The State of the Net: 2012

Transcription

1 January 18, 2012 U.S. Telecommunications, U.S. Cable & Satellite Broadcasting The State of the Net: 2012 Washington, DC January 18, 2012 Craig Moffett Senior Analyst See Disclosure Appendix of this report for important Disclosures and Analyst Certifications

2 The State of the Infrastructure Internet in America: What the Data Says Competitive dynamics The TelCo Dilemma Returns on Capital 2

3 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q ,477 19,978 22,039 24,080 26,338 Subscribers (000s) 28,215 30,466 32,642 35,194 36,839 39,406 42,031 44,947 46,987 49,826 52,253 55,157 56,819 58,909 60,661 Penetration of Households 63,118 64,071 65,456 66,516 68,220 68,884 69,927 71,039 72,496 72,906 73,748 74,700 76,182 76,740 77,455 Penetrations Gains are Slowing at ~66% of the Market Broadband Penetration and Delivery Technology 100,000 90,000 Cable DSL Fiber Satellite BB Penetration 100% 90% 80,000 80% 70,000 70% 60,000 60% 50,000 50% 40,000 40% 30,000 20,000 10, % 20% 10% 0% Source: Company reports, Kagan, Bernstein estimates and analysis 3

4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Broadband Penetration of U.S. Households Basis Points Incremental penetration dynamics suggest we are headed to ~85% Penetration Change in Penetration 70% 1,000 60% 50% 40% 30% 20% 10% 0% 65.5% 62.7% 59.8% 56.2% 50.8% 43.2% 34.6% 27.3% 19.9% 13.7% YoY Basis Point Change in U.S. Broadband Penetration Source: Company Reports, Bernstein Estimates and Analysis Source: Company Reports, Bernstein Estimates and Analysis 4

5 Reasons for Not Having Broadband Reasons for Not Having Broadband 2010 (OBI) Reasons for Not Having Broadband 2011 (NTIA) Reasons for Not Having Broadband 2010 (OBI) Reasons for Not Having Broadband 2011 (NTIA) Combo, 4% Use highspeed at work, 3% Other, 11% Use internet somewhere else, 5% Other, 7% Cost, 25% Cost, 36% Relevance, 19% Digital Literacy, 22% Lack of Availability, 5% Relevance, 46% Digital Literacy, 14% Lack of availability, 3% Source: FCC, "Broadband Adoption and Use in America, OBI Working Paper Series No. 1." John B. Horrigan, Ph.D Source: "Exploring the Digital Nation - Computer and Internet Use at Home," U.S. Dept of Commerce 5

6 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q (404) (186) (199) (229) (256) (71) (111) (136) (205) (234) (12) (11) (64) Subscriber Growth Rate ,083 1,044 Subscribers Gains (Losses) (000s) 1,143 1,411 DSL is now in decline DSL Net Additions (Losses) 11% 9% Subscriber Gains (Losses) Subscriber Growth Rate 1,750 1,500 8% 1,250 6% 1,000 5% 750 3% 500 2% 0% % (250) -3% (500) -5% (750) Source: Bernstein Analysis 6

7 E 2012E 2013E 2014E 2015E E 2012E 2013E 2014E 2015E 103.4% FiOS Video Net Additions* (000s) 49.2% 27.9% 13.5% 7.5% 4.1% 1.4% 0.3% FiOS Video Subscribers* (000s) 355.6% FiOS: Nearing End of Growth Cycle FiOS: Projected Video Net Additions FiOS: Projected Video Subscribers and Subscriber Growth 1, Actual Estimated* 5,000 4,500 4,000 3,500 3,000 Actual Estimated* YoY % Subscriber Growth 400% 350% 300% 250% 500 2, % 400 2, % ,500 1, % 50% - - 0% *estimated based on market penetration curve estimated from 1Q Q 2011 results; assumes 18M home passings by end of 2015 and that marketed video homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analysis *estimated based on market penetration curve estimated from 1Q Q 20011results; assumes 18M home passings by end of 2015 and that marketed video homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analysis 7

