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Revenue Source Shifting for U.S. Cable MSOs

Is Wall Street being too timid in valuing stocks of U.S. cable multi-system operators (MSOs)? After all, average revenue per unit (ARPU) has achieved breathtaking gains in recent years and Kagan Research forecasts this impressive growth on a per-subscriber basis will continue.

ARPU on average jumped 140+ percent from 1995 to 2005. That's because cable systems have added high speed broadband access, voice over Internet protocol (VoIP), expanded basic TV channel tiers and other digital-based services in recent years, layered on top of their traditional basic cable TV.

While impressed, investors interject a dose of "on the other hand" caution. The media landscape is more competitive with the two satellite TV platforms and telephone companies diversifying into video. There are also worries that budding Internet protocol TV will blossom and thus undercut traditional cable TV's linear channel offer, although a closer look indicates practical technical and economic hurdles are daunting for the foreseeable future.

Kagan notes that cable MSO stocks rallied at the start of the year, after investors saw robust Q1 cable earnings and a slower-than-expected rollout of video services by telco competitors.

Among the new services pumping up cable MSO ARPU, Kagan estimates that IP voice will corral 28.7 million subscribers by 2015, thus penetrating about one-quarter of marketed homes. Voice, high speed Internet, local advertising, video-on-demand and interactive services are expected to grow from roughly one-third of cable's ARPU these days to nearly half by 2015. That means the importance of basic cable video will decrease.

Given this apparent shift in the cable MSO revenue mix, it's interesting to assess how the telcos are preparing to respond to their main adversaries strategic plans. Who is merely content to 'play the game,' and who is more inclined to 'redefine the game' in order to upset the status quo?

Yes, it's a somewhat rhetorical question, since the answer is forthcoming, in one of my upcoming commentaries on this very topic.

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