January 18, 2012
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Craig Moffett • Senior Analyst • +1-212-969-6758 • [email protected]
The State of the Net: 2012
Washington, DC
January 18, 2012
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 2
The State of the Infrastructure
Internet in America: What the Data Says
Competitive dynamics
The TelCo Dilemma
Returns on Capital
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 3
Penetrations Gains are Slowing at ~66% of the Market
Broadband Penetration and Delivery Technology 1
8,4
77
19
,97
8
22
,03
9
24
,08
0
26
,33
8
28
,21
5
30
,46
6
32
,64
2
35
,19
4
36
,83
9
39
,40
6
42
,03
1
44
,94
7
46
,98
7
49
,82
6
52
,25
3
55
,15
7
56
,81
9
58
,90
9
60
,66
1
63
,11
8
64
,07
1
65
,45
6
66
,51
6
68
,22
0
68
,88
4
69
,92
7
71
,03
9
72
,49
6
72
,90
6
73
,74
8
74
,70
0
76
,18
2
76
,74
0
77
,45
5
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Q1
20
03
Q2
20
03
Q3
20
03
Q4
20
03
Q1
20
04
Q2
20
04
Q3
20
04
Q4
20
04
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
05
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
06
Q1
20
07
Q2
20
07
Q3
20
07
Q4
20
07
Q1
20
08
Q2
20
08
Q3
20
08
Q4
20
08
Q1
20
09
Q2
20
09
Q3
20
09
Q4
20
09
Q1
20
10
Q2
20
10
Q3
20
10
Q4
20
10
Q1
20
11
Q2
20
11
Q3
20
11
Pe
ne
trat
ion
of
Ho
use
ho
lds
Sub
scri
be
rs (
00
0s)
Cable DSL Fiber Satellite BB Penetration
Source: Company reports, Kagan, Bernstein estimates and analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 4
Incremental penetration dynamics suggest we are headed to ~85%
Penetration Change in Penetration
13
.7%
19
.9%
27
.3%
34
.6%
43
.2%
50
.8%
56
.2%
59
.8%
62
.7%
65
.5%
0%
10%
20%
30%
40%
50%
60%
70%
Q1
20
02
Q3
20
02
Q1
20
03
Q3
20
03
Q1
20
04
Q3
20
04
Q1
20
05
Q3
20
05
Q1
20
06
Q3
20
06
Q1
20
07
Q3
20
07
Q1
20
08
Q3
20
08
Q1
20
09
Q3
20
09
Q1
20
10
Q3
20
10
Q1
20
11
Q3
20
11
Bro
adb
and
Pe
ne
trat
ion
of
U.S
. H
ou
seh
old
s
Source: Company Reports, Bernstein Estimates and Analysis
62
0.5
73
3.5
73
4.0
86
0.0
75
9.8
53
7.0
35
8.0
29
7.9
27
3.0
0
100
200
300
400
500
600
700
800
900
1,000
Q1
20
03
Q3
20
03
Q1
20
04
Q3
20
04
Q1
20
05
Q3
20
05
Q1
20
06
Q3
20
06
Q1
20
07
Q3
20
07
Q1
20
08
Q3
20
08
Q1
20
09
Q3
20
09
Q1
20
10
Q3
20
10
Q1
20
11
Q3
20
11
Bas
is P
oin
ts
YoY Basis Point Change in U.S.
