ISI - Cable & Satellite Initiations - Oct 2011

Media: Cable & Satellite
Initiating Coverage with a Constructive View | Playing Offense in a Defensive Market

Vijay Jayant Judah Rifkin Mark Lanzana, CFA 212-446-9490 212-446-9489 212-446-5616
vjayant@isigrp.com jrifkin@isigrp.com mlanzana@isigrp.com
Mon Oct 24 2011

Cablevision Systems (CVC) Rating Buy Target Price $25.00 Current Price $17.57 Market Cap (MM) $5,004 Charter Communications (CHTR) Rating Buy Target Price $60.00 Current Price $49.75 Market Cap (MM) $5,585 Comcast Corporation (CMCSA/K) Rating Buy Target Price $29.00 Current Price $24.33 Market Cap (MM) $66,620 DIRECTV (DTV) Rating Target Price Current Price Market Cap (MM) Buy $61.00 $46.42 $34,271
Playing Offense in a Defensive Market

Constructive on the group. We are initiating coverage of the Cable & Satellite Communications industry with a positive view and recommend the sector as a core holding as we believe that the variability of cash flow outcomes is narrow whatever the economic prognosis. Acyclical secular trends. While considered and valued as a consumer discretionary, the group behaves like a staple, as proven by empirical evidence. In fact, the pay-TV category now represents a larger share of a consumers leisure wallet than prior to the 2008 recession. Capital intensity declining, free cash flow (FCF) increasing. Not only are network upgrades completed, the deployment of network efficiency strategies will be completed by end of 2011, further reducing capital intensity and driving FCF. With that, managements are increasingly returning capital to equity owners. Estimate $14B return of capital returned in 2012. Valuation still very attractive. Even though, the group has outperformed the S&P500 over the last 12 months, valuations are compelling. On our 2012 estimates, the groups average levered FCF yield is 13% (8.3% unlevered), EV/EBITDA is 5x, and P/E is 13x. From 2011 to 2014, we project compounded annual growth for these six companies of 4% for consolidated EBITDA, 26% for EPS, and 9% for levered fully-taxed FCF. Rising tide lifts all boats. Given the high correlation in share price performance, the tight valuation band within which the group trades, similar macro, competitive and regulatory risks (with only some differences) we think all six of our coverage names look compelling. In a risk on environment we prefer the levered, higher-beta names CVC, CHTR and DISH and in a risk off environment we prefer the higher quality, larger capitalization names DTV (our top pick), TWC, and CMCSA. We currently have a bias towards risk off.
DISH Network (DISH) Rating Buy Target Price $34.00 Current Price $25.91 Market Cap (MM) $11,523 Time Warner Cable (TWC) Rating Buy Target Price $88.00 Current Price $70.87 Market Cap (MM) $23,046
*Prices are as of 10/21/2011
* See the last page for an important disclosure regarding these stocks and this report.
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Table of Contents
INVESTMENT SUMMARY .................................................................................................................... 3 PART I: THE EVOLUTION OF THE CABLE & SATELLITE INDUSTRY ................................................... 16 Video Trends ............................................................................................................................... 17 Getting to the Bottom of Over-the-Top (OTT) ........................................................................... 23 High-Speed Internet (HSI) .......................................................................................................... 27 Voice over Internet Protocol (VoIP) ........................................................................................... 29 Cable Plant (Finally!) Delivering Promised Returns .................................................................. 31 The Network Advantage: Upgraded Plant Has Enabled a Renaissance of New Technologies.. 33 Small & Medium Business (SMB): Commercial Opportunity Is Still Relatively Untapped ..... 36 PART II: ARE CABLE STOCKS (YESTERDAYS CYCLICALS) TODAYS STAPLES? .............................. 39 PART III: THE CABLE & SATELLITE CONSUMER THROUGH ISIS MACRO LENS .............................. 45 Housing: The Most Important Macro Metric for the Cable & Satellite Industry ....................... 46 The Neo-Bear Argument: Is the Widening Income Gap a Game Changer? ........................... 48 PART IV: FROM MACRO TO MICRO | DEMOGRAPHICS & MARKET SHARE ....................................... 50 PART V: NET NEUTRALITY AND THE EVOLVING REGULATORY ENVIRONMENT............................... 54 PART VI: SAY HELLO TO AMERICAS MOST HATED INDUSTRY ....................................................... 57 CABLEVISION SYSTEMS (CVC), BUY | 2012YE TARGET $25 .......................................................... 60 CHARTER COMMUNICATIONS (CHTR), BUY | 2012YE TARGET $60 ............................................... 73 COMCAST CORPORATION (CMCSA/K), BUY | 2012YE TARGET $29 .............................................. 83 DIRECTV (DTV), BUY | 2012YE TARGET $61 .............................................................................. 97 DISH NETWORK CORP. (DISH), BUY | 2012YE TARGET $34 ....................................................... 112 TIME WARNER CABLE (TWC), BUY | 2012YE TARGET $88.......................................................... 122
_________________________________________________________________________________ PLEASE do not forward Page 2 of 139 October 24, 2011

Media: US Cable & Satellite Communications
INVESTMENT SUMMARY
We are initiating coverage of the Cable & Satellite Communications industry with a constructive investment view. While secular trends suggest a deceleration in growth resulting from business maturation and an increase in competitive intensity (further exacerbated by the prevailing economic and housing malaise), we believe the equity investment opportunity in the sector is highly attractive. The companies in the sector are generating significant and accelerating Free Cash Flow (FCF) as capital expenditures moderate. The Cable industrys long-promised network advantage is finally beginning to manifest itself, and management teams are leaning towards returning capital to equity owners. Moreover, stock valuations remain very attractive across virtually all names. Core to our thesis, we believe a recurring, subscription based model to be largely acyclical. As such, the variability of cash flow growth scenarios remains narrow, whether or not our economy officially descends into a second recession. Based on our proprietary research, we believe that the category is viewed by consumers as similar to companies that are defined as Consumer Staples even though the group is officially termed a Consumer Discretionary. Through the last recession, the empirical data confirm that Pay-TV revenues climbed steadily and comprised a larger share of the consumers wallet in terms of leisure expenses. To be sure, competition is increasing from traditional and alternative distribution channels, such as the socalled Over-the-Top video companies. Despite this, we are of the view that Cables network capacity, now getting powered by the implementation of switched-digital video (SDV), all-digital, and DOCSIS 3.0 Wideband technologies will allow it to differentiate itself in terms of service offerings and monetize the network investments made over the past decade. Capital Intensity, once thought to be the industrys Achilles Heel, has moderated and is now predominately success-based and thus correlated with subscriber trends. Management teams are beginning to return value to equity owners in the form of share buybacks and cash dividends. For some perspective, consider that the industry returned $36B of capital to equity owners over the four year period between 2007 and 2010, and we estimate a combined total of another $27B will be returned in 2011 and 2012, or 75% of the amount in half the time. Finally, stock valuations remain attractive, in our view; measured on our 2012 estimates they average a 13% levered FCF yield (8% on an unlevered basis) while EPS and EBITDA multiples are around 13x and 5x, respectively. We project consolidated EBITDA, EPS, and levered FCF to grow 4%, 26%, and 9%, respectively, between 2011 and 2014, compounded annually. Given the tight band within which these six stocks trade, their similar broad risks vis-a-vis competition, the economy and regulation (though with some company-specific nuances), we believe that the sector will continue to move together. The call (to us) becomes one of either you love em or hate em. Perhaps love is too strong an adjective; but given the current environment, we certainly would have to say that at the very least, we like them all. In terms of how we believe investors should play the space, our view is relatively straightforward. In a period of risk on we favor the higher beta, higher-levered names such as CVC, CHTR and DISH and in periods of risk off we favor the higher quality, larger capitalized names DTV, TWC and CMCSA. DTV is our top-pick. Currently, we have a risk off bias.

Exhibit 1: Cable & Satellite Coverage, Stock Ratings, and 2012E Price Target
Ticker Comcast Time Warner Cable Cablevision Charter DIRECTV Dish Network CMCSA/K TWC CVC CHTR DTV DISH Rating Share price Buy Buy Buy Buy Buy Buy $24.33 $70.87 $17.57 $49.75 $46.42 $25.91 Dividend 2012 YE Yield Target Price 1.6% $29.00 2.5% $88.00 3.0% $25.00 nm $60.00 nm $61.00 nm $34.00 Potential Upside 19% 24% 42% 21% 31% 31%
*Prices are as of 10/21/2011 Source: ISI Group, Bloomberg, L.P.
Macro consumer spending metrics dont correlate with Pay-TV trends; Housing trends do According to ISIs Macroeconomic team there are a few key drivers of consumer spending: disposable income, consumer net worth, bank willingness to loan, consumer sentiment, and prices at the gas pump. Though most of these metrics have been soft(ish) during the economic recovery, weve found that they dont correlate in any meaningful way with Cable & Satellite industry metrics (of course, given our ensuing conclusion that the industry behaves as a defensive business, this observation shouldnt be all that surprising). There is one Macro metric, however, which does explain many of the observed trends in the Pay-TV market, particularly the video segment: Housing growth. From the beginning of 2007 through the end of 2008 as the housing market began its historic collapse industry housing unit starts fell from almost 2MM annually to less than 500K (similar to the current pace). Curiously, video trends have followed housing trends in lockstep, with the only brief disconnect occurring precisely in the periods following the Digital Television Transition (which unnaturally inflated pay-TV growth). Today, with the housing market in a continued state of flux, the Pay-TV video market has returned to its anemic trends. Economy accounts for some video losses, but likely only at the (very) low-end We are of the view that there is a small cohort of Pay-TV customers who are indeed disconnecting their video subscriptions due to pure economic difficulties; however, we note that these subscribers are at the very lowend of the market, which according to recent data released by the U.S. Census, is growing to record levels (the poverty rate has climbed north of 15%). While we view the growing economic divide as an important social issue in the U.S., we are unconvinced that it is a meaningful headwind for the Pay-TV industry in particular. A growing poverty rate, tragic as it may be, should have no broad effect on our cash flow expectations. In fact, counter-intuitive as it might sound, we believe that growing poverty rates might actually present a silver lining for the industry to capture customers and dollars that they might have otherwise have lost to higher-end leisure activities in a healthier economic environment. Looking at median household incomes within an operators footprint, our proprietary research leads us to conclude that Cablevisions subscriber base comes out on top, with 93% of its subscribers in the top quintile of household median incomes. Another interesting nugget: we found it a bit surprising that Comcast counts 85% of its subscribers in the top two quintiles, and Time Warner Cable has 83%; this is materially higher than DIRECTVs subscriber base 70% in top-two quintiles. As would be expected, higher income quintiles generally correlated with a higher degree of Pay-TV penetration across all operators.

