Getting A Fair Shake From The Cable IndustryPresentation Transcript
Getting a Fair Shake from the Cable Industry Communications Workers of America International Brotherhood of Electrical Workers Spring 2004
The Franchise Right Is the Foundation for All Cable Revenues
Cities provide cable companies with their most valuable asset . . . the franchise
Local ads Basic cable Premium tiers Pay-per-view High-speed Internet
Based on that franchise, companies have bought and sold and created giant corporations. These corporations have a responsibility to the city to provide good quality service and jobs. However, cable regulatory law restricts our ability to demand a fair share.
We must do three things:
understand better the nature of the cable industry;
demand quality service and jobs for our communities;
change the rules to even the playing field.
Voice Cable franchise rights
Cable Companies’ Power Has Increased with Their Size
As cable companies have grown larger and increased their geographic reach, they’ve gained more resources and power when they negotiate with a single city or choose to raise prices
in billions Enterprise value = total equity (a.k.a. market cap) + the total debt and measures the total capital of the company.
Comcast is the largest of the cable companies, with an enterprise value of $91 billion
Time Warner’s value includes major non-cable holdings such as AOL, publishing, etc.
Enterprise Value (as of March 2004)
Franchise Rights Granted by Municipalities Are Companies’ Most Valuable Asset
The franchise right is the largest asset on a cable company’s books
At Comcast, the franchise right represents 43% of the company’s assets.
The franchise right the city grants is the most important asset of the cable company and the city should insist on fair value for it. Source: Comcast financial statements, as of 12/31/03. Comcast’s asset distribution is typical. Franchise rights Goodwill & intangibles 43 % 17% 20% 21% Cash, current assets, other investments Plant, property & equipment Cable Company Assets
Cable Subscribers Are Valued at $3,820 Each
The average value per cable subscriber (total “enterprise value” divided by the number of cable subscribers) is about $3,820.
This is the value that company owns because the municipality has granted it the franchise right.
Weighted average value per sub: $3,820 *Figures are for all of Time Warner; separate financials for Time Warner Cable not available. Not meaningful $3,202 $4,236 $3,034 $5,169 $3,333 Value per Sub $100.95 $26.9 $90.9 $19.8 $15.3 $17.0 Enterprise Value (billions) 4,300,000 8,400,000 21,468,000 6,537,000 2,960,000 5,100,000 Cable Subscribers Time Warner* Cox Comcast Charter Cable-vision Adelphia
Today, “Cable Services” Are 88% of Revenues
In exchange for the franchise right, the city is entitled to 5% of “cable service” revenues*
Cable services include basic & advanced tiers, premium tiers, pay per view and digital. Today, these services make up 88% of cable revenues
Sources: FCC, 10 th Annual Report on Competition in Video Markets , Table 4, Jan. 2004 (6/03 data); CWA forecast Cable companies also collect “franchise fees” from their customers as revenue. They do not generally report these, but Comcast’s figure for 2003 was 3%. Basic & Advanced Tiers Pay Per View 2% Misc. (Advanced analog, equipment, shopping, installation, voice, new services) Local Ads High-Speed Internet Premium Tiers 2003: $51.3 B 56% 12% 6% 7% Digital 10% 6% *Many cities have found it necessary to perform audits to ensure that they receive their fair share; the cost of such audits should be built into the franchise agreements
By 2011, Only 60% Will Be “Cable Services” Premium Tiers Sources: FCC, 10 th Annual Report , Table 4; CWA forecast Basic, CPST, Digital 2011: $109 B Pay Per View 1% Misc. 3% (Advanced analog, equipment, shopping, installation) 12% 38% 6% 27% Local Ads High-Speed Internet Voice 14%
Cable companies are developing new services -- like high speed internet and voice services -- which are not subject to the automatic 5% franchise fee
Cable companies’ value will skyrocket, but the portion of cable revenue subject to the 5% franchise fee will shrink to 60%.
Negotiating for these revenues to be covered will be tough, but cities and citizens should receive some value for them as well.
Without the franchise right, the cable company could not provide these services.
Less Revenue Will Be Captured by Franchise Fees
Cable company revenues will rise but less and less will benefit cities
By 2011, only 60% of cable revenues will be subject to city fees, even though 100% of those revenues are still dependent on the cable franchise right granted by the city
Currently, Comcast takes in $815 per subscriber annually and pays franchise fees of $28 per subscriber (or 3.48%)
Sources: FCC, 10 th Annual Report , Table 4; CWA forecast $44.0 $6.4 $0 Revenue not subject to franchise fee (e.g., high-speed internet, voice) $65.3 $44.9 $22.6 Video revenue subject to franchise fee 25% 88% 65.7 2003 0% 100% 57.2 1994 55% % not subject to franchise fee 60% % subject to franchise fee 76.2 Subscribers (millions) 2011
Cable Labor Costs 20% Below Industry Standard
Wages in cable lag behind similar work in converging industries (telephone, high-speed internet, VoIP, satellite TV deals, etc.)