Broadband Penetration
Source: Company Reports, Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 5
Reasons for Not Having Broadband
Reasons for Not Having Broadband 2010 (OBI) Reasons for Not Having Broadband 2011 (NTIA)
Reasons for Not Having Broadband 2010
(OBI)
Reasons for Not Having Broadband 2011
(NTIA)
Cost, 36%
Lack of Availability,
5%
Digital Literacy,
22%
Relevance, 19%
Use high-speed at work, 3%
Combo, 4%
Other, 11%
Source: FCC, "Broadband Adoption and Use in America, OBI Working Paper Series No. 1." John B. Horrigan, Ph.D
Cost, 25%
Lack of availability,
3%
Digital Literacy,
14%
Relevance, 46%
Use internet
somewhere else, 5% Other,
7%
Source: "Exploring the Digital Nation - Computer and Internet Use at Home," U.S. Dept of Commerce
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 6
DSL is now in decline
DSL Net Additions (Losses) 1
,41
1
97
9 1,0
83
1,0
44
1,1
43
55
2 69
5
47
0
68
6
(18
6) (7
1)
(12
)
15
1
(19
9)
(22
9)
(11
)
(11
1)
(40
4) (2
56
)
(13
6)
(64
)
(20
5)
(23
4)
(750)
(500)
(250)
0
250
500
750
1,000
1,250
1,500
1,750
-5%
-3%
-2%
0%
2%
3%
5%
6%
8%
9%
11%
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
06
Q1
20
07
Q2
20
07
Q3
20
07
Q4
20
07
Q1
20
08
Q2
20
08
Q3
20
08
Q4
20
08
Q1
20
09
Q2
20
09
Q3
20
09
Q4
20
09
Q1
20
10
Q2
20
10
Q3
20
10
Q4
20
10
Q1
20
11
Q2
20
11
Q3
20
11
Sub
scri
be
rs G
ain
s (L
oss
es)
(0
00
s)
Sub
scri
be
r G
row
th R
ate
Subscriber Gains (Losses)
Subscriber Growth Rate
Source: Bernstein Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 7
FiOS: Nearing End of Growth Cycle
FiOS: Projected Video Net Additions
-
100
200
300
400
500
600
700
800
900
1,000
2006
2007
2008
2009
2010
20
11
E
20
12E
20
13
E
20
14E
20
15E
FiO
S V
ideo N
et A
dditio
ns*
(000
s)
*estimated based on market penetration curve estimated from 1Q 2006-3Q 2011 results; assumes 18M home passings by end of 2015
and that marketed video homes/passed homes = 90% by end of 2015
Source: Company Reports, Bernstein Estimates and Analysis
Actual
Estimated*
FiOS: Projected Video Subscribers and
Subscriber Growth
35
5.6
%
103
.4% 4
9.2
%
27
.9%
13
.5%
7.5
%
4.1
%
1.4
%
0.3
%
0%
50%
100%
150%
200%
250%
300%
350%
400%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014
E
2015
E
FiO
S V
ide
o S
ub
sc
rib
ers
* (0
00
s)
Actual
Estimated*
YoY % Subscriber
Growth
*estimated based on market penetration curve estimated from 1Q 2006-3Q 20011results; assumes 18M home passings by end of 2015
and that marketed video homes/passed homes = 90% by end of 2015
Source: Company Reports, Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 8
U-Verse: Nearing End of Growth Cycle
U-Verse: Projected Video Net Additions U-Verse: Projected Video Subscribers and
Subscriber Growth
-
200
400
600
800
1,000
1,200
20
07
20
08
20
09
20
10
2011E
2012
E
2013E
2014E
2015
E
U-V
ers
e V
ide
o N
et
Ad
dit
ion
s*
(00
0s
)
*estimated based on market penetration curve estimated from 1Q 2007-3Q 2011 results; assumes 33M home passings by end of 2015
and that marketed homes/passed homes = 85% by end of 2014
Source: Company Reports, Bernstein Estimates and Analysis
Actual
Estimated*
352
.4%
97.5
%
44
.6%
27.5
%
20
.7%
13
.7%
11
.0%
7.9
%
0%
50%
100%
150%
200%
250%
300%
350%
400%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
20
07
20
08
20
09
20
10
2011
E
2012E
2013
E
2014
E
2015
E
U-V
ers
e V
ideo S
ubscribers
* (0
00
s)
Actual
Estimated* YoY % Subscriber
Growth
*estimated based on market penetration curve estimated from 1Q 2007-3Q 2011 results; assumes 33M home passings by end of 2015
and that marketed homes/passed homes = 85% by end of 2014
Source: Company Reports, Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 9
7.7
5.5
2
7.7
5.1
1.6
0
1
2
3
4
5
6
7
8
9
Fiber Cable DSL
