Cable One's broadband-first strategy has 'some critical holes,' analyst says

Newly spun off multiple-system operator Cable One is being carefully scrutinized as it preps for its first stand-alone earnings call on Aug. 6 for its notable strategy of downsizing video operations in favor of building up broadband. "We certainly have some sympathy for the notion that a broadband-only cable operator might be more profitable," wrote analyst Craig Moffett in an investor note. "But there are some critical holes in the Cable One story. Does the company truly believe that all costs are variable such that cutting video will bring endless margin expansion? Are Cable One's new shareholders really better off for having played hardball with Viacom?" Cable One, which spun off from Graham Holdings on July 1, made industry-trade headlines last year when it famously eschewed a program licensing renewal deal with Viacom, traditionally one of cable TV's lynchpin programmers.

The Phoenix (AZ)-based MSO has subsequently lost more than 20 percent of its video subscribers. In fact, the company lost 103,232 video customers in the first year after dumping Viacom, ending the first quarter with 421,331 video customers. In meetings with investors, Cable One executives have touted the improvements to EBITDA and free cash flow that have been yielded by substantially reducing the MSO's bill for video programming. After programming costs and capex are factored in, Cable One estimates that it only nets a free cash flow of 96 cents per video customer -- or about 1 percent of overall revenue. This viewpoint is shared by other top cable industry executives, including Cablevision's James Dolan. He recently told investors that high-speed data has become Cablevision's "No. 1 product," and added that "the video product has lost a tremendous amount of margin."