Hey, big spender…
Like graduates thumbing through their first student loan payment booklets, sometimes, it doesn't seem possible to see the end of a huge financial obligation.
The same is true of the cable industry's decade of big spending on plant rebuilds and upgrades–except instead of writing a monthly check for $114.68, the nation's seven largest operators wrote up several billion dollars worth of checks per year. And instead of sending checks to a loan service center, they sent them to the suppliers of fiber, coax, enclosures, tools, pole-line hardware, passives and actives–the stuff that collectively makes up a cable plant.
As readers of this publication acutely know, cable broadband networks need lots of stuff to be considered modern. At the very least, they need two-way signaling, with 750 MHz to 860 MHz of capacity, fed to 500-home, sub-dividable nodes.
With few exceptions, cable's boom time for aggressive capital spending on plant seems very close to a long-anticipated conclusion. Every major U.S. operator except AT&T Broadband, which is catching up from a capital spending cutoff last year, aims to be at least 89 percent upgraded by year-end.
But whether or not plant spending ever really ends is an area where reasonable people can, and do, disagree. For MSOs, being done with plant spending is good. For the suppliers that serve them, it's not.
Reality is tipping toward the wind-down, but probably not as dramatically as MSOs hope–and suppliers fear. Most senior cable executives spent the early months of 2002 assuring the investment community that the big spend on plant upgrades is nearing the end. But others quipped that just as the unemployment rate never quite gets to zero, plant upgrades never quite get to 100 percent finished. Suppliers fervently hope that's true.
If nothing else, the year-end upgrade statistics will produce ample fodder for the cable capital carousel: Wall Street financial analysts who cover cable want to see the end, so that the tens of billions of dollars previously allocated to capital can be poured on debt, or used to improve cash flow. But, the financial analysts who cover cable's publicly traded equipment suppliers don't like the notion of an end in spending, for reasons that are just as obvious.
By all accounts, there's at least another solid year, perhaps two, of substantial plant-related spending–and lots of years for variable capital spending, the type that's used to buy digital boxes and cable modems. The plant spending is rooted in the fact that many MSOs are still unifying the systems they added through consolidation and cluster-oriented swaps with their brethren.
But, as time wears on, a larger percentage of overall capital spending–upwards of 80 percent–will go toward the things needed at either end of the plant itself. Cable modems, set-top boxes, telephony units and all related headend equipment will continue to be high on cable operators' shopping lists.
In the case of AT&T and Adelphia, capital spending will increase by 30 percent and 11 percent this year, respectively, which includes vastly intensified plant work. Those levels are offset, though, by a 41 percent capital spending dip from Comcast, a 19 percent reduction from Cox, and a 17 percent drop from Charter.
In aggregate, capital spending for the top seven MSOs will drop by 6.3 percent this year, to a total of $14.8 billion, down from the $15.6 billion spent in 2001.What's in capex?
For cable operators, there's more piled into capital spending than the materials required for plant rebuilds and upgrades. The capital expenditure (or "capex") line contains the costs for analog and digital set-tops, cable modems, network interface units, and any other in-home devices used by basic and advanced service customers.
Accountants identify these items as "variable" costs because they only occur when someone orders a service that requires them. (A new synonym for variable costs–"success-based capital"–is the newest word springing up to identify these costs. Engineers will be heartened to know that financiers apparently have their fair share of buzz-phrase creators, too.)
Capex also includes inventory needed for line extensions into new customer areas, and the day-to-day items needed to maintain existing customers. Drop cable and F-connectors, for example, will remain staples, regardless of how quickly major plant construction projects wane.MSO-by-MSO trends
Adelphia. An acquisitive spree of mostly smaller MSOs is what's pushing Adelphia to plow $2 billion into capex this year, as the MSO dashes to get 90 percent of its passings upgraded for higher-capacity, two-way traffic (from 60 percent two-way activated at year-end 2001). Right now, the MSO is upgrading about two percent of its plant per month toward that goal, executives told financial analysts last month.
Next year, with the bulk of its plant work completed, Adelphia's capital spending will drop to the $1.7 billion range. In 2004, executives estimate, spending will settle to around $900 million to $1 billion.
As for advanced service additions, Adelphia's goal is to add another 600,000 digital video customers for this year, as well as another 325,000 high-speed Internet customers. Adelphia, among other MSOs offering service bundles, says that its customers are four times more likely to buy a new service if it's packaged with something else.
AT&T Broadband. Despite its pending merger with Comcast, AT&T Broadband executives spent the early months of 2002 talking up a five-point plan to improve operational efficiencies. One of the five points, and a big one, is to kick-start its dormant plant rebuild and upgrade activities. Of the $4.2 billion to $4.4 billion AT&T Broadband allocates to capital spending this year, $1 billion to $1.2 billion will go toward plant work. That's double 2001 spending on the category.
With the increased plant attention, AT&T Broadband aims to be 70 percent upgraded for 750/860 MHz capacity, with bidirectional signaling, by the end of this year. On a marketable services basis, that translates into the ability to sell digital video to 100 percent of its homes passed, high-speed Internet to 70 percent, and telephony to 40 percent of homes passed.
Operationally, AT&T Broadband, in advance of the Comcast merger, is pushing as much control to field offices as it can. Only three drivers will encourage centralization, executives told financial analysts last month:
- Areas that benefit from scale economics, such as IT and procurement,
- Areas that require consistency, such as brand management, and
- Areas that require unique resources and expertise–meaning parts of engineering, provisioning, new product development, R&D, and some aspects of telephony.
Cablevision Systems. In its demographically and geographically homogenous New York cluster, which it describes as the largest contiguo