Act
ual
Do
wn
load
Sp
eed
(Mb
ps)
Average Median
Source: FCC, "Broadband Performance: OBI Technical Paper No. 4"
The Need for Speed
Actual (Realized) Broadband Speeds by
Technology
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 10
Cable is Pulling Away in the Broadband Market
Share of Broadband Net Additions
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 11
FiOS and U-Verse Are Only a Small Slice of the National Broadband Market
Broadband: Market Share (Q4 2010) Broadband: Market Share (Q4 2011E)
Source: Company reports, Bernstein analysis
Cable, 59.5%
DSL, 29.9%
U-Verse, 4.0%
FiOS, 5.5%
Other Fiber, 1.0%
Cable, 60.4%
DSL , 27.3%
U-Verse, 4.9%
FiOS, 6.1%
Other Fiber, 1.4%
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 12
FCC: “Only One Technology Meets the Demands of a 25Mbps End-user”
Cable, Fiber and/or DSL
Cable Only
Not Served
14-16% 14-16% 14-16%
23-27% 23-27%
51-57% 51-57%
2-4% 3-9% 3-9%
1 Mbps 10 Mbps 25 Mbps
Downstream bandwidth supported
78-82%
Sources: The FCC; 2009 Form 477 data; service provider, equipment manufacturer, and trade association filings and publications; analyst
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 13
The TelCo Dilemma: Residential Access Lines Are in Free Fall
U.S. Access Lines in Service
y = -2.3043x + 196.14R² = 0.9826
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
0
50
100
150
200
250
Q4
20
00
Q2
20
01
Q4
20
01
Q2
20
02
Q4
20
02
Q2
20
03
Q4
20
03
Q2
20
04
Q4
20
04
Q2
20
05
Q4
20
05
Q2
20
06
Q4
20
06
Q2
20
07
Q4
20
07
Q2
20
08
Q4
20
08
Q2
20
09
Q4
20
09
Q2
20
10
Q4
20
10
Ind
us
try
To
tal A
cce
ss
Lin
e L
os
s R
ate
Ind
us
try
To
tal A
cc
es
s L
ine
s in
Se
rvic
e (
Mil
lio
ns
)
Total access lines Total access lines loss rate
Source: Company reports, Bernstein estimates and analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 14
y = -1.2793x - 0.0363
R2 = 0.5601
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-20%-15%-10%-5%0%5%
Annual Change in Access Lines
An
nu
al C
han
ge in
Co
st
per
Access L
ine
y = -1.2284x - 0.0501
R2 = 0.5216
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-20%-15%-10%-5%0%5%
Annual Change in Access Lines
An
nu
al C
han
ge in
Co
st
per
Access L
ine
y = -1.2179x - 0.0078
R2 = 0.5867
-10%
-5%
0%
5%
10%
15%
20%
25%
-20%-15%-10%-5%0%5%
Annual Change in Access Lines
An
nu
al C
han
ge in
Co
st
per
Access L
ine
C
y = -1.5209x - 0.0125
R2 = 0.4658
-20%
-10%
0%
10%
20%
30%
-15%-10%-5%0%
Annual Change in Access Lines
An
nu
al C
han
ge in
Co
st
per
Access L
ine
As Access Line Losses Mount, Unit Costs are Soaring
Verizon (Legacy Bell States): Rate of Access Line
Loss Versus CAGR in Cost per Line (Individual
Years by State, 2004-07)
Verizon (Legacy GTE States): Rate of Access Line
Loss Versus CAGR in Cost per Line (Individual
Years by State, 2004-07)
AT&T (Legacy SBC States): Rate of Access Line
Loss Versus CAGR in Cost per Line (Individual
Years by State, 2003-07)
AT&T (Legacy BellSouth States): Rate of Access
Line Loss Versus CAGR in Cost per Line (Individual
Years by State, 2003-06)
Source: FCC and Bernstein estimates and analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 15
As Volumes Fall, Wireline Margins Are Deteriorating
Verizon and AT&T: Wireline Margins
35.3
%
35.9
%
34.9
%
35.1
%
33.7
% 35.7
%
33.9
%
32.6
% 33.9
%
33.4
%
33.4
%
33.1
%
32.1
% 33.5
%
33.5
%
33.6
%
31.3
%
32.3
%
28.0
%
27.7
%
28.2
% 29.4
%
27.8
%
28.1
%
28.0
%
26.2
%
26.9
%
26.2
%
25.5
%
24.8
%
23.9
%
24.8
%
22.7
%
23.5
%
23.6
%
23.8
%
18%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%1Q
200
7
2Q 2
007
3Q 2
007
4Q 2
007
1Q 2
008
2Q 2
008
3Q 2
008
4Q 2
008
1Q 2
009
2Q 2
009
3Q 2
009
4Q 2
009
1Q 2
010
2Q 2
010
3Q 2
010
4Q 2
010
1Q 2
011
2Q 2
011
Wire
line
EB
ITD
A M
