Fitch: U.S. Cable Industry Positioned to Manage Slowdown of Subscriber Growth in 2008
CHICAGO--(Business Wire)--Fitch Ratings believes that a combination of increased competition
from local exchange companies, high penetration levels of cable modem
and digital television services and a difficult housing market will
lead to slowing overall revenue and, to a lesser extent, cash flow
growth for U.S. cable multiple system operators (MSOs) in 2008. This
will be partially offset by strong growth in telephony services and
advertising. Continued strong generation of cash flow and free cash
flow along with manageable leverage should lead to a stable rating
outlook for cable MSOs in 2008.
Fitch believes that the cable MSOs will add over 11.5 million new
revenue generating units (RGUs) in 2007, which represents a growth of
approximately 12% compared to the prior year. However, Fitch forecasts
that new RGU additions in 2008 will fall below 11 million. Fitch
anticipates that the growth in telephony subscribers, which should
grow from approximately 40% of total new RGUs in 2007 to 45% in 2008,
will not offset slowing growth from cable modem and digital television
services or basic subscriber losses. Fitch also believes that the
cable industry will lose nearly 1.5% of its basic subscribers to
increased local exchange carrier and satellite competition. The impact
of competition on basic subscribers will be more pronounced in 2008,
in part due to continued weak new home growth and more effective
product offerings from competitors.
While digital television subscribers are expected to grow in 2008
due to higher penetration rates of high definition (HD) television and
digital video recorders (DVRs), the pace will slow compared to 2007.
Fitch expects digital television to reach a penetration rate of
approximately 60% by year-end 2007 representing an annual increase of
approximately 600 basis points compared to 2006.
Additionally, Fitch anticipates that digital television
penetration will increase to approximately 64% in 2008. Fitch believes
that cable modem service growth will continue in the near-term, but
capturing incremental penetration amounts will be increasingly
difficult and will require refining product positioning and pricing
going forward into the future. Cable MSOs have begun to tailor new low
price, low speed cable modem tiers to target specific market segments.
Fitch notes that this strategy has the potential to negatively impact
cable modem average revenue per user (ARPU) and margin. Fitch believes
that the total of new cable modem subscribers will fall modestly in
2008 compared to 2007.
As a result of slowing new RGU additions, Fitch expects that
revenue growth for the cable MSO industry will slow to a high single
digit rate in 2008. Beyond slowing new RGU levels impacting revenue
growth, Fitch believes that annual price increases will be more
tempered than in the past due to competition. Although Fitch does not
expect cable operators to compete with price in 2008 and as a result
expects that ARPU should still grow in the low double digit range,
Fitch does believe that cable operators will spend more heavily on
advertising and marketing to differentiate their services and could
increase promotional offerings, which will put negative pressure on
EBITDA growth. One offset to competitive pressure on EBITDA is the
expectation that high margin advertising revenue should grow in the
low-to-mid teen range reflecting the impact of the 2008 election year.
With that in mind, Fitch believes that cable MSO operators will
generate high single digit EBITDA growth in 2008.
Capital spending in 2007 was approximately 20% higher than 2006,
but Fitch believes it will be flat in 2008 compared with 2007. Since
capital spending is largely success-based, slowing RGU growth should
lead to lower customer premise equipment (CPE) spending. However,
continued plant investment to support new revenue opportunities --
such as commercial services -- will likely offset any CPE capital
spending savings. Subsequently, Fitch believes that free cash flow
generation in 2008 will be flat with 2007.
Fitch also expects that cable MSOs will continue to return nearly
all of their free cash flow to equity shareholders in 2008, primarily
through share repurchases. Fitch believes that acquisition risk in
2008 will be low with activity most likely focused on trades to
improve subscriber clustering.
Generally, Fitch believes that credit ratings for cable MSOs
should be stable in 2008, although there could be some modest
weakening within some ratings with the changing competitive landscape.
Recovery ratings, which apply to speculative grade operators, should
remain relatively stable as the value of underlying assets should
remain solid as they continue to be supported by strong operational
metrics and continued system investment. Fitch notes that speculative
grade cable MSOs increased the proportion of secured debt within their
capital structures in 2007 by a material amount, but Fitch expects
this mix of secured and unsecured debt to be stable in 2008 as bank
and bond lending becomes more balanced.
--Cablevision Systems Corp. ('B+', Negative Outlook)
--Charter Communications, Inc. ('CCC', Stable Outlook)
--Comcast Corp. ('BBB+', Stable Outlook)
--Cox Communications, Inc. ('BBB-', Positive Outlook)
--DIRECTV Holdings, LLC ('BB', Stable Outlook)
--Echostar Communications Corp. ('BB-', Stable Outlook)
--Insight Communications Company, Inc. ('B+', Rating Watch
Negative)
--Intelsat, Ltd. ('B', Rating Watch Negative)
--Mediacom Communications Corp. ('B', Stable Outlook)
--Rogers Communications, Inc. ('BBB-', Positive Outlook)
--Time Warner Cable ('BBB', Stable Outlook)
Fitch's Recovery Ratings (RR) are a relative indicator of creditor
recovery prospects on a given obligation within an issuers' capital
structure in the event of a default.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
Fitch Ratings
Michael Weaver, +1-312-368-3156
David Peterson, +1-312-368-3177 (Chicago)
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
Copyright Business Wire 2007
