Cable, Broadcasters Mostly Unscathed by Economy, Credit Woes

Even in a slowing economy, people will continue to buy cable since it costs less than going to the movies, eating out and other pastimes, executives said. “If you're out of work, you're filling up your entire day with television and Internet and phone for $3 or $4 a day -- that’s a pretty good purchase decision even when you're economically hurting,” said Insight CEO Michael Willner. “Contrary to the belief of certain regulators in Washington, the cost of cable has come down considerably in the past several years because more and more customers are exploiting the bundles that we're giving them.”

It’s too soon to gauge the economy’s effect on their companies, some executives said. “We have not seen any impact on our business from larger economic trends,” said Suddenlink Chief Operating Officer Tom McMillin. “In fact, we're experiencing a very good start to the year.” He attributed that partly to purchasers of bundles of broadband, cable and phone service paying less than they would have for offerings separately. Other executives agreed. “We sell a product that is a priority expenditure in the home, so I don’t know that there’s any economic environment where people en masse may decide that they don’t want to watch TV anymore” or surf the Web, said RCN Chief Financial Officer Michael Sicoli. “Cable One doesn’t know how the economy is affecting our business,” said a spokesman for the operator, owned by the Washington Post Co. “We haven’t seen any changes good or bad, so perhaps it’s too early to tell.”

Some Cable Customers Affected by Recession

Laggard economic growth seemed to be impacting RCN customers the second half of 2007, when some didn’t pay or were late paying bills, said CFO Sicoli. He described it as “nothing significant” in terms of a hit to the company, “but it has been a trend and something we've seen into the first quarter.” To compensate, the company is “tighter on the front end,” checking applicants’ credit histories before connecting them and responding more speedily to unpaid bills, he added. “We're on them more quickly than we were at this time last year.” The company has suffered little from a slowing housing market because it operates in the densely- populated Northeast, which hasn’t seen much recent construction, he said. “So far so good.”

RCN may be affected if Wall Street firms cut more jobs, since the company sells high-bandwidth network transport services to support trading and other securities operations, Sicoli said. “If there’s continued distress in the financial sector, that could impact the RCN Metro Group,” he said. But the overbuilder is insulated somewhat because banks and others use its network as a back-up should telecom operators fail in a crisis, as occurred Sept. 11, Sicoli said. “You can’t have all your eggs in one basket… and you're not going to cut that in this type of environment” after the 2001 terror attacks, he said. “Markets may be down, but there’s still a lot of activity taking place.” Shares of RCN have slid 36 percent in 2008.

SureWest was hurt most by the slide in home construction and in home resales among cable operators and overbuilders we spoke with. With fewer people building and buying residences in northern California, the company has fewer chances to sign customers for broadband, phone and video service, said Vice President of Marketing Pete Drozdoff. Starting in the fourth quarter, the company changed its marketing, trying to take customers from AT&T, Comcast and Frontier Communications, he said: “We've had really good results of adapting our marketing.”

Bad economic tidings such as a rise in foreclosures led SureWest to play up the “deep discounting” of its bundle of services compared with competitors’ prices, Drozdoff said. “It goes to the question of ‘How much can I buy this for,'” he added. “That’s what the guy wants to know.” Yet when prospects inquire, the company often persuades them to buy costlier packages with more features, he said. “I don’t think we're experiencing a lot of people who simply want to stop spending. I think we're experiencing people who are more aware of their spending and more picky about how they do it.” SureWest stock is down 14 percent in 2008.

Insight, in Indiana, Kentucky and Ohio, hasn’t been hit hard by the housing downturn, thanks to a mild regional slowdown in housing starts, Willner said. Any harm to Insight financial results is “offset” by fewer people in its service areas moving, and thus less likely to be taken away as customers by overbuilders, he said. “I can’t tell you that we've had any specific changes in strategies as a result of the economic downturn,” Willner said. Insight was taken private in December 2005 by Willner, a fellow co-founder, and the Carlyle Group. The company had tried to sell itself, to no avail. Some potential buyers couldn’t raise funds amid tight credit markets.

Bresnan Communications is having “phenomenal results” selling broadband, cable and phone service because its systems are in areas seeing growth as baby boomers relocate to them, said Executive Vice President of Operations Steven Brookstein. In Colorado, Montana, Utah, and Wyoming, “the housing is still going up, growth is there, people are buying, people are staying,” he said. Many cable operators lost basic video subscribers in 2007, but Bresnan added 6,500, for 2.2 percent year-over-year growth, Brookstein said. It has added 2,500 this year, surpassing 100,000 phone subscribers, he said. Of competitor Qwest, which sells DirecTV service, he said, “I wouldn’t say we've seen them turn the dial up more than they have in the past” on marketing telecom services. Qwest may expand its fiber network in Missoula, Mont., to pass homes in a new development, but “we don’t think they're going to do that very broadly,” he added. Bresnan is held closely.

The economy hasn’t hurt Mediacom’s business, CEO Rocco Commisso said. “I don’t think it’s hit Main Street yet, at least not in the markets where we operate,” he said. “The business is business as usual. If anything it’s a little better than usual.” If consumers have to cut back, they're unlikely to cancel pay-TV and broadband, which are reliable, inexpensive sources of entertainment, he said. “Cable has proven over a long period of time that it’s recession-proof in a lot of respects,” he said. “People don’t just disconnect cable because of a slowdown in the economy.”