argi
n
AT&T Verizon
Source: Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 16
A Decade of ROIC (I)… Anemic Returns on Net PP&E
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
0 25 50 75 100 125 150 175 200 225 250 275 300
We
igh
ted
Av
era
ge
RO
IC E
x-U
nu
su
als
, G
oo
dw
ill,
AR
ILI
Min
us
WA
CC
, 2
00
0-0
9
Average Invested Capital Excluding Goodwill and ARILI, 2000-09 ($ billion)
IC = $146.4, ROIC spread 1.5%
IC = $129.4, ROIC spread = 0.3%
IC = $4.6, ROIC spread = -7.1%
IC = $32.0, ROIC spread 2.5%
IC = $8.5, ROIC spread 5.5%
Pre-Paid Wireless(EP = -3.3 billion)
Satellite (EP = +$4.7 billion)
Wireless (EP = +$3.2 billion)
Wireline (EP = +$22.4 billion)
Cable (EP = +$11.8 billlion)
EP = Economic profitsIC = Invested capital
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
A Decade of Economic Value Added (Excluding Unusuals, Goodwill, and ARILI)
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 17
A Decade of ROIC (II)… and even worse returns when you include what was actually paid for the assets
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575
We
ighte
d A
ve
rage
RO
IC In
clu
dng
Un
usu
als
, G
ood
will
, A
RIL
I M
inu
s W
AC
C, 2
00
0-0
9
Average Invested Capital Including Goodwill and ARILI, 2000-09 ($ billion)
IC = $210.9, ROIC spread = -3.0%
IC = $4.8, ROIC spread = -5.9%
IC = $126.8, ROIC spread -4.9%
IC = $13.8, ROIC spread -2.1%
IC = $231.9, ROIC spread = -2.1%
Pre-Paid Wireless(EP = -3.3 billion)
Satellite (EP = -$2.8 billion)
Wireless (EP = -$63.8 billion)Wireline (EP = -$48.3 billion)
Cable (EP = -$61.9 billion)
EP = Economic profitsIC = Invested capital
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
A Decade of Economic Value Added (including Unusuals, Goodwill, and ARILI)
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 18
Wireline Telecom ROIC now mostly below the cost of capital… wireless is a mixed bag, with clear winners and losers
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
7.2%
1.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
RO
IC E
xc
lud
ing
Un
us
ua
ls, G
oo
dw
ill,
an
d A
RIL
I
AT&T
BellSouth
Verizon
12.6%
0.4%
7.3%
15.4%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
RO
IC E
xclu
din
g U
nusu
als
, G
ood
will
, a
nd
AR
ILI
AT&T
Sprint
T-Mobile
Verizon
Wireline ROICs excluding Unusuals,
Goodwill and ARILI, 2000 to 2010
Wireless ROICs excluding Unusuals,
Goodwill and ARILI, 2000 to 2010
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 19
Cable and Satellite sub-sectors show strongly rising ROIC
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
24.1%
18.2%
25.6%
19.0%
-10%
0%
10%
20%
30%
40%
50%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
RO
IC E
xclu
din
g U
nusuals
, G
oodw
ill,
and A
RIL
I
Cablevision
Charter
Comcast
TWC
Cablevision ex-MSG
44.3%
46.7%
-20%
-10%
0%
10%
20%
30%
40%
50%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
RO
IC E
xclu
din
g U
nus
uals
, G
ood
will
, and
AR
ILI
DirecTV
Dish Network
Cable ROICs excluding Unusuals,
Goodwill and ARILI, 2000 to 2010
Satellite ROICs excluding Unusuals,
Goodwill and ARILI, 2000 to 2010
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 20
A Decade of Stock Performance… poor ROIC translates into poor total shareholder returns
-21
.6%
-50.6
%
-99.9
%
-46
.4%
4.2
%
-50
.5%
-94
.1%
-24
.5%
-0.6
%
-29
.9%
-99
.8%
-28.4
%
115
.9%
0.3
%
-76.9
%
0.7
%
-26.9
%
8.0
%
-97
.3%
-5.3
%
44
.2%
-35.0
%
-62
.4%
-60
.8%
-72
.1%
-20.4
%
-17.0
%
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
AT&T Cablevision Charter Comcast DirecTV Dish Network
Leap MetroPCS Sprint Time Warner
Cable
Verizon
To
tal A
bso
lute
Re
turn
fo
r P
erio
d E
nd
ed
De
c 3
1, 2
00
9
Ten-Year Total Stock Returns (YE 1999 to YE 2009)
