Cable companies are facing serious headwinds that make their outlook uncertain and precarious. Investors should avoid the stocks of ALL the cable companies, including Charter Communications (CHTR), Time Warner Cable, (TWC), Cablevision (CVC) and Comcast Corp. (CMCSA).
The phenomenon of cord cutting is accelerating, and one analyst, Craig Moffett, believes that pay TV providers lost 1.4 million subscribers last year.
Meanwhile, Netflix (NFLX) is expanding its original programming, and more top-notch content is being offered online. For example, the popular sitcoms Seinfeld and Friends recently become available to cord cutters for the first time.
Moreover, Sony Corp. (SNE) launched an Internet TV service in March, and Apple (AAPL) is considering following suit. Cord cutting is constantly becoming more of a viable option, increasing the odds that it will continue to accelerate.
Verizon Communications (VZ) has already responded to the cord-cutting phenomenon with a defensive maneuver. In an unprecedented move for a major pay-TV provider, the telecom giant has begun allowing its FiOS customers to choose to receive certain types of channels and exclude others.
The cable companies may be forced to follow Verizon’s lead, liberating their customers from the need to pay for dozens of channels that they don’t watch. Even if that strategy is successful in retaining customers, it will cut into the companies’ revenue.
Comcast may have signaled its nervousness about the outlook for the cable sector by backing out of its deal to acquire Time Warner. Yes, I know CMCSA cited regulators’ opposition to the deal as the reason for its decision.
But doesn’t it seem a little strange that this giant company, with its army of lobbyists and close connections to the White House (the Rev. Al Sharpton advises President Barack Obama and hosts a show on Comcast-owned MSNBC, and many other MSNBC talk show hosts and journalists are friendly to the Obama administation) couldn’t persuade the White House to intervene?
And it appears that Comcast, which supposedly gave up on the deal because the FCC was going to ask a judge to decide the matter, backed out of the transaction without much of a fight. Maybe the company, seeing the increased competition faced by cable companies, decided not to pull out all the stops to get the deal approved.
Of course, last week Charter eagerly stepped into the void with a $56.7 billion deal for Time Warner, pending regulatory approval.
But the cable companies’ fans will say, “Wait a minute. You’re forgetting about Internet service. The cable companies aren’t facing much competition in that area.”
Actually, the cable companies’ competition is starting to ramp up in that area as well. Have you heard of Google’s (GOOGL, GOOG) Google Fiber? The system provides extremely fast Internet service as well as TV service.
Google Fiber, which is rapidly expanding, has forced cable companies to offer cheaper, faster service. So Google Fiber is another factor that is weighing on cable companies’ profits.
Moreover, Google has said that it expects Google Fiber to be profitable. If Google can provide high-speed Internet and TV service for prices below those of the cable companies and still make a profit, other companies can and probably will offer similar services.
So cable companies will likely have to face additional, lower price competition in the TV and Internet broadband space.
Between cord cutting and Google Fiber, cable companies’ competition is rapidly expanding. Investors should stay away from this sector, which is facing a great deal of downside risk.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
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