Broadcasters and Ad Spending

Unlike broadcasters, cable operators don’t depend much on advertising, which usually contracts in a recession. Even some broadcasters say they are experiencing less impact from ad market fluctuations than in the past. “We're busy building our business on many different platforms and advertising is just one of them,” Nexstar Chief Operating Officer Duane Lammers said. “Our new media efforts are just going gangbusters despite what’s going on around us.”

Based as it is on big events, broadcasting continues to draw large audiences, making it unlikely that it will be cut from marketing plans by penny-pinching advertisers, another TV executive said. “We stand out as the place advertisers need to be because people will show up for events,” the executive said. The slowdown may be hitting print, outdoor and radio, but in TV, “the dollars are holding up pretty well,” the source said.

And broadcasters have big events looming. The summer Olympic Games and the presidential election both typically mean huge ad sales for stations. “We've got great markets that attract good political spending,” Lammers said. “It’s been pretty consistent, so we feel like it will be there,” he said. And during the Olympics, Nexstar’s NBC affiliates will outperform the other networks’ combined ratings, Lammers said. “It’s like having 17 American Idols in a row.”

Debt and Liquidity

But ad spending and operating results are only one side of the coin for companies. Tight credit markets make their ability to access cash increasingly important. For Moody’s, gauging company liquidity suddenly is paramount in evaluating credit, Senior Vice President Neil Begley said. “Typically, liquidity is just kind of a given, although we're very strict about how we look at it,” he said. “With the change in the credit markets, suddenly liquidity jumps from the background to foreground and becomes the one thing that can topple you, even for a pretty strong company.”

Moody’s and other debt-rating agencies have their eyes on lenders’ financial-performance conditions, or covenants, and companies’ success at adhering to them, as well as the extent to which companies are close to violating them, Begley said. “At what point do you have to go begging for some additional space or additional capital?” he said. “That type of pressure often leads to higher levels of default than you typically might have.” Loose covenants were among hallmarks of deals cut right before the credit markets tightened (CD Aug 6 p2), and they could backfire. “When they do finally run out of space -- it might be a year or two longer -- they're probably going to have lower recovery levels,” Begley said. “Where covenants are weak and there isn’t a cohesive group [of lenders]… to close down the company, they tend to take on more debt and go deeper in the hole.”

CBS, Time Warner and other big media companies aren’t at great risk of default because they've kept a good amount of cash on hand, with access to more if needed, Begley said. They largely have been able to extend and expand their bank loans. But if the problems that sank Bear Stearns spread to other banks, a whole new set of worries could arise, Begley said. “God forbid there are other difficulties in the financial sector, [the question becomes] could you not count on some of the commitments?”

Most TV companies are healthy, but some broadcasters with troubled balance sheets are hoping to sell assets to avoid defaulting, an executive said. Young Broadcasting, for instance, has KRON-TV San Francisco up for sale, hoping to use the proceeds to pay debt. Lack of credit sank some buyouts last year, and since then TV asset prices have dropped, the source said. “Those have declined because of tighter restrictions on credit,” the source said. “Look at the Clear Channel deal, those guys went to battle over a couple of hundred million” dollars. The sale of Clear Channel’s TV assets closed this week at a reduced price (CD March 18 p10).

“We're going to see more defaults taking place,” said Mediacom’s Commisso. Companies expecting to refinance debt in 2008 won’t be able to do so at reasonable rates unless credit market conditions change, he said. “I feel bad for those companies that have maturity coming due and the only way they can pay is through a refinancing.” Mediacom was able to refinance its debt when credit markets were flush with cash, he said. “If we had not done all our refinancing in the last three years, it would not be nice entering this market.”

“There has been a major transformation of the credit world,” Commisso said. The cause was widespread mortgage- backed lending and, to a lesser extent, highly-leveraged corporate buyouts, he said. “Unfortunately we didn’t cause those problems… But we're suffering the consequences. Our public debt is trading lower and it’s almost impossible to do a financing at a reasonable cost to the extent that we need to go to the markets.”

Federal Reserve interest rate cuts will help Mediacom and other highly leveraged companies that aren’t staring down maturities, Commisso said. “We're able to expend less on interest expense and more on capex,” he said. Mediacom told investors when it reported Q4 results that it expects capital expenditures to increase this year.

Problems getting short-term financing due to investor wariness of such kinds of debt haven’t hurt Insight or RCN because the companies aren’t trying to get new financing, said their executives. “Those of us who have long-term credit agreements in place and are comfortable reducing outstanding debt [have] no immediate impact on the business,” Insight CEO Willner said. “That’s the case for us as well.” Others may not be so fortunate. “Anybody in any industry looking for credit is having a hard time and that includes media and everybody else,” Willner said. “Businesses that are more dependent on ad revenue than we are will probably have more of an impact because of the general economy” and the risk that ad growth will slow, he added. Cable depends less on advertising than other media industries, although operators sell spots during breaks in network programming.

RCN’s Sicoli said the overbuilder is “in a good position” because it refinanced a first-lien credit facility last summer. “It was a deal done essentially at the peak of the market,” he said. “We don’t anticipate having any other financing needs otherwise.” The company has used the entire $745 million facility.