might not be better, or whose product is a little better than someone else’s - are what really matte in our view of the telecommunications, cable and satellite landscape.”
The edge cable has in broadband is so strong, he contends, that he counsels the companies to reinvest themselves around broadband as their core product, rather than video.
Meanwhile, he finds it paradoxical - and an investment opportunity - that the implied multiples for the wireless carriers are “dramatically higher” than for the cable broadband operations. “Despite investors evident distaste for cable companies,” he writes “that still smells like an exploitable opportunity.”