Eight-Year Total Stock Returns (YE 2001 to YE 2009)
Two-Year Total Stock Returns (YE 2007 to YE 2009)
S&P 500 Eight-Year
Total Stock Return +13.5%
S&P 500 Ten-Year
Total Stock Return-9.1%
S&P 500 Two-Year Total Stock
Return -20.3%
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
A Decade of Investment Returns: Cumulative Total Stock Performance (Absolute)
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 21
ROIC is now much better (than historical) for cable, and worse for telecom
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
2.9%
-0.2%
-7.4%
-0.4%
-7.4%
-1.6%
15.8% 16.4%
10.3%
17.8%
11.3%
35.6%37.7%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
AT
&T
Ve
rizo
n
Sprint
T-M
obile
Le
ap
Me
tro
PC
S
Cable
vis
ion
Ca
ble
vis
ion
ex
-MS
G
Ch
art
er
Co
mca
st
Tim
e W
arn
er
Cable
Dire
cT
V
Dis
h N
etw
ork
RO
IC E
x-U
nu
su
als
, G
oo
dw
ill,
an
d A
RIL
I M
inu
s W
AC
C
Telecommunications Cable Satellite
ROIC Excluding Unusuals, Goodwill and ARILI Minus WACC, 2010
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 22
Decomposing ROIC (II) into Asset Turnover and Margins (sub-sectors)
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
'06, 9.3%'10, 4.4%
'06, 7.5%
'10, 10.7%
'06, 4.4%
'10, 5.0%
'06, 14.1%
'10, 22.7%
'06, 28.7%
'10, 45.1%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%
IC T
urn
ov
er
(Ex-G
oo
dw
ill a
nd
AR
ILI)
NOPLAT Margin (Ex-Special Items)
35%
30%
25%
20%
15%
10%
5%
NOPLAT margin x IC turnover = ROIC
Satellite
Cable
WirelessWireline
Pre-paid wireless
Changes in IC Turnover excluding Goodwill and ARILI and NOPLAT Margin
excluding Unusuals Combinations by Industry, 2006 to 2010
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 23
Decomposing ROIC (I) into Asset Turnover and Margins (companies)
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
T
T
CVCCHTR
CMCSA
DTV
DISH
LEAP
PCS
S
TWC
T-Mo
VZVZ
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%
IC T
urn
ove
r (2
010
, E
x-G
ood
will
and
AR
ILI)
NOPLAT Margin (2010, Ex-Special Items)
5% 10% 15% 20% 25% 30% 35% NOPLAT margin x IC turnover = ROIC
Satellite
Cable
WirelineWireless
40% 45%
IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding
Unusuals Combinations by Company, 2010
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 24
Summary and Conclusions
Penetration is slowing… but the data suggests we’re far from done yet
Fiber deployments near the end
Telco share falling…
…and TelCo wireline economics are deteriorating
Cable is winning the broadband wars
Infrastructure returns are anemic – across the board
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 25
Disclosure Appendix
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 26
U.S. Telecommunications and Cable & Satellite: Coverage Universe
Source: Bloomberg, Bernstein estimates and analysis
Closing Price Closing Price
Stock Rating Target Price (01-13-12) Stock Rating Target Price (01-13-12)
VZ U $32.00 $38.92 CMCSA O $32.00 $25.38
T M $30.00 $30.07 TWC O $88.00 $65.43
S M $2.50 $2.31 CVC M $20.00 $13.97
LEAP O $12.00 $9.96 DISH M $28.00 $28.75
PCS O $13.00 $8.35 DTV O $52.00 $43.46
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 27
Valuation Methodology
We value AT&T and Verizon on a combination of P/FE and a sum of the parts analysis. Assigned multiples
are based on historical performance, colored by the company's current allocation of capital.
We value AT&T on a combination of a target P/FE multiple of 13.0x applied to our estimated forward
earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA
multiple of 5.6x after adjusting for postretirement liabilities. We add the probability-weighted expected value
associated with the proposed acquisition of T-Mobile USA.
