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Unplugging From Cable Stocks

Cody Willard

The bullish logic on the cable companies has been that they pretty much have 100% of the television market, dominate broadband connectivity and can now take market share in voice by bundling VoIP (voice over Internet protocol) with their other products.

As every major U.S. cable company, from Comcast to Time Warner to Charter Communications(CHTR Quote - Cramer on CHTR - Stock Picks), is plopping along near its 52-week low, let's go ahead and note that the bull logic has been wrong thus far. And I think it's only going to get worse for the cable bulls from here.

VoIP? It really is going to drive landline voice pricing to zero. That makes the net present value of VoIP subs pretty worthless, too. Want to make money in voice? Wireless is just about the only place of value in voice.

Certainly the cable companies in the U.S., and in many other countries, have to be scratching their heads wondering how to get into the wireless business in a manner such as NTL did this morning with the formal announcement that it is taking over Virgin Mobil. Of course, NTL's stock has long done what the U.S. cable companies haven't: It goes up, and the stock is up more than fivefold since the beginning of 2003. The company has been growing and executing, and now the company has more financial and currency flexibility than these U.S. cable companies.

You really think Comcast or Time Warner have either the financial ability or the guts to try to buy a major wireless carrier? What are they going to do, merge with Alltel, which is really the only viable wireless carrier for them now? As Alltel's market cap, before any premium that would be required, is already $25 billion, I don't think Comcast could raise the money, even if it wanted to. And Time Warner? Maybe it can trade AOL for Alltel. (Just kidding, though Google did put a value on AOL of about $20 billion or so when it gave AOL a billion for a 5% stake.)

So while a smart cable company, NTL, is investing in future growth and generating returns for shareholders, the U.S. cable companies are still scheming on how to control their subscribers and stem their accelerating viewership losses. These stocks can't go up because they're increasingly in a Catch-22 of their own making. The irony is that the best way to stem the losses would be to quit trying to control, but I don't see any indication that they're interested in "flipping" their traditional models just yet.

And seriously, what is up with the cable companies just sitting around and watching their customer base dwindle as video-over-broadband and iTunes shows and all the other competing video distribution outlets explode?

To be sure, video distribution is not a zero-sum game. But there are only a few hours in each day during which the average consumer will watch video. And as the time allotted for watching the television-sourced video has heretofore been centered around sitting on the couch in the living room, focusing on the broadcasts from the cable companies, it's key to acknowledge that that model is changing and soon we are going to be able to access any video we want anytime we want from anywhere we want.

And consumers won't be sitting around "flipping" channels trying to find something tolerable in the 8,324 channels that their cable company is endlessly blasting out to them. No, they'll take control and just bypass the broadcasts.

The consumer is king. Those who tried to control the consumer are dead.

Cable needs control to make money. They can't keep control. And the loss of control is accelerating.

Does that sound like a good business model? I'm not going to short the cable companies, but I'm sure going to stay away from the long side of them.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Charter Communications to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.