Signs Point to Trouble for Cable Stocks

Cable stocks could be in for trouble, judging from the wavering faith in the sector by some stalwart investors and wars with satellite rivals that heated up last week.

Gordon Crawford, the powerful Los Angeles-based media money manager at Capital Research & Management Co., has dumped stakes in several cable stocks, including Cox Communications Inc., and has reduced his position in the two remaining pure-play cable companies in his portfolio--Cablevision Systems Corp. and Comcast Corp.

Cable mogul John Malone, an industry visionary and closely watched investor, sold Tele-Communications Inc. to AT&T; Corp. last March and sources close to him say he is eager to sell his shares in the telecommunications giant once his one-year holding period ends this March.

Cable stocks took a dive Wednesday after analyst Richard Bilotti of Morgan Stanley Dean Witter & Co. cut his ratings of Cablevision and Cox because of worries about stiffer competition in selling Internet, phone and digital TV services.

The downgrades contributed to an 8.3% decline for the year through Wednesday in the cable index of the Paul Kagan & Assoc. research group. Cable stocks recovered a bit Thursday, propped up by boosterish reports by Merrill Lynch & Co. and PaineWebber, but shares fell again Friday despite one of the biggest one-day gains in the Dow Jones industrial average.

The pessimism follows some of the biggest gains ever in cable stocks, which rose more than 547% from May 1997 to the end of 1999, according to Kagan analyst Sharon Armbrust. Investors such as AT&T;, Microsoft Corp. and computer billionaire Paul Allen have ignited values, eager to capitalize on cable’s ability to deliver a host of new services to households, including high-speed Internet access, interactive and digital TV, and phone services.

After spending $27 billion to upgrade cable systems over the last three years, the industry is finally poised to reap the fruits of those investments. But many in the industry worry that margins will be squeezed by price wars with empowered rivals.

On Friday in New York Stock Exchange trading, Cox fell 50 cents to close at $45.19, Cablevision fell 75 cents to close at $74.25 and AT&T; rose $1.25 to close at $49.25. Comcast fell $1.38 to close at $42.38 on Nasdaq.

The biggest threat is from satellite TV providers Hughes Electronics Corp.’s DirecTV and EchoStar Communications Corp., which ended the year with 11.4 million subscribers, up 39% over the year before. That compares with cable’s customer growth of about 2%. The cable industry serves about 70 million homes.

Analysts expect many cable customers, fed up with rising rates and a history of monopolistic practices, to defect to satellite TV because of new laws, passed after Thanksgiving, that allow these providers to sell local broadcast channels to their customers, putting them on more equal footing with cable. On Friday, Hughes shares closed at $98, up $3.13, on the NYSE and EchoStar rose $3.19 to close at $85.38 on Nasdaq.

And they say a dispute between Cox and Fox Group Inc. last week played into satellite providers’ hands--and could be a harbinger of other breakdowns between cable operators and broadcasters that could accrue to satellite’s advantage. About 400,000 Cox subscribers in Texas; suburban Washington, D.C.; and Cleveland were unable to get Fox network programming for six days after Fox cut off the signal because Cox would not agree to carry two small cable channels as well under a new agreement.

The two companies settled the dispute Thursday--but not before some Cox customers disconnected cable and bought satellite dishes.

Sources say Comcast and ABC are now in a similar dispute under which ABC is pressuring Comcast to carry new cable services, including its SoapNet, in exchange for the rights to retransmit the network signal. Sources say ABC is counting on the Super Bowl game at the end of January to help get its way, just as Fox used a Washington Redskins football game as leverage. Cable executives are well aware that die-hard sports fans would buy satellite sets before missing a playoff or Super Bowl game.

The satellite services are already pouncing. On Friday, EchoStar, the nation’s No. 2 satellite TV provider, unveiled a nationwide promotion in which it is giving away equipment and installations worth $300 to $400 to any customer who submits a canceled cable bill and agrees to buy a year of programming at $39.98 a month.

The subsidy makes satellite service cheaper in some cities than cable subscriptions.

EchoStar is promoting such deals aggressively in Washington and Dallas, where many Cox customers are still fuming about the lapse in Fox service.

Crawford accused the cable industry at a trade convention a year ago of being too complacent in the face of satellite competition, and he began reducing his exposure to cable stocks this spring, when prices peaked.

Crawford, a long-term investor who was a cable backer through the doldrums of the early ‘90s, would not comment for this story. But sources close to him said he is uncomfortable with the escalating values of cable stocks and the growing competition.

They say he has liquidated his entire stake in Cox, Century Communications, Adelphia Communications, TCI and Jones Intercable Inc. Before reducing its stake, Capital Research owned 8% of Comcast, the nation’s third-largest cable company, and was its largest shareholders outside the founding Roberts family.

It is unclear how much of the stock Crawford has retained.

Sources say Crawford does not own satellite television shares, preferring to put his money into programming suppliers such as Time Warner, News Corp., Viacom and Seagram.

Crawford--who has played matchmaking roles in many of the last decade’s media mergers, most notably Time Warner’s purchase of Turner Broadcasting System--typically takes large positions in companies that he holds long-term, maintaining close relationships with their top managements. He sold out of Walt Disney Co. last year before the stock took a huge dive.

He also missed the early run-up in CBS shares under the leadership of Mel Karmazin, deeming them overvalued in the high-$20-a-share range. He bought in when shares were in the low- to mid-$30 range. Shares closed Friday at $58.

For his part, Malone, through his Liberty Media Corp., continues to have deep ties to the cable industry, with stakes in cable equipment maker General Instrument, Discovery Communications, USA Networks and Encore Starz Media. But Malone has also invested in alternative distribution outlets, such as wireless technologies, broadcasting and digital subscriber lines.