Cable companies chose the low road route: keep wages low, use lots of contractors, pressure employees to meet quantitative standards while only giving lip service to quality
Technician and Service Rep Pay and Benefits
Cable companies have not created the kinds of stable jobs that can build our community
Also, most cable companies fight workers who try to organize a union. Comcast in particular has declared “it is waging war against the CWA.”
Sources: Technicians - Survey data. Service reps – Cornell-Rutgers Telecommunications Project, Telecommunications 2000: Strategy HR Practices & Performance . Pay includes base wage, overtime, and commissions.
Cutting Corners on Service and Safety Sources: Columbia Telecommunications Corporation (CTC), Technical Inspection of Physical Plant , City of Los Angeles Cable Television Systems, March 6, 2002; Kramer Firm, Inc., Plant Safety Evaluation of Comcast Cable in the City of Detroit, Michigan , Dec. 10-12, 2003; CTC, Prince Georges County, MD Cable Television Subscriber Network and Testing Report , July–Sept. 2003; William Pohts, Technical Audit of Comcast Cable Television System Serving Baltimore, MD , March 2003. All reports available at www.comcastwatch.com. There is no need for poor quality in the network. Yet, various technical audits from around the country indicate the cable companies have been cutting corners on service and safety: “ . . . the number of subscriber drops not grounded or not meeting all of the NEC Section 820 requirements exceeds 40% of all currently and formerly served addresses, and will require a significant amount of time to bring into compliance .” Detroit “ The County temporarily suspended inspection activity . . . pending resolution of the thousands of outstanding violations accumulated since 2000 without repair action or response from Comcast .” P.G. County, MD
40% of service drops found deficient
“ Many of the deficiencies raise significant safety concerns. . . . in numerous cases, the drop cables were not adequately grounded, presenting an electrical hazard to subscribers, as well as Operator personnel.”
“ . . . problems were plainly visible from City streets, and should have been corrected by the Operators as part of routine maintenance of their cable systems.”
The Cable Companies Claim: “There’s No Money in the System”
Cable Companies Report Accounting Losses But Make Real Profits Cable companies say they’re barely making a profit . . . . . . but the real story -- the story they tell Wall Street, and that they use to calculate executives’ compensation -- is in the operating cash flow margin Source: Company financial statements. For Adelphia, figures are for 18 months ending 12/03; all others for year 2003. Time Warner net profit for entire company; operating cash flow for cable operations only. When asked to make repairs or justify rate increases, cable companies often say they are broke. Yet Wall Street has kept their stock prices high. What’s going on? 7.95%* -2.29% -.66% -4.94% -6.1% -16.6% Net Profit Margin Time Warner Cox Comcast Charter Cablevision Adelphia 39% 37% 36% 40% 28% 29% Op. Cash Flow Margin
“We Spent $75 Billion on Upgrades”
Of the purported $75 billion, 59% ($44 billion) was spent on maintenance and consumer equipment like set top boxes.* These are routine costs of doing business, not real investment in the network.
Despite the money spent, service and safety violations continue throughout the systems
Redlining of underserved communities
*Cable industry accounting rules currently allow maintenance, set-top boxes, and some programming expenses to be listed as capital investment, not operating expenses. This policy is under review. Sources: U.S. PIRG, Failure of Cable Deregulation , Aug. 2003, p. 20; U.S. Government Accounting Office (GAO), Issues Related to Competition and Subscriber Rates in the Cable Television Industry , Oct. 2003. Source: FCC, 10th Ann. Report , p. 29. 2% Commercial (i.e., non-residential) 12% Support 34% Set-Tops, Modems, etc. 27% Build Out, Rebuild & Upgrade 25% Maintenance “ Capital” Investment
Companies Are Already Recouping Costs . . . and cable companies are also reaping increased revenues from services such as digital cable and telephony. but increased revenues from Internet services alone almost cover those costs . . . Companies incurred costs for the plant upgrade . . . *While cable companies describe upgrade costs as $400-800 per subscriber, they annualize the cost through depreciation at $80 per subscriber. Source: Consumers Union and Consumer Federation of America, The Continuing Abuse of Market Power by the Cable Industry, Feb. 2004 , p. 10, citing GAO data. + $74/sub Internet service revenues + $80/sub Annualized capital costs (depreciation expense)*
“Programming Costs Keep Rising”
Programming costs have risen, but increases in ad revenues have outpaced programming cost increases by $2.6 billion
$14.71 $10.99 2002 +117% +94% Change Source: U.S. PIRG, Table 4, citing NCTA industry statistics Cable Ad Revenue Programming Costs $5.66 1996 Increased Revenues Outpaces Costs $6.79