We value Verizon on a combination of a target P/FE multiple of 13.0x applied to our estimated earnings, as
adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.7x
after adjusting for postretirement liabilities.
We value Sprint using EV/EBITDA multiples of 5.5x forward 12 month EBITDA for the wireless business
(proportionately consolidating their 54% stake in Clearwire) and 3.5x for the wireline business, adjusted for
other non-operating assets and liabilities.
We value Leap Wireless and MetroPCS based on a weighted average of derived DCF values under four
different scenarios – a base case (which is given a 50% weight in the target price derivation), high and low
scenarios (weighted at 15% each), and a realistic downside scenario (weighted at 20%). Our base case
scenario assumes that Leap and MetroPCS' unlimited pre-paid ARPU remains in the $38-$39 range through
2015 and that their penetration of covered POPs reaches 7.2% and 9.5%, respectively, with the high and
low scenarios respectively incorporating more optimistic and pessimistic assumptions for ARPU, subscriber
growth, CPGA, CPU and capex.
We value the DBS sector on the basis of Steady State Cash Flow (SSCF) multiples, adjusted for market
value estimates for non-DBS assets. SSCF multiples have historically clustered around 9-11x trailing SSCF
for DirecTV and Dish Network, with higher multiples reflecting higher growth expectations, and lower
multiples reflecting lower growth expectations. We currently apply a 7.5x SSCF multiple to our forecast
forward 12 month SSCF for DirecTV and a 6.0x multiple for Dish Network, reflecting a 12 month look
forward as the basis of our 12 month target price, and lower-than-historical SSCF multiples to reflect the
sector's and the companies' diminished longer term growth prospects. We value the company's Latin
American assets using a forward SSCF multiple of 6.5x for PanAmericana and Sky Brazil, and a 10.0x
trailing EBITDA multiple for Sky Mexico.
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 28
Valuation Methodology, continued
We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast
EBITDA multiple of 6.25x for the core cable distribution business, 8.0x forward EV/ EBITDA for the cable
networks businesses of Comcast and NBCU, and 6.0x forward EV/EBITDA for NBCU's broadcast business.
We value other consolidated and non-consolidated operations and non-public equity investments on various
bases as appropriate. Publicly traded investments are carried at current market value.
In order to derive our price target for Time Warner Cable, we use a target multiple of 6.5x forward 12 month
forecast EBITDA, and add back the NPV of Time Warner Cable's deferred tax asset. We estimate that Time
Warner Cable will realize approximately $330 million of tax savings per year for fifteen consecutive years
from the 2006 acquisition of Adelphia as a result of its step-up in basis. When calculating the net present
value of these tax shields, we apply an 7.50% discount rate, which corresponds to Time Warner Cable's
estimated weighted average cost of capital.
We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast
EBITDA multiple of 7.0x for the core cable business. We value other assets and liabilities on various bases
as appropriate.
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 29
Risks
The risks to our target price for AT&T include:
Failure to gain regulatory approval to close the proposed T-Mobile USA transaction, adverse financial or other consequences associated with any conditions required to
garner regulatory approval, or the inability to wring the expected synergies out of a combined entity.
A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower
growth, and would likely be met with severe multiple contraction, in our view.
Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment.
Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider)
would yield lower ROIC and consequent multiple contraction.
Overpayment in an acquisition, which could be a variety of potential targets.
Our target price for Verizon is below the current trading range. Upside risks to our target price include:
Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current
dividend yields more attractive relative to investment alternatives.
Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal
wireless market penetration than we forecast.
Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the
Enterprise segment.
Subscriber gains as a result of fiber expansion (FTTX) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion.
Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins.
A faster-than-expected recovery in Enterprise revenues and margins.
Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares.
Our target price for Sprint is below the current trading range. Upside risks to our Sprint target price include the following:
A potential regulatory rejection of the AT&T and T-Mobile merger, which would give Sprint more leverage to strike a replacement deal with T-Mobile.
A spin off of Nextel could results in improved operating metrics, or, alternatively, could fuel investor enthusiasm even in the absence of improvement.
The growth rate of the industry could prove stronger than we anticipate. Sprint's churn rate or share of gross additions could improve sooner or more meaningfully than
we anticipate.
