Watch the Indicators, History Matters

Only a very-rare communications industry executive is not wondering where we are in the recession and what it will mean for services of various types. But a bit of knowledge about history is something of an advantage in that regard. There are some traditional leading indicators, and some well-established consumer spending patterns.

"Entertainment and diversified media and cable stocks tend to go down a year before a recession," says Jessica Reif Cohen, Merrill Lynch media analyst. "The market was telling us a year ago what we now know." Cable stocks declined 28 percent in 2007. Time Warner Cable declined another 25 percent or so in 2008.

Cable stocks historically hit bottom faster than the overall market and, in turn, recover sooner. So one early indicator that the bottom of the recession has passed is rising cable stock prices. Peak unemployment claims, on the other hand, typically are reached only after the trough of a recession has passed, and the recovery already begun. Watch for a month when unemployment claims decline. Confirm the trend for a quarter. That will be a traditional signal that the recovery already is underway.

And do not mistake stock prices with operating performance. As with other financial assets, there is an "overshoot to the negative" effect for cable stocks. So operating performance will not be as bad as asset prices would suggest, history suggests.

If history is a reliable guide, cable operator operating metrics should show mid-single-digit revenue, cash flow and free-cash-flow growth, Reif Cohen says. That is one reason cable stocks traditionally have been considered recession resistant.

Telephone companies have had the same sort of status. And that seems still to be the pattern, despite secular declines in fixed voice lines, which have been more than compensated for by uptake of broadband access lines. American consumers are unlikely to part with their broadband connections, an Accenture study recently found.

Indeed, they are more likely to get rid of cable television channels (once considered practically a utility) or their mobile phones than their high-speed Internet connections. Broadband is as recession-proof as any service can be, Accenture suggests. And there is scant, if any, evidence that consumers will do either of those things, either. Mobile phones and broadband, as much as multi-channel television, seem to have moved from the "luxury" category to the status of a "necessity."

Looking at the European market, Jupiter Research analyst Ian Fogg thinks that in countries where there's been a housing slowdown, broadband operators will benefit, because it will lead to higher retention and lower churn. The reason, similar to what Internet service providers generally believe in the U.S. market, is that a household move is a frequent trigger of provider change behavior.

When people move, they are presented with an automatic opportunity to change service providers of all sorts. And since household sales activity is dramatically lower in both the U.S. and U.K. markets, fewer of those churn opportunities are occurring.

"Few consumers will wish to end home broadband access if they have time on their hands and need to job hunt, or have renewed impetus to use the Internet to bargain hunt for cheap deals on utilities or retail," Fogg argues. "Similarly, consumers with more time, will have more time for entertainment, although I do see consumers becoming more likely to switch down to cheaper packages with the same operator, especially where they pay for premium channels."

Though anything can happen, what likely will happen is that broadband, wireless and entertainment video churn, subscriber and revenue growth will emerge from even the present recession in remarkably good shape. By that, we mean historical precendent suggests slower rates of growth and flatter rates of average revenue per unit growth, but growth continuing, nevertheless.

--Gary Kim