Are Cable stocks (yesterdays cyclicals) todays staples? As discussed later in this report, Cable & Satellite companies have long been viewed by investors as discretionary services, and historically have traded in a highly correlated fashion to the S&P Cyclical Index. Less intuitive is actual consumer behavior as it relates to spending on Pay-TV (specifically video) services. According to Bureau of Labor & Statistics, real (inflation-adjusted) spending on Cable & Satellite video services actually grew by 3% during the 2008-2009 recession; by this measure, at least, one could argue that Cable & Satellite stocks are defensive in nature and deserve a valuation premium that staple stocks are assigned in such uncertain environments. As a consequence, Pay-TV accounts for a greater share of wallet in terms of leisure spending than it did a few years ago. In 2006, 17.9% of total leisure spending was devoted to Pay-TV services. Today, 21.2% of such spending is devoted to the category. We believe Cables defensive nature is tied to the consumers inherent psychological need for entertainment (even during tough times), and that Pay-TV still offers an excellent value compared to other forms of entertainment (e.g. live sports, which can cost a family hundreds of dollars for a few hours of entertainment). Pay-TV (video) a features race unfortunately, those features bring declining margins Video, a segment which represents about 53% of Cable revenues in 2011 and all of DBS revenue by and large, is basically mature (88% penetration), suggesting a zero-sum share-shift market environment. Pay-TV continues to face margin headwinds as programming costs are increasing at ~6-8% annually while average revenue per unit (ARPU) is only increasing ~3-4%. While ARPU does benefit from the industrys (modest, but real) pricing power given regular annual rate increases and the take-up of advance services, ARPU is negatively impacted by elevated promotional activity. Advanced services like High-Definition (HD), digital video recorders (DVRs) and, more recently, video streamed to mobile hand-held devices etc., are ways to differentiate, lift ARPU and potentially drive share gains. Here, we believe the only advantage (if any) for operators is time-to-market, which has generally been getting shorter as competitors launch me-too products. We predict that the Pay-TV video industry will grow revenues at a 2% CAGR between 2011E2015E, holding its base relatively constant at about 100MM subscribers. However, as touched upon above, gross margins are expected to decline to 55% from 60% today. Our estimated video market shares at 2011YE, has Cable at 58%, DBS at 34% and the fledgling Telcos at 8%; market shares are expected to change to Cable at 54%, DBS at 32% and Telcos at 14% by 2015E. Gaining share in growing High-Speed Internet (HSI) market; Cable showing some pricing power given high-end speed advantage HSI has quickly become the fastest growing consumer segment for Cable with 10% revenue growth in 2011E driven by share gains in a market which is not fully saturated (87% penetration of PC homes and 70% penetration of all homes). The market has become bifurcated between the low cost, low speed option where Telco Digital Subscriber Line (DSL) technology leads, and the growing, higher cost ($40/month), faster speed (10 Mbps+) market where cable has dominant share. It appears to us that Telco fiber gains are primarily sourced from cannibalizing their own DSL subscriber base. With Gross Margins in the 90%+ range, HSI is the most profitable residential product in the bundle. Importantly, network service profitability is closely tied to price (given the high margins cited above), which, over the last 12-18 month, saw its first wave of rate increases in recent memory. Cables speed advantage is the cornerstone of its marketing message even though we think the marginal utility of speeds above 20 Mbps is suspect (or at the very best, of utility to very few). We believe that the current, industry standard, all you can eat HSI proposition will evolve to a usage based model. Between 2011E-2015E, we forecast that Cable HSI revenues will increase at a 6% CAGR and Cables market share will increase to 58% from 56% in 2011E. Cable VoIP telephony: Winning in a lousy market Insofar as Wireline telephony goes, despite the market declining due to wireless substitution, Cables lowercost Voice over Internet Protocol (VoIP) has enabled it to gain share as it has priced its service cheaper than Telco circuit-switched service. In the bizarro world of fixed-line telecom, Cable can honestly state that its

taking share in a business thats arguably in secular decline, thanks to wireless substitution. Cable currently has 35% share of the fixed-line voice market, estimated to increase to 44% in 2015 driving VoIP revenues 3% when compounded annually over that period. Over that same period, we estimate prices will decline 1% annually. Even with these headwinds, VoIP is a very profitable business with gross margins vary between 65-80% and are a function of pricing and whether the long-distance traffic is backhauled over third party facilities or not. Small-Medium Business (SMB): The fastest growing segment with upside Although the notion of Cable MSOs selling services (besides video) to SMBs has been an industry promise for some time now, we believe that the industry might just be hitting the sweet spot of growth from the channel. Historically, the Cable industry has targeted the smallest of the small businesses (think in terms of a 1-2 person Dental office). Today, though they are still far (far) from targeting the large enterprises that remain the bread-and-butter of the large Telcos, the Cable industry is expanding its horizons, going after larger small businesses (think: 10-20 lines). Given the value proposition that Cable MSOs offer these (still tiny) businesses which often look to save in every facet of their regular expenses we believe that opportunity is, without getting ahead of ourselves, huge. Across the U.S., we believe that the size of the Cable target market is somewhere in the 5MM business range. We further predict that industry-wide, the small business opportunity alone could be north of $10B. Given Cables success to date, we think that in five years SMB revenues might be as much as 10% of the Cable revenue mix, compared to less than 5% today, suggesting a 13% growth rate when compounded annually. Declining capital intensity: Adoption of network efficiency technologies to drive service differentiation The National Cable Television Association (NCTA) has estimated that since 1996 the Cable industry has collectively invested more than $170B in capital expenditures, the vast majority of which have been devoted to plant upgrades. Today, most Cable plants are fully upgraded and most incremental network spend is devoted to improving the efficiency of the plant. Specifically, three new technologies the Cable industry has been deploying are: all-digital, Switched Digital Video (SDV) and DOCSIS 3.0 Wideband HSI.
Increasing FCF and returning it to equity owners We are of the view that Cables capital spending binge (bender?) has now subsided, which turns the question of the massive cash generation of these companies into a focus insofar as returning capital to shareholders goes. We estimate that the six companies discussed in this report will generate in aggregate between $15-17B in annual FCF in the three-year period between 2011 and 2013E. Moreover, we estimate that 85-95% of the FCF will be returned to equity owners, primarily in the form of share buybacks (85% of capital returns) and the rest in recurring cash dividends. DIRECTV (our top pick) remains the most aggressive company in our universe in returning capital to stakeholders, while DISH Network, with an open $1B buyback authorization, seems to be on the opposite end of the spectrum, despite the stock being as cheap as its been in years. Finally, although any M&A risk continues to be real for all of these companies, we note that with NBCU out of the way for Comcast, TWC in the process of acquiring $3.7B in Cable assets, Cablevision having bought Bresnan Communications for $1.4B, and DISHs $3.7B investment in wireless spectrum (& Blockbuster assets) done, we expect any M&A activity to be less pronounced over the next year.

An all-digital network allows a Cable operator to reclaim the bandwidth used by spectrum-hogging analog channels, which use about 10x and 2.5x more bandwidth than digital and HD channels, respectively. SDV technology allows an operator to deliver only the signals that are requested by the subscriber in a given Node, allowing the operator to offer a vastly larger selection of channels. Finally, DOCSIS 3.0 technology materially improves HSI speeds by up to 10-15x, enabling the Cable operator to compete with even the most sophisticated Telco fiber offering for at least the next five years. Once a 750 MHz network is all digital and fully switched, there is more capacity unused than used even with the vast range of video and data offerings generally available on the Cable platform.
Over-the-Top threat not to be taken likely; but perhaps a friend & not foe? Though Over-the-Top (OTT) video has many definitions, we define it as any application, device or service that enables consumers to view video from sources other than their traditional, Pay-TV subscription. In our view, OTT as a replacement for traditional Pay-for video has inherent limitations: no live local news, no live sports and a generally sub-par library of titles (check out whats available on Netflix if you disagree). Over the next 5 years, we believe that OTT will serve not as a replacement but primarily a complement to Pay-TV subscriptions. Over the longer term, as Internet Protocol (IP) based video streaming becomes more mainstream, we hold the simple view that services like Netflix could become just another application, in the Cable/Satellite bundle, much like Premium channels are another application today. A final, cautionary note on the potential veracity of the OTT threat: we believe that U.S. broadband providers will eventually move to a Usage Based pricing model for their services (a practice already employed in Canada). Should such a shift occur, we believe that this could further serve as a deterrent on the prospect of traditional Pay-TV disintermediation. The prospect of swapping a $50 Pay-TV subscription for a $100 broadband overage charge likely wont be an appealing trade to the majority of consumers. In the end, we go by the virtue of respect but dont admire. As such, we forecast OTT-Only subscribers to comprise ~6% of the Pay-TV market by 2015E. ISIs proprietary survey of teens sheds some light on early OTT adoption In order to get a gauge on consumer adoption rates of OTT services, we targeted the early adopters (aka teenagers), working with ISIs survey team. After receiving responses from more than 500 teenagers aged (13-19) on questions related to viewing habits, we found that slightly less than half 46% of our survey respondents rely on OTT video as their primary source of content & 40% thought they were very likely to replace traditional Pay-TV with online video. Interestingly, older teens in our survey were even more likely to be cord cutters (55% of respondents between the ages of 16 and 19 watch online video more than any other video source). YouTube and Network websites like MTV.com were the most popular sources of online content since they are generally free. Netflix was the most popular source of subscription online content, beating Hulu+ (the paid for Hulu service) and the new but popular HBO GO service. Regulation: Net Neutrality defined; implications of AT&T and T-Mobile transaction The recent key debate about Net Neutrality, or the issues surrounding a given ISPs rights in managing network traffic was (presumably) settled in December, 2010, when FCC Chairman Julius Genachowski delivered his long-awaited remarks on preserving the Internet and openness. In essence, the FCC preserved the status-quo and did not re-classify broadband as a Title II service. What was a bit surprising was his support and endorsement for Usage-Based-Pricing for fixed-line broadband, a stance that drew some criticism from consumer groups, but certainly pleased the network owners (including the Cable companies in our coverage universe). He left open the possibility for ISPs to charge a premium for certain managed services. Industry participants are watching maneuverings in the merger attempt between AT&T and T-Mobile. Although the FCC is still reviewing the transaction, the Department of Justice (DOJ) has sued to block the deal on the grounds it being anti-competitive (we note that the DOJ rarely sues if it doesnt think it has a reasonable case to win). If the transaction somehow gets approval (thereby removing a major competitor from the wireless market), we believe the prospect of a DTV/DISH merger (originally floated to and eventually blocked by the FCC in 2002) could come to the forefront. In the event that the wireless M&A transaction doesnt get approval, many believe AT&T might look toward another acquisition, possibly a play for DISH, as widely reported in the past (Multichannel News, 2/10/2011).

Customer service correlated to market share trends; say hello to Americas most hated industry With such high penetration in the Pay-TV market, one wouldnt expect operators to score anywhere near the low levels that they do on customer service surveys. But compared with other consumer facing industries, including the postal service, newspapers, & wireless carriers, the Pay-TV industry shows up at the bottom of the heap, year after year. We performed a simple regression of the six companies in our coverage universe, using average JD Power scores as an independent variable driving share gains in the video market beginning with year-end 2007 through 2Q11. DIRECTV, with the best customer service rankings amongst Pay-TV providers, saw the biggest share gainthe opposite trend was observed for Charter. Valuation: At a discount to Staples and in a tight band. DTV (our top pick) looks cheapest relative to growth Should Cable and Satellite stocks be valued by investors as Consumer Discretionary or Consumer Staple stocks? According to our analysis of the trailing EBITDA multiples of the S&Ps Staples vs. Discretionary (thank you, Mr. Bloomberg), the three- year average multiple for the Staples has been 9.4x, versus 8.7x for the Discretionary stocks (see Exhibit 2 and Exhibit 3). Today, the Staples trade at their historical premium, whereas their Discretionary counterparts trade at a hefty discount (more than one SD below at 7.8x). For reference, the Cable & Satellite group (i.e. the six stocks under coverage), trade at an un-weighted average trailing multiple of ~6x trailing EBITDA. We use the aggregate of five valuation measures, which include levered and unlevered FCF yield, enterprise value to EBITDA, price to earnings, which are all then compared to normalized growth expectations for each company, and finally a discounted cash flow (DCF) analysis. Apart from the DCF, which includes our longterm projections through 2017, we focus on 2012 estimates for our target prices. All multiples are pro forma for transactions that may have closed (but only represent a partial period) or are still pending. Exhibit 4 through Exhibit 7 stack our multiple matrix to the underlying growth rates. In our derivation of FCF yields we normalize all companies on their tax-paying status: that is, if a company is not a full tax payer, we fully tax the earnings and then deduct the net present value of the tax shields as an asset. Moreover, any benefits/reversals of the governments economic stimulus plans are excluded. Unlevered FCF yield reflects the return on the enterprise, irrespective of the capital structure, and is calculated as fullytaxed FCF excluding net interest expense divided by enterprise value (adjusted for nonconsolidated and deferred tax assets). Levered FCF yield shows the kicker to equity owners from leverage and is the fully-taxed FCF (after net interest expense) divided by the fully-diluted equity market capitalization (adjusted for nonconsolidated assets and deferred tax assets). Cablevision and DISH are the most attractive on the absolute yield but Charter and DIRECTV look the most attractive when we bring in FCF growth. DISH and Cablevision are the cheapest on price-to-earnings but DIRECTV looks the cheapest when we bring in the growth equation. In our EV/EBITDA we use EBITDA after stock based compensation. Dish is the cheapest but adjusting for growth DIRECTV is the most attractive. We use a DCF analysis to determine fair value for 2012E target price expectations. Our DCF uses the capital asset pricing model and CDS spreads to determine the weighted average cost of capital. Our perpetual growth rate assumptions are higher for cable than DBS. (see Exhibit 8)

