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Wall Street Finally Recognizes MSO Upside

For years, when financial journalists wrote about prospects for the cable TV industry, quotes from Kagan Research analysts usually provided the "on the other hand" viewpoints at the end. These articles usually suggested that cable TV faced a grim future due to the rise of the Internet and other new media, resulting in the upbeat prognosis from Kagan analysts being relegated to contrarian minority opinions.

The needle is swinging back as cable�which really never faltered in fundamentals�is now posting sizzling earnings. "Wall Street's sentiment is gradually shifting," notes Kagan Research analyst Renee Shaening. The Kagan Cable MSO Average has climbed 20.1 percent from late December to May 8, with cable stocks climbing from depressed levels.

The reason? New services are booming: voice subscribers are ramping at breakneck speeds while high speed data and digital video net additions are accelerating � the latter bolstered by video-on-demand and digital video recorders. Also, cable has just scratched the surface in terms of revenue opportunities in the commercial services sector.

"You can look at all the services separately but it's more relevant to view them together," says Shaening. "They are being sold in bundles that are a powerful marketing proposition. The bundle reduces subscriber churn and selling bigger service packages ratchets up ARPU," or average revenue per (subscriber) unit.

While cable's trend line is ascending, there are some pockets of concern. Capital expenditure for equipment and infrastructure such as digital set-top boxes is not abating. Local advertising revenue is growing slowly, although Shaening expects this will blossom down the road. Speculation has emerged that telcos � such as Verizon � rolling out competitive video services could trigger a ruinous price war. We'll just have to wait and see.

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