Cable TV Deals: There’s Logic in the High Prices

Entrepreneur and Washington Redskins owner Jack Kent Cooke and the New York Times Co. sold their cable television interests last week.

And both received handsome prices, confirming that demand for cable TV systems remains strong in contrast to the market for local television stations--where Channels magazine reports a glut of unsold properties because business has been poor. Cable’s optimism contrasts also with continuing gloom at the TV networks, ABC, CBS and NBC, which only 10 years ago held 90% of the national audience but now have 68%.

Cooke Cablevision fetched an estimated $1.5 billion last week, or roughly $2,150 for each of its 700,000 subscribers. That means if you pay about $20 a month to subscribe to cable--as 53% of TV households now do--smart business people are willing to pay $2,000 to reach you.

Or more. The New York Times cable system, which serves affluent communities in southern New Jersey, went for the equivalent of $3,000 per customer--or almost three times what the newspaper paid to buy the system in 1981.

What’s up with cable? More customers, higher subscriber payments and advertising revenue. Cable systems took in over $1 billion in advertising last year--a small percentage of television’s $25 billion in ad dollars but double cable’s ad totals five years ago.

Which made a lot of people sit up and take notice. Deals in communications--a vast industry with newspapers, radio, television, books, magazines and movies competing for the customer’s time--arouse interest beyond the buyers and sellers. Advertisers are looking for ways to reach customers, politicians monitor anything that reaches voters, and regulators are watchful because communications involves public policy.

Growth Industry

And people pay attention because media deals both reflect what the public watches and predict what it will be offered.

So what do high cable prices say? That the business is still growing. “In a few years, 70% of the 90 million TV households will have cable,” says analyst Kenneth Berents of the Philadelphia brokerage house Butcher & Singer.

It has grown from a service for homes with poor TV signals to a significant and permanent part of television. NBC is starting an all-news cable service to compete with Cable News Network. ABC owns ESPN, which showed NFL football last season and will soon have major league baseball.

So why did Cooke and the New York Times sell? And were buyers, including Denver’s Tele-Communications Inc.--the largest cable operator--wise to buy at this time?

The stock market seems disapproving. Although Tele-Communications’ President John Malone paid $2,100 a subscriber for some of Cooke’s cable systems, the stock market values Malone’s own company at about $1,200 a subscriber.

The difference is in perspective: The market is looking at near-term revenues while Malone understands that the business has reached a turning point. Cable operators, having wired more than half the nation’s TV households, now must invest in programming and build bigger systems to use such programs economically. Malone’s TCI owns local sports channels in Pittsburgh and Denver and plans more in Western states; cable pioneer Ted Turner has just launched a national movie channel.

Other companies will decide either to commit sizable resources to cable or to cash out, as New York Times and Cooke did last week.

Will cable displace free, broadcast television? Not at all. Cable represents an addition to a U.S. system that has stressed choice and variety since the Federal Communications Act of 1934 made service to local communities the guiding principle of industry. Politically, it was a case of Congress making sure of access to constituents. But economically it has resulted in an enormous and varied market of 1300 television stations, and now more than 7,000 cable systems.

It’s a system being copied worldwide: France and Italy now allow non-government channels; Britain soon will get the kind of multi-station variety Americans take for granted. And it’s a system that, as cable prices show, builds values in more ways than one.