Exhibit 2: S&P500 Consumer Staples Trailing EBITDA Valuation Multiple

10.5x 10.0x
Exhibit 3: S&P500 Consumer Discretionary Trailing EBITDA Valuation Multiple

10.5x 10.0x
EV/TTM EBITDA
9.5x 9.0x 8.5x 8.0x 7.5x
EV/TTM EBITDA
9.5x 9.0x 8.5x 8.0x 7.5x
Source: Bloomberg L.P., ISI Group
Exhibit 4: Fully Taxed Levered FCF Yield (2012E) vs. 3-year Levered FCF CAGR (2012E-2014E)
Exhibit 5: Fully Taxed Unlevered FCF Yield

(2012E) vs. 3-year Unlevered FCF CAGR (2012E2014E)
Source: ISI Group estimates, Bloomberg, L.P., company documents

Exhibit 6: EV/EBITDA (2012E) vs. 3-year EBITDA CAGR (2012E-2014E)
Exhibit 7: P/E (2012E) vs. 3-year Diluted EPS

CAGR (2012E-2014E)
Exhibit 8: Discounted Cash Flow Assumptions

Cost of Equity Comcast Time Warner Cable Cablevision Charter DIRECTV Dish Network 9.2% 9.2% 10.4% 10.4% 9.3% 10.4% Cost of Debt 4.0% 4.5% 7.7% 7.2% 5.0% 7.2% Net Debt/ Total Cap 25% 38% 40% 50% 30% 10% WACC 7.5% 6.7% 8.1% 7.3% 7.4% 9.8% Perpetual 2012 YE Growth Rate Target Price 0.5% $29.00 0.0% $88.00 0.0% $25.00 0.0% $60.00 -0.5% $61.00 -0.5% $34.00

Exhibit 9: Cable & Satellite Comparative Valuations

Ticker Comcast Time Warner Cable Cablevision Systems Charter Communications DIRECTV DISH Network Rating Share Price 10/21/2011 $24.33 $70.87 $17.57 $49.75 $46.42 $25.91 Diluted EPS '11E-'14E CAGR 19.6% 21.8% 36.9% NM 26.9% -1.3% 21.8% 26.3% 2012YE Target $29 $88 $25 $60 $61 $34 Potential Upside 19.2% 24.2% 42.3% 20.6% 31.4% 31.2% Diluted Shares 2,829 343 290 121 751 453 FCF '11E-'14E CAGR 8.2% 4.5% 8.7% 10.2% 16.6% 2.7% 8.5% 8.5% Diluted Market Capitalization $68,567 $24,339 $5,094 $6,037 $34,870 $11,725 Net Debt $43,049 $20,436 $9,878 $12,033 $10,934 $3,556 Enterprise Value (EV) $111,616 $44,775 $14,972 $18,070 $45,804 $15,281 Unlevered FCF '11E-'14E CAGR 6.0% 2.7% 5.6% 3.6% 15.8% 1.7% 4.6% 5.9% Dividend Yield (2011E) 1.9% 2.7% 3.3% ------0.9% 1.3% 2012E 6.2% 5.9% 11.8% 6.2% 22.7% 12.5% 9.0% 10.9% Non-Cons & Tax Assets $(14,936) $(2,226) $(723) $(2,022) $(1,797) $(3,361) Adjusted EV $96,680 $42,548 $14,249 $16,048 $44,006 $11,919
CMCSA/CMCSK Buy TWC CVC CHTR DTV DISH Buy Buy Buy Buy Buy Price/Adj. Earnings 2011E 2012E
Levered FCF Yield 2011E 2012E 11.3% 9.4% 14.3% 8.5% 6.7% 14.3% 10.3% 10.7% 12.0% 11.0% 16.6% 11.7% 10.7% 14.3% 11.9% 12.7%
Unlevered FCF Yield 2011E 2012E 6.4% 7.5% 7.2% 5.7% 5.8% 11.7% 6.8% 7.4% 7.0% 7.5% 8.1% 6.5% 8.0% 13.1% 7.7% 8.3%
EV/EBITDA EBITDA 2011E 2012E '11E-'14E CAGR 6.6x 5.5x 6.3x 5.8x 5.9x 3.5x 5.9x 5.6x 6.0x 5.5x 5.7x 5.5x 5.1x 3.2x 5.5x 5.2x 6.2% 3.9% 4.5% 3.6% 7.7% -1.5% 4.2% 4.0% as 2012E 58.7% 158.1% 102.1% 68.8% 188.0% --85.5% 96.0% 2012E 4.5% 5.6% 11.1% 5.2% 17.5% 12.5% 8.3% 9.4%
Comcast Time Warner Cable Cablevision Systems Charter Communications DIRECTV DISH Network Cable & Satellite Median Cable & Satellite Average
15.8x 15.1x 15.4x NM 14.4x 8.7x 14.8x 13.9x EV/Sub 2011E $3,726 $3,276 $4,401 $3,714 $1,467 $918 $3,495 $2,917
13.5x 12.7x 11.2x 19.7x 11.4x 9.1x 12.0x 12.9x
2012E $3,548 $3,542 $4,266 $3,733 $1,302 $847 $3,545 $2,873
EV/Primary Service Unit 2011E 2012E $1,661 $1,506 $1,459 $1,518 $1,551 $1,461 $1,634 $1,560 $1,467 $1,302 $918 $847 $1,509 $1,484 $1,448 $1,366 2012E 6.8% 7.8% 16.9% 6.0% 31.7% 18.9% 12.3% 14.7%
Capex/Revenue 2011E 2012E 9.5% 9.4% 14.2% 13.7% 11.9% 11.9% 18.8% 18.6% 10.3% 9.7% 6.3% 7.3% 11.1% 10.8% 11.9% 11.8% 2012E 9.6% 24.4% NM 22.8% NM 128.4% 16.2% 20.8%
Net Debt/EBITDA 2011E 2012E 2.0x 1.8x 3.2x 3.1x 4.0x 3.8x 4.5x 4.3x 1.8x 1.9x 0.8x 0.9x 2.6x 2.5x 2.7x 2.6x
Returns of Capital to Shareholders % of FCF 2010A 2011E 44.0% 47.8% 65.5% 150.6% 110.7% 129.1% --100.2% 214.5% 294.8% 17.9% --54.8% 114.7% 75.4% 120.4% Return on Assets (ROA) 2010A 2011E 4.1% 4.8% 5.0% 5.2% 7.8% 9.5% 3.8% 4.1% 13.4% 15.5% 13.2% 16.9% 6.4% 7.4% 7.9% 9.3%
Return on Invested Capital (ROIC) 2010A 2011E 6.5% 7.4% 7.0% 7.4% 11.8% 13.9% 4.2% 4.7% 22.7% 27.5% 24.2% 27.8% 9.4% 10.6% 12.7% 14.8%
Return on Equity (ROE) 2010A 2011E 8.3% 9.0% 14.6% 17.5% NM NM NM NM 161.8% NM NM NM NM NM 17.3% NM
Return on Net Tangible Assets (RONTA) 2010A 2011E 4.9% 6.2% 5.3% 5.5% 8.2% 10.1% 4.7% 5.0% 17.3% 20.2% 13.2% 16.9% 6.7% 8.1% 8.9% 10.7%
Notes: Comcast is pro forma for NBCU, Time Warner Cable is pro forma for NewWave and Insight Communications, Cablevision is pro forma for AMC Networks, DISH Network EBITDA excludes TiVO litigation accrual reversal, DIRECTV EV/Sub is for the U.S. business segment Source: ISI Group estimates, Bloomberg, L.P., company documents
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Exhibit 10: Cable & Satellite Key Operational Comparisons

Time Warner Cable
Comcast Network AT&T Network Overlap AT&T U-verse Footprint Overlap Verizon Network Overlap Verizon FiOS Footprint Overlap All-Digital Coverage (2011E) Switched Digital Video Coverage (2011E) DOCSIS 3.0 Coverage (2011E) #1 #2 #3 #4 #5 Top 5 as % of Total Subs Homes Passed Basic Video High Speed Data (HSD) Voice Primary Service Units (PSUs) Digital Video Revenue Generating Units (RGUs) Basic as % of Homes Passed HSD as % of Homes Passed Voice as % of Homes Passed Digital Video as % of Basic PSUs per Basic Subscriber Double Play Penetration Triple Play Penetration Bundled Penetration Video ARPU Incl. Advertising & Other High Speed Data (HSD) Voice Total ARPU per Basic Sub Distribution Revenues Distribution EBITDA EBITDA M argins Distribution Capital Expenditures Capex as % of Revenues 30% 20% 29% 14% 100% --100% Philadelphia, PA Chicago, IL Boston, M A San Francisco, CA Seattle, WA 31.2%
Charter
Cablevision 6% --63% 40% 100% 100% 100% New York, NY M issoula, M T Denver, CO Billings, M T New Haven, CT 94.0% 5,561 3,283 2,932 2,946 9,161 9,161 59.0% 52.7% 53.0% --2.8x 16.2% 72.1% 88.4% $96.31 $37.40 $31.32 $152.01 $6,272 $2,510 40.0% $752 12.0%
DIRECTV US 48% 24% 23% 14% 100% ----Los Angeles, CA New York, NY Chicago, IL Dallas-Ft. Worth, TX Atlanta, GA 17.6% 116,761 19,433 ----19,433 --19,433 16.6% ------1.0x ------$92.79 ----$92.79 $21,712 $5,382 24.8% $1,625 7.5%
DIS H Network 48% 24% 23% 14% 100% ----Los Angeles, CA Dallas-Ft. Worth, TX Atlanta, GA Chicago, IL New York, NY 15.1% 116,761 14,056 ----14,056 --14,056 12.0% ------1.0x ------$78.56 ----$78.56 $14,049 $3,654 26.0% $879 6.3%
33% 60% 22% 24% 22% 10% 10% 3% 15% NA 100% 100% 73% 100% Markets (2Q11) Los Angeles, CA St. Louis, M O New York, NY Cleveland,OH Dallas-Ft. Worth, TX Raleigh, NC Los Angeles, CA Greenville, NC Atlanta, GA Flint, M I
Source: ISI Group estimates, company documents
Company Summaries
Cablevision (CVC, Rated Buy, 2012 YE Target Price: $25). As a pure-play Cable company (with MSG and AMC Networks having been spun-off), theres little arguing that Cablevision has been the best executing MSO in terms of operations over the past decade. Whether Cablevisions stellar performance has been a function of its tightly clustered footprint (in the Northeast), its favorable customer demographic profile or an above-par management team shouldnt take away from the companys remarkable success. The legacy Northeast footprint (ex. Bresnan) has Triple Play penetration of 72%. Penetration rates of virtually every subscriber category lead the industry, and Cablevision extracts more revenue per user (ARPU) than any other

