Cable Will Win the Bandwidth Wars

Sanford Bernstein analyst Craig Moffett, who’s been a big fan of cable companies for a while now, says that even after a 60% run-up in the last 12 months in shares of Comcast (CMCSA), the nation’s largest cable operator, people still just don’t get it.

Because the phone companies, Verizon Communications (VZ), and AT&T (T), have also risen in that time, by 11.5% and 32%, respectively, and the phone companies aren’t going to win The Bandwidth Wars.

In a 70-page report that arrived over the transom yesterday afternoon, replete with diagrams and tables, Moffett lays out the argument that after spending billions to build-out fiber-optics around the country, Verizon and AT&T will only be able to cover 40% of the population in the foreseeable future. While broadband Internet becomes a must for most consumer households, only cable will be able to reach 60% of American homes with fast pipes. So it makes no sense, he says, that the market is treating both cable stocks AND phone stocks as if both teams can win.

They can’t.

Not everyone can win. The trajectory we are on is one of decisive advantage for cable in large swaths of the country as a truly high-speed connection becomes a “must have” for American families.

The phone companies’ digital subscriber line [DSL] Internet connections of 1 megabyte or so will be no match for cable’s broadband service of 5 megabytes today, says Moffett.

But then Moffett presents what I think is a very interesting hypothesis: that phone companies are shooting themselves in the foot with fiber optics:

Worse, the TelCos are building fiber in precisely those places where DSL works the best today […] By upgrading those territories the next step to fiber, the DSL plant they leave behind — simply by the laws of de-averaging — will be worse.

The phone companies, with all their DSL and fiber lines combined, may eventually grab 47.5% of U.S. households while cable grabs 52.5%. But as cable starts to lure away subscribers who aren’t near a fiber line, cable’s share rises to 64%.

(Moffett concedes that he’s assuming the phone companies won’t cover more than 50% of U.S. households with fiber, which might not be true if the phone companies learn to string fiber more cheaply over time. He’s also assuming DSL doesn’t get much faster than it is now, but he admits there’s always that possibility it may. Bear in mind that Moffett’s been covering cable stocks on a regular basis for a while and is only just now picking up coverage of phone company stocks for Bernstein. )

Bottom line: Moffett says Comcast shares could in the next 12 months rise 15% to $48, and Cablevision Systems (CVC) could rise 4% to $31.

Moffett’s so passionate about the matter, he hosted a conference call yesterday to discuss the findings of the report.

Comcast shares rose half a percent yesterday to $41.69, Cablevision shares fell half a percent to $29.83, Verizon shares rose a fraction of a percent to $38.29, and AT&T shares fell .4% to $37.21.

Comments

[Malkiel]

" He’s also assuming DSL doesn’t get much faster than it is now, but he admits there’s always that possibility it may".

Well, Since ATT/SBC is offering 6mps RIGHT NOW, it sounds like his analysis is already busted. And having 40% of a market for starters isn't bad when the phone companies are winning the market war in the territories they do cover. The ratio of dsl to cable internet customers in Connecticut is about 8 to 1 at the moment.

Cable internet has problems with being bundled into expensive packages people don't want to move up to. He's also discounting the universal penetration of phone lines to rural areas thanks to FDR's rural phone programs in the '30's, while cable companies are determined never to string out that far. Time to get a little less "passionate" and a little more rigorous...