8 E 2012E 2013E 2014E 2015E E 2012E 2013E 2014E 2015E U-Verse Video Net Additions* (000s) 97.5% U-Verse Video Subscribers* (000s) 44.6% 27.5% 20.7% 13.7% 11.0% 7.9% 352.4% U-Verse: Nearing End of Growth Cycle U-Verse: Projected Video Net Additions U-Verse: Projected Video Subscribers and Subscriber Growth 1,200 1,000 Actual Estimated* 7,000 6,000 5,000 Actual Estimated* YoY % Subscriber Growth 400% 350% 300% 800 4, % 600 3, % 150% 400 2, % 200 1,000 50% - - 0% *estimated based on market penetration curve estimated from 1Q Q 2011 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analysis *estimated based on market penetration curve estimated from 1Q Q 2011 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analysis 8

9 Actual Download Speed (Mbps) The Need for Speed Actual (Realized) Broadband Speeds by Technology Average Median Fiber Cable DSL Source: FCC, "Broadband Performance: OBI Technical Paper No. 4" 9

10 Cable is Pulling Away in the Broadband Market Share of Broadband Net Additions 10

11 FiOS and U-Verse Are Only a Small Slice of the National Broadband Market Broadband: Market Share (Q4 2010) Broadband: Market Share (Q4 2011E) U-Verse, 4.0% Other Fiber, 1.0% FiOS, 5.5% U-Verse, 4.9% Other Fiber, 1.4% FiOS, 6.1% DSL, 29.9% DSL, 27.3% Cable, 59.5% Cable, 60.4% Source: Company reports, Bernstein analysis 11

12 FCC: Only One Technology Meets the Demands of a 25Mbps Enduser Cable, Fiber and/or DSL Cable Only Not Served 14-16% 14-16% 14-16% 23-27% 23-27% 51-57% 51-57% 78-82% 2-4% 3-9% 3-9% 1 Mbps 10 Mbps 25 Mbps Downstream bandwidth supported Sources: The FCC; 2009 Form 477 data; service provider, equipment manufacturer, and trade association filings and publications; analyst 12

13 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Industry Total Access Lines in Service (Millions) Industry Total Access Line Loss Rate The TelCo Dilemma: Residential Access Lines Are in Free Fall U.S. Access Lines in Service y = x R² = % 10.0% % % % 0 0.0% Total access lines Total access lines loss rate Source: Company reports, Bernstein estimates and analysis 13

14 Annual Change in Cost per Access Line Annual Change in Cost per Access Line Annual Change in Cost per Access Line Annual Change in Cost per Access Line As Access Line Losses Mount, Unit Costs are Soaring Verizon (Legacy Bell States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, ) Verizon (Legacy GTE States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, ) 25% 20% 15% 10% 5% 0% -5% -10% -15% y = x R 2 = % 25% 20% 15% 10% 5% 0% -5% -10% -15% y = x R 2 = % 0% -5% -10% -15% -20% 5% 0% -5% -10% -15% -20% Annual Change in Access Lines Annual Change in Access Lines AT&T (Legacy SBC States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, ) AT&T (Legacy BellSouth States): Rate of Access Line Loss Versus CAGR in Cost per Line (Individual Years by State, ) 25% 20% 15% 10% y = x R 2 = % 20% 10% y = x R 2 = % 0% 0% -5% -10% 5% C 0% -5% -10% -15% Annual Change in Access Lines -20% -10% -20% 0% -5% -10% Annual Change in Access Lines -15% Source: FCC and Bernstein estimates and analysis 14

15 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2011 Wireline EBITDA Margin 22.7% 26.2% 28.0% 27.7% 28.2% 27.8% 26.9% 26.2% 25.5% 24.8% 23.9% 23.5% 23.6% 24.8% 23.8% 28.1% 28.0% 29.4% 35.3% 35.9% 34.9% 33.7% 32.6% 33.9% 33.9% 33.4% 33.4% 33.1% 32.1% 31.3% 33.5% 33.5% 32.3% 33.6% 35.1% 35.7% As Volumes Fall, Wireline Margins Are Deteriorating Verizon and AT&T: Wireline Margins 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% 18% AT&T Verizon Source: Bernstein Estimates and Analysis 15