39.6% 30.2% S ubscribers (000s) 52,214 27,554 11,832 22,525 12,235 4,413 17,550 10,062 3,502 9,063 4,625 1,816 49,138 26,922 9,731 20,188 9,048 1,101 69,326 35,970 10,831 Penetration 43.1% 44.4% 37.3% 33.6% 36.5% 29.6% 17.4% 16.8% 15.3% 89.6% 74.0% 24.9% 2.2x 2.2x 2.2x 31.5% 39.8% 35.4% 35.0% 31.1% 31.0% 66.5% 70.8% 66.4% 2011E Average Revenue per S ubscriber (ARPU) $85.82 $80.70 $81.04 $41.49 $43.13 $40.93 $32.64 $39.45 $40.51 $138.01 $134.41 $135.96 2011E Financials (In Millions) $37,288 $19,721 $7,201 $15,272 $7,163 $2,718 41.0% 36.3% 37.8% $5,050 $2,808 $1,356 13.5% 14.2% 18.8%
MSO. (Factor in that Cablevision achieved all of this even though it has the most extensive overlap with Verizons FiOS Fiber overbuild.) All the past success begs the question: Is there now nowhere to go but down? We are of the view that even if subscriber metrics are tepid in future periods, Cablevision will have stable, growing FCF, even as it rolls out its Network DVR service and a footprint-wide Wi-Fi network. Cablevision continues to return capital to shareholders via buybacks and dividends and has set a target leverage ratio of 4x-4.5x Debt/TTM EBITDA (we note that although the company is organically de-levering, it might see a pull back in capital returns in the near term as refinancing in the high yield debt markets remains challenging). In fact, the company is deleveraging so quickly it could conceivably be taken private within 5 years. And this all comes at a compelling valuation; we recommend Cablevision for investors seeking a levered way to invest in a pure-play Cable business. Charter Communications (CHTR, Rated Buy, 2012 YE Target Price: $60). It would be a tad more than an understatement to say that Charter Communications has a checkered history among both its customers and investors. After going bankrupt under the weight of an untenable debt load in 2009, Charter reemerged as a more healthy recapitalized company later that year. Today, the company continues to make strides in catching up on service offerings, and is set to roll out a new integrated TiVO service in 2012. Yet Charter still severely lags industry peers in virtually all subscriber-related metrics; video penetration, by way of example, is a paltry 37%. While Charters management no longer has to worry about liquidity on a day-to-day basis, we believe it will take some time for the company to reignite the confidence of consumers. Charter consistently ranks at the very bottom of customer satisfaction surveys (although 2011 results, which were recently released, showed a slight improvement, which could be an encouraging sign). In a surprising twist, its CEO recently resigned for personal reasons; a replacement has not been named. Of note, Charter felt confident enough to institute a price increase in video and HSI (for the first time) in July, 2011, a sign of pricing power. Given its prevailing market position, Charter has embraced the concept of selling HSI and VoIP-only bundles, and even has a cross marketing promotion with DISH Network to sell a synthetic triple play to DISHS video customers in its footprint. We believe that the value of Charters tax assets which we calculate to be $18 per share are underappreciated by the Street, and could also be attractive to a potential M&A partner (although we remain cautious on M&A as Charter might want to tread carefully and not sell any crown jewels before fortifying remaining clusters). Though Charter does not remain without its challenges, theres more good than bad in the story; to the extent investors believe in the Cable story as a sector play, Charter is perhaps a good levered way to invest in the Cable theme. Comcast (CMCSA/K, Rated Buy, 2012 YE Target Price: $29). Comcast is the largest U.S. Multichannel provider and with its recent acquisition of a majority stake in NBC Universal (NBCU), the company can also call itself the largest (traditional) media company in the world. To be sure, with Cable comprising 80% of revenues and 90% of EBITDA, Comcast should still very much be considered a Cable company. Comcasts decision to create a media conglomerate with its acquisition of NBCU when the trend in the industry has been to move toward pure-plays was at the very least, an interesting one. Even assuming that Comcast cant improve lagging operations at NBCU, the transaction looks attractive given its unique structure and given that the assets were purchased at near bottom of the economic cycle. The companys cable business is performing better than the peer group as it completes its rollout of all digital and a ubiquitous DOCSIS 3.0 network. While local advertising remains weak, NBCU is highly levered to national advertising (i.e. cable networks). Comcast will be using NBCUs considerable (and growing) FCF to buy-in the rest of the company from GE over the next seven years; importantly, it has pledged not to compromise on the Cable divisions cash flow for such a purpose.

We believe that one of the key issues on the stock is what Comcast ultimately decides to do with the Cable Units FCF (namely, how much of it will be returned to shareholders?). We do not expect Comcast to borrow money to finance its return of capital strategy; moreover, we believe there is a growing preference for increasing the recurring (cash) dividend over increasing its stock buyback. Investors looking for a large cap, more diversified play on Cable might prefer Comcast. DIRECTV (DTV, Rated Buy, 2012 YE Target Price: $61). In addition to its Core U.S. business, DIRECTV has a rapidly growing business in Latin America (DLA), making it the largest Pay-TV provider in the world. As a stock, DIRECTV presents investors with a little bit of everything: it has a slowing subscriber base in the U.S., but rapidly rising cash flows; in Latin America, a region that is enjoying a fast expanding middle-class, subscriber growth is exceeding even the most bullish of expectations, while its FCF growth like has a steep runway ahead. The company has aggressively returned capital to shareholders, primarily via buybacks; its target leverage ratio is 2.5x Debt/TTM EBITDA, and we forecast a continued return of capital via an equity shrink in the years to come (DLAs growing cash flows should support capital returns starting in 2012). DIRECTV has proven time and again that it has the wherewithal to roll-out a best-in-class video product, which has become synonymous with its brand name. We believe that the companys ongoing success will depend on its ability to continue to innovate and monetize its competitive advantage; for example, this year it is making the normally coveted NFL Sunday Ticket a mainstream product without impacting subscriber economicsin the process we believe the company is taking video share. Finally, DIRECTV is expected to release no less than five service enhancements by the end of the year. With a best-in-class product, above peer-group growth rates, an attractive valuation, aggressive capital returns and a first class management team to boot, we recommend that investors accumulate DTV shares. Its our top-pick, hands down. DISH Network (DISH, Rated Buy, 2012 YE Target Price: $34). DISH Network, the smaller of the two DBS operators, is (at least on paper) the cheapest stock in our coverage universe, trading at a 15-40% discount across the various valuation metrics that we track, though some would argue, with good reason. DISH prides itself as the best value proposition in the multichannel video business. Fundamentally, DISH has faced an uphill battle in recent quarters, with subscriber growth turning negative in four out of the past five periods. With a subscriber base over-indexing to the lower quintiles of disposable income which are increasingly feeling the pain in our economic malaise combined with promotional offers that lost their cache in an increasingly competitive environment, subscriber trends have admittedly gone the wrong way. With a new CEO (Joe Clayton) at the helm, the company seems to be re-energized. At the beginning of October 2011, DISH introduced an integrated online and DVD rental service (Blockbuster Movie Pass), available only to DISH subscribers (free for certain programming tiers for a period or for an incremental $10 fee/month). Strategically, some of the companys M&A activities could be viewed as confounding, although we believe investors are beginning to see some optionality. Apart from Blockbuster, the company acquired spectrum assets from bankrupt companieswhy, exactly, is anybodys guess. Indeed, its quite possible that founder and Chairman Charles (Charlie) Ergen himself might not be entirely sure what DISH will do with its newfound arsenal of spectrum; nevertheless, given the bargain-basement price paid, we view DISHs recent M&A activity as to limit risk while perhaps giving the company strategic optionality over the long-term. To be sure, DISH remains a deep value play, with a risk/reward profile tilted toward reward, in our view. Time Warner Cable (TWC, Rated Buy, 2012 YE Target Price: $88). Time Warner Cable, the second largest MSO in the U.S., was born from a separation from parent Time Warner (fully completed in March 2009), and now trades as an independent entity. Since its complete separation, Time Warner shares have skyrocketed, in part a testament to good execution, but also in part to what was demand for a truly

independent Cable company (one not controlled by a single entity/family via super-voting shares). True to its promise, TWC has run itself as a company for the people and owned by the people, offering the best disclosure in the industry and aggressively returning capital to shareholders. That is, until recently. Over the past year, TWC has announced $3.7B worth of acquisitions of various Cable and CLEC properties (the largest of which being Insight Communications), worrying investors that TWC might have somehow shifted its strategic direction to growth through acquisition instead of returning capital to shareholders. We believe that although such a shift would be troubling, theres no evidence that one has occurred, especially since there arent that many Cable assets left to buy and management does undertakes a rigorous return analysis on any investment, whether it is M&A or a stock buyback. We believe that share buyback levels will continue to be depressed from the previous quarterly run rate through the middle of 2012 (TWC has pledged not exceed a 3.25x leverage ratio). Fundamentally, the company has shown some signs of weakness in recent periods, particularly Q211, when it reported weak subscriber trends and even the loss of DVR subscribers for the first time. We expect trends to rebound, and expect further upside as it brings Insight properties up to TWC standards. Pro forma for the recent acquisitions, TWC shares no longer trade at a justifiable premium.

PART I: THE EVOLUTION OF THE CABLE & SATELLITE INDUSTRY

The growth of the Cable & Satellite industry over the past sixty or so years has been nothing if not extraordinary. The evolution of an industry where people have become conditioned to pay for formerly free broadcast television is, in our view, irony at its best. Indeed, the original abbreviation for the Cable industry was CATV, otherwise known as Community Antenna Television, where people paid for service in areas where free over-the-air reception was spotty. Ever since the original communal antenna service was introduced, the Pay-TV industry has evolved into something meaningfully more robust. In addition to traditional Cable service, consumers have the option of receiving their video signals from two national digital broadcast satellite (DBS) providers, and more recently, from the Regional Bell Operating Companies (RBOCs, namely, AT&T and Verizon). All three industries (Cable, DBS and Telco) have fought aggressively in targeting the same consumeras video penetration in the U.S. has grown to 88% of households as of 2010, up from just 39% in 1983 (see Exhibit 11 and Exhibit 12).
Exhibit 11: Pay-TV Penetration of Households Exhibit 12: U.S. Pay-TV Subscribers by Industry (Cable, DBS & Telco)
Source: SNL Kagan, ISI Group estimates, company documents
Source: SNL Kagan, ISI Group estimates, company documents
Of course, the now ~$160B consumer market in the U.S. has evolved to include much more than video, especially insofar as the Cable Multiple System Operators (MSOs) and the Telcos are concerned. Cable MSOs and the RBOCs are also competing aggressively in the High Speed Internet (HSI) and voice telephony markets, each having entered the others turfs over the past decade.

Video Trends
Declining marginal economics to be offset (partially) by bundling and adoption of more advanced services By the end of this year, we estimate that the Cable industry will account for 58% of the Multichannel video market, with 58.3MM subscribers; we also estimate that the DBS operators, DIRECTV and DISH Network, will combine for 33.6MM subs, giving them a 34% market share; finally, we project that the Telcos will combine for 8.3MM subs, giving them slightly under 8% market share (see Exhibit 13). By 2015E, we estimate that Telco share of the video market will have increased to about 14%, while Cables share will have shrunk to about 54% of the market and DBS will have shed a less severe, but still meaningful, 200bps to 32% of the market, in aggregate (see Exhibit 14). We anticipate that the total Pay-video market will be just a tad larger, at 102MM subscribers, in 2015E up from 100MM at the end of this year; implicit in this Multichannel forecast is a certain amount of Over-the-Top (OTT) only subscribers, although we believe that they will remain primarily a complement rather than a replacement to the traditional multichannel video offering during our forecasting period.
Exhibit 13: Basic Video Subscriber Mix Circa 2011E Exhibit 14: Basic Video Subscriber Mix Circa 2015E
Source: Company reports, ISI Group estimates
The overall theme that we see in video is something close to a zero-sum game in market share; the Telcos (and to some extent, Over-the-Top) will ultimately take share from the more traditional incumbents, with Cable feeling a greater share of the pain. Moreover, we see margin compression ahead for all Pay-TV operators, as rate increases might fail to keep pace with quick-rising programming costs. Lastly, as we will discuss in further detail below, we believe that the video industry will continue its arms race of service enhancements, where there will be only a small time-to-market advantage before new services become copied by others, and thereby commoditized. To the extent that there are added costs in equipment/R&D to unroll these services or features and the operators are not compensated (i.e. they come to be expected due to technological change or consumer adoption patterns), this could further pressure video margins going forward. State of video competition: Overbuilds are now complete | Telcos might come back for a second helping With the Telco video overbuilds essentially complete, Cable & DBS relative exposure to Verizon and/or AT&Ts footprint is relatively well understood, but that in no way means that the competitive threat has

abated. Cablevision which is densely clustered in the Northeast, in particular, has 63% overlap with Verizons network (including legacy DSL) and 40% overlap with its newer, FiOS Fiber-to-the-Home buildout. Comcast, the largest MSO in the U.S., has almost identical exposure (in terms of footprint overlap) to AT&T and Verizon, at ~30% each. Time Warner Cable and Charter over-index to AT&Ts overbuild, which is not entirely surprising, since AT&Ts fiber-build, while arguably less powerful technologically still covers a larger swath of homes passed (see Exhibit 15 and Exhibit 16).
Exhibit 15: Cable MSO Overlap with Telco Footprints
Exhibit 16: Cable MSO Overlap with Telco Fiber Networks
Source: Company reports, ISI Group estimates, SNL Kagan
Source: Company reports, ISI Group estimates, SNL Kagan
Exhibit 17: Heat Map of AT&Ts Television Footprint by State (Darker Shading Indicates More Homes Passed)
Exhibit 18: Heat Map of Verizons Television Footprint by State (Darker Shading Indicates More Homes Passed)
Source: SNL Kagan; ISI Group analysis
Source: SNL Kagan; ISI Group analysis
One risk for the Cable & DBS incumbents is that now, given that the Bells are all-but-finished building their networks, they might focus on what are now legacy Fiber markets. We already see signs of this happening.

