You are going to pay substantially less for television programming two years from now than you do now. You may not even pay for it at all; it may come for free, with some sort of deal—perhaps from Verizon, maybe from DirecTV—as an incentive to watch television ads. And if the technology advances fast enough, you may be able to get everything untethered, via wireless, perhaps from someone you haven’t even heard of who has engineered a way to get television into your home. Wall Street hasn’t figured out which method of delivery will triumph yet. I see bets being placed on everything from Apple, which just released the video iPod, to Zoran, a company that makes the signal-processing chips found in digital TVs and cameras—but one thing appears certain. Cable, long the dominant purveyor of television into the home, will be the loser.
It doesn’t matter whether the cable operation’s embedded in Time Warner (a stock that can’t move despite having a professional agitator, Carl Icahn, buying back billions of dollars’ worth of its own shares) or whether it is stand-alone, in the form of Comcast, Cablevision, or Charter. These once-darlings, long heralded as having the fastest, fattest pipe into the greatest number of American homes, have turned toxic, generating some of the lowest returns out there. You have to go to airline stocks, or even the dreaded automobile sector, to rival their performance.
It wasn’t always this way. For years, the best investments in the business, the ones with the steadiest growth and increase in cash flow, were the cable companies. These were the modern monopolies, grandfathered in by governments, free to charge whatever they wanted. We looked at them as if they were the Standard Oil of our generation, except they had the support of the modern equivalent of Teddy Roosevelt. For years, they raised their prices religiously and forced you to pay more and more for basic cable, then even more on top of that for premium products—without, of course, any improvement in service or manners. When every other monopoly, whether in semiconductors, phones, or even software, was challenged by the government, causing prices to tumble, the cable boys were allowed to keep their lucrative turf for themselves. Arrogant cable executives told Wall Street, “The sky’s the limit,” then built charges approaching and then exceeding $100 a month into their business models.
But a funny thing happens to any monopoly when it raises rates endlessly: The pricing umbrella allows another player who normally couldn’t afford to compete to come in, to develop a new technology that otherwise might not take off.
Satellite became the first challenge. Cable companies long ago ceded the rural portions of the country to satellite, as anyone who drives through the more sparsely populated parts of any state knows simply by looking at the plethora of BUDS, or “big ugly dishes,” as the industry calls them. But with cable pricing rising relentlessly, the satellite companies, EchoStar and DirecTV, began making inroads into cities, offering loss-leader packages that started taking share from cable, at first in dribs and drabs but then in giant gobs as the dish companies became adept at advertising and promotion.
Around 2000, the cable companies’ basic-subscriber ranks simply stopped growing, as savvy consumers took advantage of the dish deals. But the cable companies still thought they had the edge because unlike satellite’s beam-down from the heavens, coaxial cable can both send and receive data. That “bundled package” of Internet and video, perhaps even on demand, gave the cable operators hope that their dominance could remain unchecked.
But once again, their greed price betrayed them. The threat of bundled phone service—enabled by a technology called through Voice over Internet Protocol, or VoIP—awoke Verizon and SBC, the two most technologically advanced phone giants. As their stocks declined because of the cable challenge, these wounded former monopolists decided to fight back, first with low-price always-on broadband Internet service and now, aided by the build-out of all-fiber networks, low-price video on demand.
Then last year, the unthinkable happened. The cable companies started cutting prices or offering features, like HD and DVR—add-ons that we once thought would cost consumers fortunes—for nominal amounts. Cablevision, anxious to expand its franchise, offered reduced-rate packages. So did Time Warner. They were, for once, giving you more for less, something that’s in no monopolist’s playbook. Despite that, new customers failed to materialize.
Then this year, the networks, fed up with being DVR’d and TiVo’d to death, decided to offer programming on demand directly to consumers. For $1.99, you can download an episode of Desperate Housewives or a music video directly to your video iPod. Suddenly, we could envision a world without cable. Just the makers of programming and us, subscribing to our favorite shows like we now subscribe to magazines. We won’t care if that show gets sent to us over a coaxial cable, a copper phone wire, or a satellite feed. With the cost of wireless coming down and the technology now vastly more powerful, it won’t be long before we will be able to obtain high-quality video without a pipe at all, directly to our next-gen video iPod or Internet phone or wi-fi-enabled home-entertainment server.
Now the cable companies find themselves going into 2006 besieged on all sides. Verizon and SBC, their backs to the wall, their wireless build-out almost finished, are plowing billions into providing you with low-cost packages for phones, Internet, and video. DirecTV, aided by its new largest shareholder, Rupert Murdoch of Fox, can offer below-market rates for dishes, confident it can make it up in advertising on the back end. With no new properties to buy—there’s virtually nothing left once the Adelphia carcass gets split up between Time Warner and Comcast—and no new features to give away, the cable companies can’t grow inside or outside their territories. They have become shrinking, wounded hulks, just another set of players grasping for the consumers’ attention.
For $1.99, you can download ‘Desperate Housewives’ to your video iPod and envision a world without cable.
How do you play this? I think you have to dump the cable companies, every last one of them. Comcast, in particular, seems vulnerable to further downside, as it is the least advanced in its phone offerings and is still acting monopolistic in its home markets.
Not that I want to buy the phone companies, the dish companies, or the networks. Everyone involved in this dogfight is struggling to preserve a status quo that seems to vanish by the day. The only winners?
The arms merchants themselves, the technology companies that stand to gain from the orders that all of these companies have to place to stay on top: chip- makers Broadcom and Qualcomm, and, of course, Apple, the pioneer with the momentum.
Oh yeah, there’s another winner I forgot: you! Your bills for televised entertainment will never again be as high as they were in the cable monopolists’ heyday. Competition: It’s a wonderful thing.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Qualcomm.
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