16 Weighted Average ROIC Ex-Unusuals, Goodwill, ARILI Minus WACC, A Decade of ROIC (I) Anemic Returns on Net PP&E A Decade of Economic Value Added (Excluding Unusuals, Goodwill, and ARILI) 8.0% 6.0% 4.0% 2.0% 0.0% EP = Economic profits IC = Invested capital Wireline (EP = +$22.4 billion) IC = $146.4, ROIC spread 1.5% Satellite (EP = +$4.7 billion) IC = $8.5, ROIC spread 5.5% Cable (EP = +$11.8 billlion) IC = $32.0, ROIC spread 2.5% Wireless (EP = +$3.2 billion) IC = $129.4, ROIC spread = 0.3% -2.0% -4.0% -6.0% Pre-Paid Wireless (EP = -3.3 billion) IC = $4.6, ROIC spread = -7.1% -8.0% Average Invested Capital Excluding Goodwill and ARILI, ($ billion) Source: Capital IQ, corporate reports and Bernstein estimates and analysis 16

17 Weighted Average ROIC Includng Unusuals, Goodwill, ARILI Minus WACC, A Decade of ROIC (II) and even worse returns when you include what was actually paid for the assets A Decade of Economic Value Added (including Unusuals, Goodwill, and ARILI) 1.0% 0.0% EP = Economic profits IC = Invested capital Satellite (EP = -$2.8 billion) IC = $13.8, ROIC spread -2.1% -1.0% -2.0% Wireline (EP = -$48.3 billion) IC = $231.9, ROIC spread = -2.1% Wireless (EP = -$63.8 billion) IC = $210.9, ROIC spread = -3.0% Cable (EP = -$61.9 billion) -3.0% IC = $126.8, ROIC spread -4.9% -4.0% Pre-Paid Wireless (EP = -3.3 billion) -5.0% IC = $4.8, ROIC spread = -5.9% -6.0% -7.0% Average Invested Capital Including Goodwill and ARILI, ($ billion) Source: Capital IQ, corporate reports and Bernstein estimates and analysis 17

18 ROIC Excluding Unusuals, Goodwill, and ARILI ROIC Excluding Unusuals, Goodwill, and ARILI Wireline Telecom ROIC now mostly below the cost of capital wireless is a mixed bag, with clear winners and losers Wireline ROICs excluding Unusuals, Goodwill and ARILI, 2000 to % 14% 12% 10% Wireless ROICs excluding Unusuals, Goodwill and ARILI, 2000 to % 14% 12% 10% 8% AT&T Sprint T-Mobile Verizon 15.4% 12.6% 8% 6% 7.3% 6% 7.2% 4% 4% 2% 0% AT&T BellSouth Verizon 1.6% 2% 0% -2% -4% 0.4% Source: Capital IQ, corporate reports and Bernstein estimates and analysis 18

19 ROIC Excluding Unusuals, Goodwill, and ARILI ROIC Excluding Unusuals, Goodwill, and ARILI Cable and Satellite sub-sectors show strongly rising ROIC Cable ROICs excluding Unusuals, Goodwill and ARILI, 2000 to 2010 Satellite ROICs excluding Unusuals, Goodwill and ARILI, 2000 to % 40% Cablevision Charter Comcast TWC Cablevision ex-msg 50% 40% DirecTV Dish Network 46.7% 44.3% 30% 25.6% 30% 20% 19.0% 24.1% 20% 18.2% 10% 10% 0% 0% -10% -10% -20% Source: Capital IQ, corporate reports and Bernstein estimates and analysis 19

20 -76.9% -50.6% -99.9% -99.8% -97.3% -46.4% -50.5% -62.4% -60.8% -72.1% Total Absolute Return for Period Ended Dec 31, % -21.6% -26.9% -29.9% -28.4% -35.0% -20.4% -24.5% -17.0% -0.6% -5.3% 8.0% 4.2% 0.3% 0.7% 44.2% 115.9% A Decade of Stock Performance poor ROIC translates into poor total shareholder returns A Decade of Investment Returns: Cumulative Total Stock Performance (Absolute) 125% 100% Ten-Year Total Stock Returns (YE 1999 to YE 2009) Eight-Year Total Stock Returns (YE 2001 to YE 2009) Two-Year Total Stock Returns (YE 2007 to YE 2009) 75% 50% 25% S&P 500 Eight-Year Total Stock Return +13.5% 0% -25% -50% -75% -100% S&P 500 Two-Year Total Stock Return -20.3% AT&T Cablevision Charter Comcast DirecTV Dish Network Leap MetroPCS Sprint Time Warner Cable S&P 500 Ten-Year Total Stock Return -9.1% Verizon Source: Capital IQ, corporate reports and Bernstein estimates and analysis 20