In order to illustrate the geographic intensity of Telco Fiber builds, we constructed heat-maps of videopassing coverage for both AT&T and Verizon (see Exhibit 17 and Exhibit 18 respectively). Darker shading represents denser passings in a given State (note that shadings represent the absolute number of passings, not the relative number of passings adjusted for a States population).
Indeed, as Pay-TV subscribers ourselves, weve seen it first hand in the Long Island market, a highly coveted territory for both Cablevision and Verizon. Promotional activity by Verizon (free multi-room DVR for life, $89 triple play, etc) seems to have kicked into overdrive. Though Cablevision has responded with promotions of its own, we believe that the Telcos goal is to extract as much value from their now completed networks. Video cost-structure likely to drive continued gross margin declines Video remains Cables most mature but least profitable product. And of course, its currently DBSs only product offering. For reference, the reason that video is less profitable than HSI or VoIP comes down to cost structure, specifically, programming costs. In order to offer hundreds of channels of video, Pay-TV companies have to pay the owners of the content for the right to retransmit signals to subscribers. Pay-TV operators are even paying for channels that are available free over the air. Content costs have been rapidly rising as traditional old media companies struggle to find new revenue streams in the face of a challenging advertising market, their other main source of revenues (see Exhibit 19).
Exhibit 19: U.S. Television Ad Spending (National, $Bs)
60
U.S. Television Advertising Spend ($B) 56.8 54.5 54.7 54.8 55.0 50.7
55 50 45 40 35 30
43.3 48.6
46.1
51.5
Source: Magna Global, ISI Group
Programming agreements, in general, favor the content owners over the distributers, since payment schedules are structured on a per-channel per subscriber basis. In essence, many subscribers often subsidize those who enjoy the less popular channels almost the equivalent of Television Socialism. While there are some scale advantages on costs for the larger operators given their ostensibly larger negotiating clout (Comcast, with 22.5MM subscribers generally pays less for a given channel than Mediacom, which has ~1.2MM subscribers), programming costs are still variable expenses for all operators. That makes holding video margins even steady difficult for operators, and certainly renders the prospects of growing them all-but-impossible. While precise terms of programming agreements vary by operator, length of the contract and programmer, a few rules of thumb generally hold true: Over the past few years, programming costs to distributers (Cable & DBS, Telcos and now OTT companies) have been rising faster than annual rate increases.

The larger content owners often sell their channels in bundles, thereby leveraging stronger properties to support weaker ones (for example, Disney might force a distributor to take the tepidly rated ABC Family Channel if it wants to also carry the vastly more popular ESPN) Certain channels are relegated to the basic tier, which is the most attractive tier for programmers since they are compensated (as mentioned above), on a per-subscriber basis (and hence get paid for a distributers entire subscriber base) Some channels are relegated to special niche tiers, often becoming a source of contention between programmers and distributers. For example, what may be included on a basic tier on DIRECTV might only be included on an opt-in tier on DISH Network. Recently, there have been reports that the most expensive basic tier property in the land ESPN might be relegated to a special (opt-in only) Sports Tier by TWC and DISH1. While no decision has been made (yet), doing so would likely send shockwaves throughout the industry, and possibly create a new normal.
In 2010, SNL Kagan counted approximately 170 channels as the average number carried on a typical Cable/Satellite basic tier, with an aggregate monthly cost of $36.30 per subscriber, a compounded annual growth rate of ~5% of since 2006. The average annual rate of inflation has been about 2.5% as gauged by the CPI over the past six years. These programming cost estimates do not include any retransmission fees for the previously free broadcast channels. (Telco and DBS providers have historically paid retransmission fees for broadcast channels; more recently, the Cable industry is being brought into the fold, which is in some ways, is leveling the playing field.) The top-15 channels which include such must haves like ESPN, TNT and Fox News and TBS accounted for 56% of all affiliate fees in 2010. Even more telling, perhaps, is that these 15 channels enjoyed an average rate increase of 6% from 2006-2010, certainly greater than the average video rate increase of the average Cable/Satellite bill. Drilling down even further, over the past four years, the top five channels averaged a stunning 12.5% increase, on average (see Exhibit 20).
Exhibit 20: Basic Tier Affiliate Fees (2006-2010); Top-15 and All Other 1
Channel ESPN TNT Disney Channel NFL Network FOX News ESPN2 USA Network M GM HD TBS CNN en Espanol CNN HDNet Nickelodeon FX Network HDNet M ovies All Other Total M emo: Top-15 as % of Total 2006 $3.30 0.89 0.81 0.40 0.27 0.40 0.49 0.00 0.43 0.47 0.44 0.79 0.37 0.35 0.50 20.53 30.41 48.1% 2007 $3.48 0.91 0.83 0.80 0.32 0.46 0.50 0.50 0.44 0.48 0.46 0.81 0.38 0.37 0.50 21.67 32.91 51.9% 2008 $3.75 0.93 0.86 0.85 0.44 0.50 0.52 0.52 0.46 0.49 0.47 0.64 0.41 0.40 0.51 21.20 32.94 55.4% 2009 $4.08 0.99 0.88 0.75 0.58 0.54 0.55 0.53 0.49 0.51 0.50 0.55 0.44 0.42 0.44 19.85 32.09 61.7% 2010 $4.34 1.10 0.91 0.78 0.70 0.58 0.57 0.55 0.54 0.53 0.52 0.52 0.47 0.43 0.42 23.29 36.26 55.7% 2006-2010 CAGR 7.1% 5.6% 3.0% 18.2% 27.5% 9.7% 4.2% na 5.8% 3.5% 4.3% -9.8% 6.0% 5.3% -4.3% 3.2% 4.5%
Top 5 channels: 12.5% CAGR
Top 15 channels: 6% CAGR
Source: SNL Kagan, ISI Group analysis 1 We believe that if retransmission payments for broadcast channels is included, total programming costs could be $2-3 higher per basic sub
http://www.tvpredictions.com/espn092211.htm

We forecast that the companies under coverage will generate $82.5B in video revenue in 2015E (up from $73B in 2010, pro forma for all acquisitions and divestitures), a ~2% CAGR. At the same time, we forecast that programming costs will rise from $30B to $37B over the same time period, or double the rate, at 4.6%. If our forecasts prove correct, this will lead to video gross margin compression of 60% in 2010 (pro forma) to 55% in 2015E (see Exhibit 22).
Exhibit 21: Cable & Satellite Industry-Video Subscribers & Net Additions (2009A 2015E) Exhibit 22: Cable & Satellite Industry-Video Revenues vs. Programming Costs
Source: Company reports, ISI Group estimates Note: Revenues, margin and cost estimates include public traded companies under coverage
There remains little doubt, in our view, that the propensity for customers to take ancillary services has been and will continue to be there. According to Kagan estimates, by YE 2010, 54% of digital subscribers were also HD subs. The DVR take rate was approximately 33% of all households, up from less than 5% in 2003. HD and DVR trends are shown in Exhibit 23 and Exhibit 24). (Note that these exhibits exclude the DBS operators where HD and DVR penetration is likely higher given that they are all-digital platforms, whereas Cable still has a fair amount of analog customers, who would be ineligible for these services.)

Of course, programming costs wont be the only source of potential pressure on video margins, in our view. We believe that although there will continue to be innovation in the video market such leaps forward might amount to a virtual Arms Race, where operators add features and value added products to lift ARPU; however, such advanced services command a premium for only a short time period, quickly becoming commoditized me too products. HD is a high profile example of such a phenomenon. Operators once charged as much as $10/month for HD and within ~2-years HD effectively became a free service. To the extent that operators continue innovating and are forced to offer new products for free, this could serve as a second headwind for video margins going forward (more equipment, additional programming rights, customer care complexities etc).
Exhibit 23: Cable Industry HD Penetration of Basic and Digital Subscribers (Annual)
Exhibit 24: Cable Industry DVR Penetration of Basic Subscribers (Annual)
Source: SNL Kagan, ISI Group estimates
On a distinctly more positive note, at least for the Cable MSOs, one theme that continues to put a floor on video stability is the propensity of bundling. Over just the past year, Triple Play (that is, those customers that take a bundle of video, data and voice) penetration at the four public MSOs has increased by an average of 340 bps (as a percentage of basic subscribers). Cablevision leads the industry by a wide margin, with an almost unfathomable Triple Play penetration of 72% of basic video customers, a 4.1% increase since 2Q10 (see Exhibit 25). As we will discuss in the HSI section below, we believe that the data has evolved into the most important mousetrap in the bundle, an area where Cable MSOs have a distinct advantage over their Telco counterparts and certainly against DBS (which does not sell HSI).
Exhibit 25: Triple Play Penetration (Cablevision, Charter, Comcast and TWC as a % of Basic Subs)
100.0% 90.0% +410 bps
80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Cablevision Charter Comcast TWC +320 bps +400 bps +230 bps 2Q10 2Q11
Source: SNL Kagan, ISI Group

Triple Play Penetration of Basic Subs
Getting to the Bottom of Over-the-Top (OTT)

Adding another layer of intrigue to the video narrative, competitive intensity from non-traditional sources is also heating up. Were referring, of course, to the so-called Over-the-Top (OTT) phenomenon, where traditional Pay-TV subscription services are bypassed by Internet video subscription based services such as Netflix, Hulu+ or free sites such as YouTube. We predict that traditional Pay-TV penetration will be flattish between now and 2015E, hovering around the magic 100MM subscriber number (see Exhibit 26). This estimate implies that the aggregate household formation over the next four years or so will be balanced by a rise in OTT household penetration (see Exhibit 27). While this would equate to ~5% penetration for cord-cutters, in the grand scheme of the industry, we dont believe it will be enough to dramatically move the needle.
Exhibit 26: ISI Multichannel Subscriber Forecast Exhibit 27: ISI Multichannel Subscriber Forecast (including OTT Forecast)
Source: ISI Group estimates
Taking a step back, we believe its worth posing the question of what exactly is OTT? Its a tougher question to answer at first blush than one might realize. For the sake of our investment thesis, we define OTT as any application, device or service that allows one to bypass traditional modes of video consumption, (aka, the Pay-for or even over-the-air model). In many ways, Googles YouTube the most heavily trafficked video site on the Internet by a wide margin was an OTT pioneer. For a while, everything (including pirated content) seemed destined to eventually find its way onto YouTube. Today, the most popular (certainly until some recent PR missteps) paid OTT model is Netflix (NFLX, not covered). With 24MM paying subscribers as of 2Q11, it certainly has earned its fair share of street-cred and we believe justifiably so. Consider some of the non-subscriber related statistics that Netflix has posted. In October 2010, a network solutions provider, Sandvine, published a study titled Fall 2010 Global Internet Phenomena Report. At the time, they concluded that Netflix accounted for a remarkable 20% of all fixedline broadband traffic in the U.S. during prime-time weekday hours (8-10pm). Amazingly, in an update to its initial study just seven months later, Sandvine said that the number had climbed to 30% of all prime-time traffic (!) Adding further fuel to investor worries that the traditional video services might eventually become disintermediated, is the growing number of Americans who are turning to the Internet to satisfy at least a portion of their video needs (as well discuss in our section on the Consumer, video consumption accounts for more than 50% of all Leisure activity in the U.S.). As of August, 2011, 185 million unique American

users (see Exhibit 28) view at least one video online per month. This aggregates ~35 billion videos per month. The biggest hurdle to streaming video over the Internet has generally been the tremendous bandwidth requirements. But, with the connection hurdle having been removed in all but a small footprint of homes via fast Cable modems and Telco fiber connections, disintermediating traditional Pay-TV service has become easier than ever. The average realized broadband speed across the U.S. over time has increased from .04Mbps in 1997 to 6.3Mbps in 2009 according to FCC data, see Exhibit 29.
Exhibit 28: U.S. Monthly Unique Online Video Viewers Exhibit 29: Average Realized Broadband Speed in the U.S. Over Time
Source: comScore, ISI Group
Source: FCC OBI Technical Paper No. 4, ISI Group
We see three broad scenarios ultimately playing out, none of which have a timeline or is mutually exclusive: 1. The distributors find a way to monetize OTT traffic over their last mile connections. Its ironic that many of Netflixs 24MM subscribers are bypassing their video subscriptions by using their broadband modem service as a chief conduit. We believe that given the flexibility put in place by the FCC to allow network owners to charge customers based on usage Usage Based Pricing (UBP) will give them flexibility in either using online video as a monetization tool or to the extent UBP alters consumer behaviors, then many might be less inclined to cut the cord. By way of example, in Canada, where UBP has been widely instituted, OTT providers have already altered the way that they deliver their content streams. In order to conserve bandwidth, users are defaulted to a lower resolution video stream, and can opt in for higher quality video (and take on the corresponding costs of going over their allotted caps). Although UBP has not yet been instituted in the U.S. in the fixed-line broadband business (its already an industry standard practice in wireless), we believe that its only a matter of when not if. We believe that the key for ISPs is to concoct speed tiers that are attractive to consumers, and offer those who are relatively low intensity users also a better value. As it stands today, with pricing