The downside risks facing our target prices for Leap Wireless and MetroPCS include the following:
Irrational pre-paid price competition initiated by one of the major carriers – most likely Sprint and/or T-Mobile, who are losing post-paid subscribers irrespective of their
efforts on the pre-paid side and thus are not as concerned about cannibalization between pre-paid and post-paid.
More limited than expected ability to penetrate their respective markets due to intensified pre-paid competition and/or economic forces, which could compromise their
scale economies and overall cost structure.
Greater than expected data consumption among pre-paid subscribers, which in turn could drive higher than expected capex requirements.
Downside risks specific to Leap include the possibility its new initiatives, including its new MVNO relationship with Sprint and nationwide 3G data roaming offer, raise its
cost structure beyond expectations.
Downside risks specific to MetroPCS include a greater-than-expected negative impact from Leap eventually selling its services in MetroPCS' footprint under its MVNO
agreement with Sprint.
Upside risks to our target prices for MetroPCS and LEAP include the following:
Greater than expected growth in the pre-paid wireless market overall, due to more post-paid wireless subscribers migrating to unlimited pre-paid
Greater than expected uptake of higher priced service offerings, which could result in enhanced profitability.
More rational price activity in the pre-paid market
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 30
Upside risks to our target price for Dish Network include:
Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost.
A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU.
An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and
would raise valuation multiples for Dish Network.
Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster.
Downside risks to our target price for Dish Network include:
Slower-than-expected subscriber growth would likely yield multiple contraction.
A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU.
A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in
these expectations could result in multiple contractions.
Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may
also yield negative returns.
An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material.
Risks to our price targets for the Cable operators include the risk that the competitive pricing environment will be more aggressive than we expect. Notwithstanding our
analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in
the absence of evidence of price competition, may continue to weigh on the stocks for some time.
New pathways to the home for video or other entertainment could also reduce the value of cable's video distribution bottleneck. Deep fiber deployments by the RBOCs
will impact cable subscribers and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast.
Comcast
Video pricing could come under pressure as growth for the satellite operators and TelCos slows.
The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely.
Longer term, cable's advantaged position in broadband could result in regulation.
Time Warner Cable
Video pricing could come under pressure as growth for the satellite operators and TelCos slows.
The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely.
Longer term, cable's advantaged position in broadband could result in regulation.
Cablevision
Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured.
Cablevision faces a very substantial overlap with Verizon's FiOS that could result in greater share loss or lower prices than anticipated.
The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely.
Longer term, cable's advantaged position in broadband could result in regulation.
Risks, continued
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 31
Disclosure Appendix
SRO REQUIRED DISCLOSURES
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Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No
analysts are compensated based on performance in, or contributions to, generating investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan
Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on
emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise
specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 01/17/2012, Bernstein's ratings were distributed as follows: Outperform - 45.1% (1.4% banking clients) ; Market-Perform - 46.0% (0.5% banking clients); Underperform - 8.9% (0.0%
banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment
banking services within the last twelve (12) months.
Bernstein currently makes a market in the following companies DISH / DISH Network Corp, DTV / DIRECTV Group Inc, CMCSA / Comcast Corp.
The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for
such services VZ / Verizon, T / AT&T Inc, S / Sprint Nextel Corp, TWC / Time Warner Cable Inc.
An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies VZ / Verizon, T / AT&T Inc, CVC / Cablevision Systems
Corp, TWC / Time Warner Cable Inc.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC,
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U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 32
12-Month Rating History as of 01/16/2012
Ticker Rating Changes
CMCSA O (RC) 12/14/10
CVC M (RC) 05/10/10
DISH M (RC) 10/10/08
DTV O (RC) 01/11/12 M (RC) 04/24/08
LEAP O (RC) 09/28/11 M (RC) 02/09/11 O (IC) 12/14/09
PCS O (RC) 08/10/11 M (RC) 08/09/10
S M (RC) 09/19/11 U (RC) 03/21/11 M (RC) 03/14/11 U (RC) 01/19/10
T M (RC) 10/25/11 O (RC) 03/24/11 M (RC) 01/05/09
TWC O (RC) 11/02/10
VZ U (RC) 10/12/10
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
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U.S. Telecommunications, U.S. Cable & Satellite Broadcasting 34
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