21 AT&T Verizon Sprint T-Mobile Leap MetroPCS Cablevision Cablevision ex-msg Charter Comcast Time Warner Cable ROIC Ex-Unusuals, Goodwill, and ARILI Minus WACC DirecTV Dish Network ROIC is now much better (than historical) for cable, and worse for telecom ROIC Excluding Unusuals, Goodwill and ARILI Minus WACC, 2010 Telecommunications Cable Satellite 40.0% 35.0% 35.6% 37.7% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 2.9% 15.8% 16.4% 10.3% 17.8% 11.3% 0.0% -5.0% -10.0% -15.0% -0.2% -7.4% -0.4% -7.4% -1.6% Source: Capital IQ, corporate reports and Bernstein estimates and analysis 21

22 IC Turnover (Ex-Goodwill and ARILI) Decomposing ROIC (II) into Asset Turnover and Margins (subsectors) Changes in IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding Unusuals Combinations by Industry, 2006 to NOPLAT margin x IC turnover = ROIC 4.0 '10, 45.1% Satellite '06, 28.7% Cable 35% 30% 2.0 '10, 22.7% 25% 1.5 '06, 14.1% 20% 1.0 '10, 4.4% Wireline '10, 5.0% '06, 9.3% Wireless '10, 10.7% 15% 10% '06, 4.4% Pre-paid wireless '06, 7.5% 5% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% NOPLAT Margin (Ex-Special Items) Source: Capital IQ, corporate reports and Bernstein estimates and analysis 22

23 IC Turnover (2010, Ex-Goodwill and ARILI) Decomposing ROIC (I) into Asset Turnover and Margins (companies) IC Turnover excluding Goodwill and ARILI and NOPLAT Margin excluding Unusuals Combinations by Company, % 10% 15% 20% 25% 30% 35% 40% 45% NOPLAT margin x IC turnover = ROIC DTV Satellite DISH Cable Wireline CMCSA Wireless CHTR TWC CVC T VZ T VZ S T-Mo PCS LEAP 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% NOPLAT Margin (2010, Ex-Special Items) Source: Capital IQ, corporate reports and Bernstein estimates and analysis 23

24 Summary and Conclusions Penetration is slowing but the data suggests we re far from done yet Fiber deployments near the end Telco share falling and TelCo wireline economics are deteriorating Cable is winning the broadband wars Infrastructure returns are anemic across the board 24

25 Disclosure Appendix 25

26 U.S. Telecommunications and Cable & Satellite: Coverage Universe Closing Price Closing Price Stock Rating Target Price ( ) Stock Rating Target Price ( ) VZ U $32.00 $38.92 CMCSA O $32.00 $25.38 T M $30.00 $30.07 TWC O $88.00 $65.43 S M $2.50 $2.31 CVC M $20.00 $13.97 LEAP O $12.00 $9.96 DISH M $28.00 $28.75 PCS O $13.00 $8.35 DTV O $52.00 $43.46 Source: Bloomberg, Bernstein estimates and analysis 26