What might be the ultimate effects of OTTs emergence on Cable & Satellite stocks? As mentioned above, with the traditional hurdles for delivering OTT quickly being broken down including the emergence of devices that connect directly to Flat Screen televisions, such as the AppleTV and Roku Box, or in many cases, the Flat Screens themselves the traditional Pay-TV operators are not going to sit idly while their bread-and-butter businesses are threatened (even if it is the lowest margin business).
the same for everybody, a great majority is essentially subsidizing the bandwidth consumption of a small minority. According to Sandvine, the top 2% of users hog approximately 30% of monthly traffic. The top 10% account for 60% of monthly traffic (see Exhibit 30). It is our belief that these users will eventually have to alter their habits, or pay up for their consumption.
Exhibit 30: U.S. Aggregate Distribution of Broadband Usage vs. Percentiles
Source: Sandvine, ISI Group
3. The Cable MSOs choose to become dumb-pipes. Although the nature of programming agreements make this scenario unlikely in the near term, we believe that if network owners determine that it is more profitable to be dumb pipes instead of aggregators of video programming, they might choose to go that route. As mentioned in our industry section, the video business is the lowest margin business in the bundle while HSI carries with it the highest margins. ISIs survey team taps the Teen demographic to shed some light on OTT patterns Pay-TV operators and content providers dont have the proverbial crystal ball to forecast how fast the shift to OTT video might be, but we believe the next best thing would be a glimpse into what the early adopters have been doing. In the technology space, teenagers and early adopters are often synonymous.

2. OTT services could end up being a compliment to Pay-TV services, similar to premium channels. One of the biggest knocks against OTT is that as a standalone service, it doesnt offer two of the most popular things that linear, Pay-TV programming does: local news and live sports (to be fair, we note that Major League Baseball does allow streaming through its MLB.com service). As such, we continue to believe that the true cord-cutters (that is, those who completely cancel their online video services), will be smaller than what many are forecasting. The vast majority of Netflixs 24MM subscribers are still subscribers to some form of Pay-TV. Consider that subscribing to a premium channel, such as HBO, can cost as much as $15/mo. At $7.99/mo for unlimited streaming, Netflix seems like a bargain (for a more dated library of choices). Especially when, in addition to the hardware mentioned above that makes OTT integration with HD TVs easier than ever, many new television sets come with their own Netflix apps integrated within the devices. As Cablevisions COO Tom Rutledge recently articulated, services like Netflix might soon be viewed merely as another application for which consumers leverage their Cable pipe. We not only agree with Mr. Rutledges vision, but we further believe that his prediction is already happening.
We tapped ISIs renowned survey team, led by Oscar Sloterbeck, to poll thousands of Teens (we received more than 500 responses) on their video viewing patterns. While the results were not necessarily representative of the population at large (due to time constraints and our sample size, we were unable to get a cross section of all demographics, races, ages, etc), we believe that the results of the survey which will be ongoing & refined were illuminating. A summary of the initial results are in Exhibit 31. Slightly less than half 46% of our survey respondents claim to watch online video as their primary source of video content and 40% thought they were very likely to replace traditional Pay-TV with online video. Older teens in our survey, who have greater access to Smartphones, game consoles, and personal computers were even more likely to be cord cutters (55% of respondents between the ages of 16 and 19 watch online video more than any other video source). YouTube and content network websites like MTV.com were the most popular sources of online content. Netflix was the most popular source of subscription online content, ahead of Hulu+ and HBO GO.
Exhibit 31: ISI Group Teen Video Usage Survey Summary
Source: ISI Group

High-Speed Internet (HSI)

The sweet spot of Cables (sweet) suite of services We project that the fixed-line broadband market will reach 82MM subscribers industry-wide, or >70% penetration of eligible homes defined as those with a PC (up from 62% in 2008) by the end of 2011. Penetration in the U.S. is slowing, but still climbing, partly due to a growing denominator (PC Homes). Cable will continue to take HSI share from Telco. We estimate Cable has 56% share at 2011 year end. More glaring, however, is that when removing DSL from our forecast which is now arguably an uncompetitive product compared to Cable modems Cables share of the true broadband market (i.e. Cable inclusive plus Telco fiber) will likely be 85% in 2011, an astonishing share gap. However, we believe that Telco fiber builds are admittedly in the early innings, and will if our forecasts prove correct continue to gain share over time, accounting for 10% of the market at the end of 2011 and 14% of the market by 2015E. However, these gains probably wont come at the expense of Cable, but instead from the replacement of DSL losses (as the trite but true saying goes, todays DSL is yesterdays dial-up). The Telcos are effectively keeping share by upgrading their networks to remain competitive (according to AT&Ts 3Q11 earnings press release, 70% of AT&Ts DSL homes can get 3 Mbps speeds or higher). However, by 2016E, the damage might already have be done, with share losses from the Telco (at least a portion) permanently gone in favor of Cable. Cable was relatively late to the game in offering broadband service to subscribers in the U.S. Today, Telco fiber notwithstanding, the Cable industry has generally won the war for broadband subscribers as compared to DSL, which still relies on an outdated technology and also depends on a customers physical distance to a central office (the greater the distance, the slower the realized speeds). Due DOCSIS 3.0 technology, the Cable plant is able to offer far superior speeds and do so at higher margins. Plus, in aggregate, the Cable industry covers the vast majority of the country with an upgraded plant (by contrast, Telco fiber which is competitive with Cable modem service reaches just 40% of U.S. households, and of that, less than 20% is truly competitive Fiber-to-the-Home).

To be sure, much of Cables purported speed advantage vs. DSL is, in our view, more of a marketing tool rather than a practical one when judging by the basis of on the ground advantage. Though its nice to say one has a 50Mbps connection in practice, there are few applications that could actually leverage such a robust pipe. While such a dynamic will likely change over time, we note that the Cable (and Telco) fiber industry is doing a very good job in altering customer perception in terms of what actually is worth premium pricing. A sample of some online activities and theoretical download speeds is included in Exhibit 32. As one can see, a 10-15Mbps connection is generally sufficient for most applications; many DSL services offer speeds at or close to those levels by using new technologies. We note that in the future, the Telcos might choose to cross market with 4G services with cheap or even free DSL. This doesnt mean that 4G will be used inside the home, just that similar to Cable using its speed advantage as a marketing tool, the Telcos might use the fact that they have a fourth product wireless in their bundle, while Cable doesnt. To the extent consumers believe that they might be extracting value from such an offering, it could be a boon for the Telcos in future periods (a hypothetical scenario, but one to look out for).
Exhibit 32: Actual Download Speeds Required by Online Activity

Content Type Basic download (or upload) Non real-time Example Application Web-browsing Basic email Job search E-book download Advanced web-browsing P2P networking Remote file hosting On-demand music and video Social networking Medical record sharing User generated videos Online video streaming Streamed classroom lectures Online video rental or purchase Broadcast quality HDTV HD streamed university lecture Online gaming Interactive education Lower definition telemedicine Real-time interactive experiences Video teleconference HD Telemedicine Example Providers Gmail, Hotmail Monster.com Amazon Kindle, Nook 0.5-5+ BitTorrent, Gnutella filestube, Mediafire, Rapidshare iTunes Google+, Facebook Pandora, Rhapsody Youtube Hulu, Youtube Netflix, Amazon, Blockbuster 0.1-0.3 0.3-0.5 1-5 5-10+ (Mbps) 0.1-0.3
Large download (or upload)
Near real-time
Streamed audio Basic streamed video SD-quality streamed video HD-quality streamed video
Voice over Internet Protocol (VoIP) Basic interaction Real-time Video-conference + VoIP IPTV 2-way advanced video interaction Enhanced video teleconferencing (HD quality or similar)
Skype, Vonage StarCraft , Zynga, Xbox Live Aleks, University of Phoenix AT&T U-verse Cisco
0.1-0.3 symmetrical 0.3-0.5 symmetrical 0.6-1.0 symmetrical 1-5+ symmetrical (per TV) 2-5+ symmetrical 5-10+ symmetrical
Source: FCC OBI Technical Paper No. 4 on Broadband Performance, ISI Group
Exhibit 33: Industry HSI Subscribers and Net Additions
Exhibit 34: Cable HSI Weighted ARPU

We forecast that Cables share of industry broadband subscribers will increase to 58% by 2015 from 56% in 2011E, despite Telco fiber increasing its base from 8.3MM to 13MM during the same period. Effectively our forecasts imply that the Telcos will replace lost DSL with gained fiber (see Exhibit 33.) Also very important, we believe that the Cable industry will be able to maintain price integrity of its broadband product, and we therefore dont forecast any meaningful price discounting, and have modeled flattish to slightly modest ARPU upside going forward (see Exhibit 34). We believe that with the widespread availability of DOCSIS 3.0 across the Cable plant, there is enough capacity in the Cable network to continue to increase speed tiers while at least maintaining current pricing levels.
Voice over Internet Protocol (VoIP)

Less exciting of an opportunity than it once was, but Cable is still a share gainer Unlike video, and certainly unlike HSI, the fixed-line voice market is one thats potentially in secular decline, and no one present company included knows where it will bottom out. The single biggest headwind that the overall phone industry has been experiencing is wireless replacement of Wireline phones. According to the Center for Disease Control, in 2003, only 4.2% of U.S. households were wireless only. By the end of 2010, ~30% of household had cut the cord. The trend on the Wireline telephony side has been the inverse. In 2003, 42% of households were Wireline only. By the end of last year, 13% relied exclusively on a cordonly device (see Exhibit 35). We expect these trends to continue; how quickly is anyones guess.
Exhibit 35: U.S. Percentage of Households That Have Substituted Wireless for Wireline Over Time
100.0% 90.0% 80.0%
Proportion of HHs
70.0% 60.0%
54%
55%
59%
58%
62%
62%
61%
57% Combination
50.0% 40.0% 30.0% 42% 20.0% 10.0% 0.0% 4% 6% 8% 13% 16% 20% 25% 30% 39% 32% 30% 22% 17% 15% 13%
Wireline Only Wireless Only
Source: Bloomberg, L.P., Center for Disease Control, ISI Group
When the Cable MSOs entered the residential (and more recently, commercial) phone market a few years ago, they did so with nothing to lose. There was virtually no new infrastructure to build, as they were simply leveraging their upgraded Hybrid Fiber Coax (HFC) plant to offer voice connections over an existing IP network. Margins would therefore be very high (70-80% gross margins if you backhauled your long-distance traffic). Cable voice is priced below circuit-switched telephony and has become a key source of the discount in the triple-play bundle. From 2001 to the end of this year, the Cable phone industry will have grown from essentially nothing, to almost 24.5MM subscribers (see Exhibit 36), generating incremental revenues of some $10B (average industry ARPU of $34/Mo). We expect Cable VoIP trends to continue to grow, albeit at a moderating pace. We expect approximately 26MM Cable VoIP subscribers by 2015E. Conversely, although Telco access line losses are moderating (due to the mathematical laws of shrinking numbers), we expect the incumbents to continue to lose access lines, down from about 70MM at YE 2011E to 60MM at YE 2015E (Exhibit 37).