Nine of the World’s Richest People Got Their Fortunes from Cable Source: Forbes , March 2004 $625 million Comcast Brian Roberts $1.4 billion Cablevision Charles Francis Dolan $2.1 billion MediaOne, others Amon Barr Hostetter, Jr. 1.1 billion Cable TV Alan Gerry $1.9 billion TCI, other cable TV John Malone $825 million Lenfest Cable Harold FitzGerald Lenfest $11.0 billion Cox Anne Cox Chambers $11.0 billion Cox Barbara Cox Anthony $2.3 billion AOL-TW, TBS, others Ted Turner Net Worth Source of Fortune
Cable Deals Have Paid Off for Execs Sources: “Changes At the Top,” CableWorld , June 9, 2003; “Rewarding Comcast Officers,” Philadelphia Inquirer , May 6, 2003 Comcast-AT&T Broadband merger Up to $600,000 bonus in addition to $1.2 M salary, regular $1.6 M bonus, 1.9 M stock options Ralph Roberts, Finance Cmte. Chairman Eligible for additional bonuses of at least $375,000 to $495,500 Steven Burke, Exec VP Lawrence Smith and John Alchin, co-CFOs Performance bonus of no less than $2.7 M, plus salary of $1.8 M C. Michael Armstrong Chairman $1.8 M bonus, plus regular $6 M bonus, $1.2 M salary and 5.5 M stock options Brian Roberts, CEO Up to $16.2 M Ron Cooper, COO & Pres. Up to $24.6 million over three years in salary, bonuses, stock and options. (Only on request of the bankruptcy judge’s did Adelphia back off a guaranteed $7.6 M payout if the board removes Schleyer for “good reason.”) William Schleyer, CEO & Chairman Adelphia reorganization following bankruptcy and accounting scandal Annual compensation for directors up 43% at Comcast, 67% at Cablevision, and 150% at Cox
Cable Prices Are Rising at Three Times the Rate of Inflation Source: U.S. Bureau of Labor Statistics Cable Rates Inflation
Cable Companies Use Monopoly Power
Rates for most services offered by cable operators are deregulated, and rates have been soaring as operators take advantage of their power in the marketplace
Competition was supposed to keep prices down, but in markets where 98% of Americans live, a single cable operator has market share of more than 80%
Satellite TV doesn’t keep prices down; satellite competes with high-end digital programming, not basic and enhanced services
“ FCC [data] also confirm that DBS, while growing in subscribers . . . is unable to restrain cable’s prices.”
Programming bundles are used to force consumers to pay for higher tiers
The only effective competition has been a wireline overbuild; cable prices are 15% lower where there’s an overbuild
Sources: GAO report, p. 7; CU & CFA report, p. iv; U.S. PIRG report, p. 1.
Cable Operators Own Significant Content
Cable operators are 64% more likely to carry the programming in which they have a majority ownership stake
Comcast and other cable companies own regional sports teams, which they use to control viewers
86% of “must have” regional sports programming is vertically integrated
E.g., Comcast owns the 76ers and the Flyers; Cablevision owns the Knicks, the Rangers, and the N.Y. Liberty
To launch a new channel, programmers need distribution on MVPDs that cover 40-60% of subscribers
Sources: FCC, 10 th Annual Report ; U.S. PIRG report, pp. 3-4; CU & CFA report, p. 8; Statement of Chairman Pitofsky, and Commissioners Steiger and Varney, In the Matter of Time Warner Inc./Turner Broadcasting System Inc., Docket No. C-3709, Feb 3, 1997, before the Federal Trade Commission
Cable Operators Not Addressing the Digital Divide
Providing broadband connections is critical to the future of all Americans. Our policies don’t encourage broadband expansion, and America is falling behind countries like South Korea, Canada and Japan.
There are significant disparities in which of our citizens are connected to the internet. The less you earn, the less likely it is that you will be connected. African-Americans and Hispanics are two times less likely to be connected.
“ [W]e need to invest in a modern infrastructure in remote and poor areas. While lower wages in India and China may be a fact of life, why should we ever be outpaced because there is better broadband in Bangalore than Buffalo?” Gene Sperling, “A New Consensus on Free Trade,” Washington Post , March 1, 2004 Broadband Penetration Rates 18% U.S. 27% Japan 36% Canada 75% South Korea 68.1% Asian-American 30.8% African-American 32.0% Hispanic 55.4% White U.S. Households with Internet Access, by Race 78.9% $75,000 & above 44.1% $25,000-$34,999 67.3% $50,000-$74,999 33.4% $15,000-$24,999 57.1% $35,000-$49,999 25.0% < $15,000/year U.S. Households with Internet Access, by Income
Cities must negotiate hard and must be prepared to fight to protect their interests -- just as hard as the industry is fighting to protect itself
Cities should join movement to re-regulate cable prices
Franchise agreements should capture new revenue growth areas: high-speed internet, voice
Cities must insist on universal deployment
Build-out/deployment timetables for low-income areas
High service quality and safety standards and funds to audit
Community wage standards
E.g., St. Paul cable franchise renewal agreement: “The wages and benefits paid to the occupational groups utilized by the company or its contractors or subcontractors in the construction, operation, or maintenance of the cable system shall not be less than the wages or fringe benefits paid to comparable positions in the classified civil service system.”