27 Valuation Methodology We value AT&T and Verizon on a combination of P/FE and a sum of the parts analysis. Assigned multiples are based on historical performance, colored by the company's current allocation of capital. We value AT&T on a combination of a target P/FE multiple of 13.0x applied to our estimated forward earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.6x after adjusting for postretirement liabilities. We add the probability-weighted expected value associated with the proposed acquisition of T-Mobile USA. We value Verizon on a combination of a target P/FE multiple of 13.0x applied to our estimated earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.7x after adjusting for postretirement liabilities. We value Sprint using EV/EBITDA multiples of 5.5x forward 12 month EBITDA for the wireless business (proportionately consolidating their 54% stake in Clearwire) and 3.5x for the wireline business, adjusted for other non-operating assets and liabilities. We value Leap Wireless and MetroPCS based on a weighted average of derived DCF values under four different scenarios a base case (which is given a 50% weight in the target price derivation), high and low scenarios (weighted at 15% each), and a realistic downside scenario (weighted at 20%). Our base case scenario assumes that Leap and MetroPCS' unlimited pre-paid ARPU remains in the $38-$39 range through 2015 and that their penetration of covered POPs reaches 7.2% and 9.5%, respectively, with the high and low scenarios respectively incorporating more optimistic and pessimistic assumptions for ARPU, subscriber growth, CPGA, CPU and capex. We value the DBS sector on the basis of Steady State Cash Flow (SSCF) multiples, adjusted for market value estimates for non-dbs assets. SSCF multiples have historically clustered around 9-11x trailing SSCF for DirecTV and Dish Network, with higher multiples reflecting higher growth expectations, and lower multiples reflecting lower growth expectations. We currently apply a 7.5x SSCF multiple to our forecast forward 12 month SSCF for DirecTV and a 6.0x multiple for Dish Network, reflecting a 12 month look forward as the basis of our 12 month target price, and lower-than-historical SSCF multiples to reflect the sector's and the companies' diminished longer term growth prospects. We value the company's Latin American assets using a forward SSCF multiple of 6.5x for PanAmericana and Sky Brazil, and a 10.0x trailing EBITDA multiple for Sky Mexico. 27

28 Valuation Methodology, continued We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 6.25x for the core cable distribution business, 8.0x forward EV/ EBITDA for the cable networks businesses of Comcast and NBCU, and 6.0x forward EV/EBITDA for NBCU's broadcast business. We value other consolidated and non-consolidated operations and non-public equity investments on various bases as appropriate. Publicly traded investments are carried at current market value. In order to derive our price target for Time Warner Cable, we use a target multiple of 6.5x forward 12 month forecast EBITDA, and add back the NPV of Time Warner Cable's deferred tax asset. We estimate that Time Warner Cable will realize approximately $330 million of tax savings per year for fifteen consecutive years from the 2006 acquisition of Adelphia as a result of its step-up in basis. When calculating the net present value of these tax shields, we apply an 7.50% discount rate, which corresponds to Time Warner Cable's estimated weighted average cost of capital. We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 7.0x for the core cable business. We value other assets and liabilities on various bases as appropriate. 28

29 Risks The risks to our target price for AT&T include: Failure to gain regulatory approval to close the proposed T-Mobile USA transaction, adverse financial or other consequences associated with any conditions required to garner regulatory approval, or the inability to wring the expected synergies out of a combined entity. A steeper, or more sudden, deceleration in wireless subscriber growth as a consequence of wireless saturation or economic weakness would lead to sharply slower growth, and would likely be met with severe multiple contraction, in our view. Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment. Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider) would yield lower ROIC and consequent multiple contraction. Overpayment in an acquisition, which could be a variety of potential targets. Our target price for Verizon is below the current trading range. Upside risks to our target price include: Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current dividend yields more attractive relative to investment alternatives. Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal wireless market penetration than we forecast. Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the Enterprise segment. Subscriber gains as a result of fiber expansion (FTTX) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion. Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins. A faster-than-expected recovery in Enterprise revenues and margins. Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares. Our target price for Sprint is below the current trading range. Upside risks to our Sprint target price include the following: A potential regulatory rejection of the AT&T and T-Mobile merger, which would give Sprint more leverage to strike a replacement deal with T-Mobile. A spin off of Nextel could results in improved operating metrics, or, alternatively, could fuel investor enthusiasm even in the absence of improvement. The growth rate of the industry could prove stronger than we anticipate. Sprint's churn rate or share of gross additions could improve sooner or more meaningfully than we anticipate. The downside risks facing our target prices for Leap Wireless and MetroPCS include the following: Irrational pre-paid price competition initiated by one of the major carriers most likely Sprint and/or T-Mobile, who are losing post-paid subscribers irrespective of their efforts on the pre-paid side and thus are not as concerned about cannibalization between pre-paid and post-paid. More limited than expected ability to penetrate their respective markets due to intensified pre-paid competition and/or economic forces, which could compromise their scale economies and overall cost structure. Greater than expected data consumption among pre-paid subscribers, which in turn could drive higher than expected capex requirements. Downside risks specific to Leap include the possibility its new initiatives, including its new MVNO relationship with Sprint and nationwide 3G data roaming offer, raise its cost structure beyond expectations. Downside risks specific to MetroPCS include a greater-than-expected negative impact from Leap eventually selling its services in MetroPCS' footprint under its MVNO agreement with Sprint. Upside risks to our target prices for MetroPCS and LEAP include the following: Greater than expected growth in the pre-paid wireless market overall, due to more post-paid wireless subscribers migrating to unlimited pre-paid Greater than expected uptake of higher priced service offerings, which could result in enhanced profitability. More rational price activity in the pre-paid market 29