2003 2004 2005 2006 2007 2008 2009 2010
Exhibit 36: Historical Cable VoIP Subscribers
Exhibit 37: Cable/Telco Residential Voice Forecasts
Exhibit 38: Wireless Substitution Forecast of Primary Access Lines

100%
Wireless Only Penetration of HHs
70% 60%
46%
52%
57%
63%
68%
80%
72%
75%
78%
90%
82%
85%
87%
50% 40% 30%
Note that a key reason we believe that HSI is insulated from such a pronounced substitution effect even though 4G is now becoming widely available is because of the high costs involved in delivering bandwidth intensive mobile data compared to the cost involved in delivering mobile voice, a service that is not particularly data-intensive. Although Wireline-like speeds can be achieved using advanced Long Term Evolution (LTE) devices, the variable cost structure of moving large amounts of data over-the-air make wireless-for-fixed line data replacement cost-prohibitive and untenable on a mass-scale, at least for the foreseeable future.

Cable Plant (Finally!) Delivering Promised Returns

The Cable industry, in particularly, has historically been maligned by consumers, at least judging by the basis of customer service surveys. By the same token, until fairly recently, Cable stocks were held under similar low-esteem by the investment community, generating little in the way of shareholder returns over the past two decades. While its difficult to blame any single factor for less-than-stellar equity returns, one reason investors have been unenthusiastic about Cable & Satellite equities (until fairly recently) has been industrys propensity to spend capital on plant upgrades, maintenance, M&Aessentially (and perhaps an unfair caricature) any excuse not to return capital to shareholders. The National Cable Television Association (NCTA) estimates that since 1996 the Cable industry has invested more than $170B in capital expenditures collectively. However, it seems that the trend might finally be reversing, at least in terms of CAPEX as a percentage of revenues. As of this writing, almost the entire Cable plant has now been upgraded to at least 550 MHz of bandwidth with two-way capacity (most of it to 750 MHz or higher). Capital intensity (CAPEX as a % of revenues) has leveled off to ~15% from a peak of more than 30% earlier in the last decade. (see Exhibit 39).
Exhibit 39: Cable Industry Revenues, CAPEX and Capital Intensity
Source: NCTA, ISI Group estimates and analysis
With Cables network upgrades now (virtually) finished, the industry now seems poised to focus on returning capital to its rightful owners shareholders. On an industry-wide basis, we expect that net-leverage ratios will organically fall, given increasing EBITDA and FCF, suggesting the industry has capacity for additional financial engineering going forward (see Exhibit 40 and Exhibit 41). Most important, we project that the percentage of Free Cash Flow paid out to shareholders will reach nearly 100% by 2013E (up from 85% in 2011E), see Exhibit 42.

Exhibit 40: Cable & DBS: Consolidated EBITDA and FCF (2011E 2013E)
Exhibit 41: Cable & DBS: Debt Maturities, FCF & Leverage Ratios (2012E-2016E)
Exhibit 42: Cable & DBS: Return of Capital and Payout (2011E 2013E)

The Network Advantage: Upgraded Plant Has Enabled a Renaissance of New Technologies
The benefits of the upgrades to the Cable plant arent just being felt on the financial side of the equation; the benefits are being reaped in terms of what the Cable network can do in terms of its product offering to consumers. Over the last two years in particular, the industry has been leveraging technologies which would not have been possible without upgraded networks. Three of these key technologies include: An all-digital network architecture, which allows the reclamation of bandwidth-hogging analog channels. Switched Digital Video (SDV) technology, which delivers content only when requested, effectively allowing more efficient usage of bandwidth. DOCSIS 3.0, also known as Wideband data transfer, which can improve HSI speeds by a factor of 10-15x over existing technology.
While all-digital, SDV and DOCSIS 3.0 are at various stages of completion depending on operator, they are likely to be substantially completed by 2011 year-end. In Exhibit 43 through Exhibit 45 we provide an illustrative example of just how much efficiency conversion to all-digital and Switched Digital Video architecture can bring to a Cable operators plant. As shown in Exhibit 43, the analog tier while only delivering 80 channels nevertheless occupies around two-thirds of the available bandwidth. For some perspective, consider that analog is 10x less efficient than digital compressionyet digital quality and sound are leaps and bounds better. Even HDTV channels are 2.5x more efficient than these bulky analog channels. However, if we remove analog from the equation, such as in an all-digital scenario (see Exhibit 44), then the Cable plant instantaneously becomes more efficient, but requires every household to have a set-top-box (STB) or adapter (which itself might not be needed in time, see our discussion on the potential utopia of a set-top-boxless world, below). Switched Digital Video (SDV) works a bit differently, but the end result (more capacity) is similar. SDV might sound like a complicated concept, but its actually a surprisingly simple and elegant solution to an agelong problem suffered by Multichannel providers. In a sentence, SDV is a smart method of channel delivery, which recognizes that while the lions share of viewing goes to the most popular channels, there is a very long tail of channels that are watched by just a few viewers at any given time. The SDV architecture effectively acts as a communal VOD channel; when a switched channel is requested by a user (perhaps ESPN in Farsi?), the entire Node gets the signal broadcast to it (even if only a single home is watching). The trick with SDV is that the operator makes sure that there are enough open channels to satisfy all requests. This can be accomplished by a combination of plant upgrades, elimination of analog channels to free capacity, Node splitting and other technical improvements that are beyond the scope of this report (and our Pay-Grade, thank you very much). Please see Exhibit 45 for an illustrative example of a Cable plant that primarily relies on SDV as its spectrum management solution.

Exhibit 43: Illustrative Cable Plant Pre All Digital Conversion

Upstream VOD/PPV % of Subscribers Accessing VOD/PPV Simultaneously # of Simultaneous Streams Number of Channels per 6 M Hz # of 6 M Hz Frequencies Data & Voice HSD Throughput Committed (M bps) % of Subscribers Online at the Same Time # of Simultaneous Streams Total Bandwidth Required Throughput per 6 M Hz Channel # Frequencies Required Average Throughput Rate as % of Committed Number of Video Channels Compression (# of Channels per 6 M Hz) Number of Channels 9 1.0x 9 80 1.0x 80 200 10.0x 20 20 2.5x 8 6 1.0x 6 10.0 33.0% 51 514 38 14 10.0% 1 1.0x 1 0.1 50.0% 38 2 38 0 100.0% 0 1.0x 0 1 125 1.0% 2 1.0x 2 6.5% 14 10.0x 1 3.3% 7 2.5x 3 Analog Digital HDTV VOD/PPV Data Voice Available Total
MHz Allocated
10 UPS TREAM
20
30
40
50 ANALOG
60
70
80
90
100 DIGITAL
110
120
HDTV
Source: ISI Group estimates and analysis

Exhibit 44: Illustrative Cable Plant All Digital

Upstream VOD/PPV % of Subscribers Accessing VOD/PPV Simultaneously # of Simultaneous Streams Number of Channels per 6 M Hz # of 6 M Hz Frequencies Data & Voice HSD Throughput Committed (M bps) % of Subscribers Online at the Same Time # of Simultaneous Streams Total Bandwidth Required Throughput per 6 M Hz Channel # Frequencies Required Average Throughput Rate as % of Committed Number of Video Channels Compression (# of Channels per 6 M Hz) Number of Channels 9 1.0x 9 20 1.0x 20 250 10.0x 25 125 2.5x 50 4 1.0x 4 20.0 33.0% 51 1028 38 27 10.0% 3 1.0x 3 0.1 50.0% 38 2 38 0 100.0% 0 1.0x 0 14 125 6.5% 14 10.0x 1 3.3% 7 2.5x 3 Analog Digital HDTV VOD/PPV Data Voice Available Total
MHz Allocated
10 UPS TREAM
20 ANALOG
30
40
50 DIGITAL
60
70
80
90 HDTV
100
110
120
AVAIL.
Exhibit 45: Illustrative Switched-Digital Video Cable Plant Bandwidth Use

Upstream Broadcast Channels # of Channels Avail. % of Channels Broadcast % of Simultaneous Broadcast Streams VOD/PPV/S witched # Subscribers/Node # Boxes/Node % of Subs Accessing Video Concurrently % of Simultaneous Streams Data & Voice HSD Throughput Committed (M bps) % of Subscribers Online at the Same Time # of Simultaneous Streams Total Bandwidth Required Throughput per 6 M Hz Channel # Frequencies Required Average Throughput Rate as % of Committed Number of Video Channels Compression (# of Channels per 6 M Hz) Number of Channels 9 1.0x 9 20 1.0x 20 125 10.0x 13 63 2.5x 25 28 121 20.0 33.0% 51 1028 38 27 10.0% 3 1.0x 3 0.1 50.0% 38 2 38 0 100.0% 0 1.0x 0 28 125 140 210 33% 69 78 157 33% 52 250 50% 125 125 50% 63 Analog Digital HDTV VOD/PPV Data Voice Available Total
MHz Allocated
10 UPS TREAM
20 ANALOG
30
40
50 HDTV
60
70
80 VOD/PPV/S WITCHED
90 DATA
100
110 AVAILABLE
120

# Boxes/Home
1.5x
1.5x
A set-top-boxless world might be coming soon or at least sooner than you think One ostensible disadvantage of digital television (be it Cable, DBS or Telco) is the need for a STB or adapter for every TV set thats subscribed to the service. Not only do STBs cost the providers an inordinate amount in capital each year, they also bring an annoying rental charge to the consumer on top of their already high monthly bills. Moreover, theres no denying that even the sleekest STB can be an eye-sore in a day and age when the form factor of flat-screen televisions is making such devices elegant pieces of furniture in addition to conduits for consuming Americans most popular form of leisure. But what if STBs could soon become relics of the past? To be fair, ever since the creation of the CableCARD, the vision of a set-top-boxless world has existed, but has unfortunately never taken off (partly due to lenient FCC provisions that only required one-way capability for CableCARDS; thus things as basic as a programming guide have been/are still unavailable to CableCARD subscribers). However, we believe that things might finally be poised for a change. While we dont want to get ahead of ourselves, we note that the Cable network is inherently capable of piping IP Video to the ever-emerging class of digital smart TVs - after all, for the network, it is just a stream of bits (zeros and ones, for the math majors amongst our ranks). For the facilities-based Cable/Telco operators (i.e., those who own their networks), we think video will become an application much like VoIP. We see numerous benefits to such an architecture: 1) it would be easier to enable and manage, 2) truck rolls and maintenance calls would likely decline significantly, and 3) the triple-play bundle proposition may become an even easier sell.
Small & Medium Business (SMB): Commercial Opportunity Is Still Relatively Untapped
For those that have followed the Cable industry for a while, it might seem to be an eternity since the promise of the Small Medium Business (SMB) opportunity was articulated by the MSOs. Yet, as the saying goes, times are a changin (!) SMB has been a topic du jour in the industry for a while now; although SMBs have long subscribed to Cable (and Satellite) for video services in the workplace, phone and data (and now backhaul services) have been tougher nuts to crack. In fact, before 2003, phone and data offerings were virtually non-existent via the Cable MSO. By last year, however, revenues from SMBs (for companies under coverage) had grown to $3B, and we expect them to reach north of $4B this year (almost a 30% growth rate). (See Exhibit 46 and Exhibit 47). Sizing the exact opportunity in the marketplace is difficult. According to SNL Kagan data, the total U.S. Cable addressable footprint as of YE 2010 was 4.6MM small & medium businesses. This consisted of 3.9MM businesses with between 1-9 employees, 600K businesses with 10-99 employees, and a mere 150K with more than 100 employees. Kagan does not forecast the footprint to grow materially between now and 2015, and the vast majority of the businesses that will be available for the Cable industry to target will be the smaller (1-9 employee ones, see Exhibit 48)

Exhibit 46: U.S. Cable Industry SMB Subscribers by Product
Exhibit 47: Commercial Revenue Forecast
Source: SNL Kagan, Company reports, ISI Group estimates
*Includes Cablevision, Charter Communications, Comcast, and Time Warner Cable Source: Company reports, ISI Group estimates
Exhibit 48: Cable Industry SMB Footprint Opportunity (2010A 2015E)

6000 5000
SMB's Passed by Cable (000s)
4000 3000 2000 1000 0
159 587
187 681
223 734
244 764
266 787
285 805
Large
3,896
3,852
4,013
4,063
4,111
4,150
Small
2010
2011E
2012E
2013E
2014E
2015E
Source: SNL Kagan, ISI Group analysis
Not only are the MSOs selling their traditional bundle of products to small and medium sized businesses, but they are also finding new revenue streams in which to leverage their advanced, fiber-backed networks. Cell Tower Backhaul is one example. The wireless industry is struggling to manage surging demand for mobile data with their legacy networks and it wont get any easier Cisco forecasts that global mobile data traffic will increase 26x between 2010 and 2015E. Along with the all-too-familiar rise of Smartphones and tablets devices, we believe that half of mobile traffic is now video, which will reach two-thirds of mobile data traffic by 2015. U.S. wireless providers are adding thousands of cell towers each year to keep up with traffic demands. Cable MSOs are helping wireless providers cut the backhaul transport costs of cell sites with their local networks. The cell backhaul market opportunity could be as high as $10B in the U.S. by 2015 (Exhibit 49).