30 Risks, continued Upside risks to our target price for Dish Network include: Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost. A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU. An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and would raise valuation multiples for Dish Network. Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster. Downside risks to our target price for Dish Network include: Slower-than-expected subscriber growth would likely yield multiple contraction. A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU. A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in these expectations could result in multiple contractions. Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may also yield negative returns. An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material. Risks to our price targets for the Cable operators include the risk that the competitive pricing environment will be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. New pathways to the home for video or other entertainment could also reduce the value of cable's video distribution bottleneck. Deep fiber deployments by the RBOCs will impact cable subscribers and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. Comcast Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Time Warner Cable Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Cablevision Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured. Cablevision faces a very substantial overlap with Verizon's FiOS that could result in greater share loss or lower prices than anticipated. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. 30

31 Disclosure Appendix SRO REQUIRED DISCLOSURES References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No C, collectively. Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-japan Index for stocks listed on the Asian (ex-japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. As of 01/17/2012, Bernstein's ratings were distributed as follows: Outperform % (1.4% banking clients) ; Market-Perform % (0.5% banking clients); Underperform - 8.9% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. Bernstein currently makes a market in the following companies DISH / DISH Network Corp, DTV / DIRECTV Group Inc, CMCSA / Comcast Corp. The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services VZ / Verizon, T / AT&T Inc, S / Sprint Nextel Corp, TWC / Time Warner Cable Inc. An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies VZ / Verizon, T / AT&T Inc, CVC / Cablevision Systems Corp, TWC / Time Warner Cable Inc. This research publication covers six or more companies. For price chart disclosures, please visit you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites , 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore

32 12-Month Rating History as of 01/16/2012 Ticker Rating Changes CMCSA O (RC) 12/14/10 CVC M (RC) 05/10/10 DISH M (RC) 10/10/08 DTV O (RC) 01/11/12 M (RC) 04/24/08 LEAP O (RC) 09/28/11 M (RC) 02/09/11 O (IC) 12/14/09 PCS O (RC) 08/10/11 M (RC) 08/09/10 S M (RC) 09/19/11 U (RC) 03/21/11 M (RC) 03/14/11 U (RC) 01/19/10 T M (RC) 10/25/11 O (RC) 03/24/11 M (RC) 01/05/09 TWC O (RC) 11/02/10 VZ U (RC) 10/12/10 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority. To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this publication in the United States and accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. To our readers in the United Kingdom: This publication has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, authorised and regulated by the Financial Services Authority and located at 50 Berkeley Street, London W1J 8SB, +44 (0) To our readers in member states of the EEA: This publication is being distributed in the EEA by Sanford C. Bernstein Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Markets in Financial Instruments Directive. To our readers in Hong Kong: This publication is being distributed in Hong Kong by Sanford C. Bernstein (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission (Central Entity No. AXC846). This publication is solely for professional investors only, as defined in the Securities and Futures Ordinance (Cap. 571). To our readers in Singapore: This publication is being distributed in Singapore by Sanford C. Bernstein, a unit of AllianceBernstein (Singapore) Ltd., only to accredited investors or institutional investors, as defined in the Securities and Futures Act (Chapter 289). Recipients in Singapore should contact AllianceBernstein (Singapore) Ltd. in respect of matters arising from, or in connection with, this publication. AllianceBernstein (Singapore) Ltd. is a licensed entity under the Securities and Futures Act and registered with Company Registration No C. 32

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