Medium
Exhibit 49: Cable Industry Business Services Market Opportunity by Segment

Small Businesses ~$10B Opportunity Video HSD Voice Medium BusinessesLarge Businesses ~$10B Opportunity >$10B Opportunity Video HSD Voice Fiber Internet Metro Ethernet Fiber Internet Metro Ethernet Voice trunking Carrier Wholesale >$10B Opportunity Wholesale Ethernet Ethernet cellular backhaul
Source: ISI Group analysis, company documents
MSOs have been acquiring competitive local exchange carriers (CLECs) and firms in the enterprise space to extend their capabilities in the large business and wholesale segments, which represent a total market opportunity of over $20B annually (Exhibit 49). So far the FCC has been willing to wave the provision in the Telecommunications Act of 1996 that restricts Cable operators from owning more than 10% of local exchange carriers that provide service in their franchise area. Comcast acquired CLECs Cimco in 2009 and New Global Telecom in 2010. Time Warner Cable acquired cloud computer firm NaviSite in 2011. We forecast business services revenue to continue to be a source of growth for Cable, with revenues approaching 10% of total revenues by 2015 from mid-single digits in 2010 (Exhibit 51).
Exhibit 50: Cable Industry Business Services Revenue Growth Forecast
Exhibit 51: Cable Industry Business Services

Revenue % of Total Cable Revenue
*Time Warner Cable acquired NaviSite in 2011, Comcast acquired New Global Telecom in 2010 Source: ISI Group estimates, company documents

PART II: ARE CABLE STOCKS (YESTERDAYS CYCLICALS) TODAYS STAPLES?

On the most basic level, Cable & Satellite companies have long been viewed by investors and the general public as discretionary services. The definition of a discretionary business (i.e. one that is cyclical, depending on economic trends) is fairly straightforward: during tough economic times, consumers generally look to cut such non-essential items from their budgets, with the goal of hopefully having enough left over to pay for the necessities, which are also known as consumer staples (examples of staples include, but are not limited to: shelter, food and healthcare). During and post the recent recession which officially ended during July, 2009, real (i.e. inflation adjusted, chained to 2005 dollars) consumer expenditures for things like food and healthcare grew virtually unabated (see Exhibit 52). By contrast, expenditures on things like transportation and financial services declined precipitously during that period (see Exhibit 53). Based on the aforementioned simple definitions of discretionary versus staple, these observed trends should not have been unexpected.
Exhibit 52: Personal Expenditures for Consumption of Food Items (excludes alcohol)
800 750 700 650 600 550 500 450 1 0.9 701.55 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Exhibit 53: Personal Expenditures for Consumption of Transportation Services

315 310 305 300 295 290 285 280 275 270 265 1 304.13 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
310.30
($'B)
645.41
($'B)
632.80
283.20
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9/1/2008
2/1/2009
7/1/2009
5/1/2010
3/1/2011
8/1/2011
Source: U.S. Bureau of Economic Analysis, ISI Group
Based on textbook definitions of discretionaries and staples, one might surmise that Cable & Satellite stocks should be grouped as discretionary businesses and indeed, they have been historically, as anyone who pulls up a Bloomberg sector grouping chart can confirm. As the thinking goes, although 200+ channels of HD television, a digital video recorder, HBO and other services are certainly nice things to have, theyre not necessarily things that someone couldnt live without. At least not when the alternative is home heating. Dont take our word for it; the proof is in the data. We assembled a simple market weighted average of the six publicly traded Cable/DBS stocks (not coincidentally, the same six we are initiating coverage on today), and looked at trading patterns going back to 2005 (one-time special dividends were excluded, so as to not skew results). As shown in Exhibit 54, our basket of Cable & Satellite stocks have historically traded in lockstep with a broader basket of discretionary equities, at least in terms of overall correlation, although absolute performance has been better in the Cable & Satellite universe due to select outperformers, particularly TWC and DTV.

Exhibit 54: U.S. Cable & Satellite Index vs. S&P Discretionary Index
300 350
250 200 150
250 200 150
100 50 0
100 50 0
Cable & Satellite Index

Source: Bloomberg, L.P., ISI Group analysis
S&P Cyclicals Index
But do Cable & Satellite services really behave like discretionary services when observing actual day-to-day consumer behavior? Posing this question would have at one time been provocative... but admittedly, not so much so today. We believe that the general consensus is that consumers hang on to their Cable & Satellite and related services longer than they do for other discretionary items, strangely making them ideal defensive names in an economically weakened environment. Consider personal consumer expenditures on Cable & Satellite (in particular, video) services over the past five years. As shown in Exhibit 55, aggregate consumer spending on Cable & Satellite video services actually grew by 3% during the 2008-2009 recession, mimicking the behavior of the more staple-like businesses referenced above. By this measure, at least, the view that Cable & Satellite stocks are actually defensive in nature once thought controversial seems supported by the data. Indeed, spending on broadband, not captured in the above Cable & Satellite analysis, rose at an even faster clip, at 12.6% during the 2008-9 recession (see Exhibit 56). As might be expected, given the high utility of HSI, and the fact that its a product that has not fully matured, theres little doubt by even the most poignant naysayers that broadband is a staple for most householdsAfter all, theres no National Television Plan, though there is indeed a National Broadband Plan.
Consumer Cyclical Index
Cable and Satellite Index
300

Exhibit 55: U.S. Cable & Satellite Television Consumer Personal Expenditures (Chained to 2005 $s)
Consumer Spending on Cable & Satellite Video
90 85 80 75 70 65 60 55 74.64 76.78 1 84.54 0.9 0.8 0.7 0.6 0.5 0.4
Exhibit 56: U.S. Cable & Satellite Internet Access Consumer Personal Expenditures (Chained to 2005 $s)
Consumer Spending on Internet Access ($'B)
60 55 50 45 40 35 30 42.46 47.80 1 55.21 0.9 0.8 0.7 0.6 0.5 0.4
3% growth during recession
0.3 0.2 0.1
12.6% growth during recession
0.3 0.2 0.1
8/1/2006
1/1/2007
6/1/2007
4/1/2008
9/1/2008
2/1/2009
7/1/2009
5/1/2010
3/1/2011
8/1/2011
8/1/2006
1/1/2007
6/1/2007
4/1/2008
9/1/2008
2/1/2009
7/1/2009
5/1/2010
3/1/2011
11/1/2007
12/1/2009
10/1/2010
11/1/2007
12/1/2009
Ignoring HSI for a second, the pay-TV video offering has become a bellwether in the American way of life. Consider that over time, the average American adult has spent almost a constant amount of their share of a 24 day 5.2 hours on leisure and recreation as categorized by the Bureau of Labor Statistics. Assuming that eight hours are spent on sleep (one can always dream, right?), that means that the average American adult devotes fully 1/3 of their waking hours to leisure activities. And given that more than half 53 % (see Exhibit 57) of leisure activity is spent watching television (15% of ones waking hours), the importance of TV in the American psyche becomes more pronounced. Think about it: data confirm that we spend 15% of our waking hours staring at a box.
Exhibit 57: Hours per Day Spent on Leisure Activities per Adult American (Television and Other)
5.1 5.0
Hours Spent on Recreation
5.2
5.1
5.1
5.1
5.2
5.3
5.2
4.0 3.0 2.0 1.0 0.0
2.53
2.54
2.55
2.51
2.49
2.41
2.43
2.45
2.58
2.65
2.58
2.58
2.62
2.77
2.82
2.73
2003
2004
2005
2006
2007 Other Liesure
2008
2009
2010
TV Viewing
Source: U.S. Bureau of Labor Statistics, ISI Group
The rise of tablets as a new viewing option along with the virtual commoditization of flat screen televisions once the playthings of only the mega-wealthy has only solidified pay-TVs importance in the consumers

6.0
10/1/2010
8/1/2011
50
25
daily entertainment experience. From 2001-2010, the average selling price (at retail) for a flat screen television has declined from ~$3,300 to $630, an average annual decrease of 17%, leading to skyrocketing unit growth (see Exhibit 58).
Exhibit 58: Flat Screen Television Unit Volume Versus Average Selling Price
$3,500 $3,000 20,000
Average ASP (Retail Level)
25,000
$2,500 $2,000 $1,500 $1,000 5,000 $500 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 15,000
10,000
Source: NPD Group, ISI Group analysis Note: Data provided courtesy of ISIs Retail Hardlines Team
In large part, our comfort with Cable & Satellite stocks, even during such economically soft times, stems from our belief that theres an underlying reason that consumers spend the way they do on pay-TV services, as they fill an important Leisure Void at a reasonable price-point. Thats crucial, as leisure isnt an optional activity, its a necessity. Based on the work of the so-called Humanistic Psychologists the most influential of whom was probably Abraham Maslow we believe that there is a framework for understanding the pyramid of basic human needs which helps explain why people make the day-to-day decisions that they do. Maslows theory on human behavior, which he neatly articulated in a 1943 paper titled A Theory of Human Motivation shows the psychologist constructing a simple pyramid detailing his vision of basic human needs (see Exhibit 59). Heres the key payoff from Maslows work for Cable & Satellite investors: at the top of the pyramid is the basic human need for self-actualization, which is code for leisure and recreation. In other words, Maslow believed that in addition to requiring air to breathe, shelter to live under and water to drink, Humans, as a species, also need outlets to enjoy life through some form of leisure/recreational activity.
Annual Unites Sold (000s)

Exhibit 59: Abraham Maslow Pyramid of Needs

Self Actualization EsteemNeeds
BelongingNeeds
SafetyNeeds
PhysiologicalNeeds
Source: Psychological Review, ISI Group
Cable & Satellite spend not only increasing in real terms, also taking a bigger share of wallet Looking at the entire Recreation spending category, prior to the recession, consumers spent ~$386B annually on things like sporting events, concerts, club memberships and casino gambling (among other things). By the time the recession had ended, Recreational spending was down $17B to $370B, a 4.3% decline (Exhibit 60). It has only been recently more than two years after the recession officially ended that recreational spending has eclipsed pre-recession levels. This trend is even more apparent when Cable & Satellite spending is stripped out of the Recreation bucket, which we do in Exhibit 61. By that measure, Recreational spending actually decreased by slightly more than 6% during the recession, and has just barely reached pre-recession levels.
Exhibit 60: Consumer Annualized Recreational Spending Over Time ($Bs, Chained to 2005)
410 400 390 380 370 360 350 340 330 320 401.08 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
386.19 369.25
11/1/2007
12/1/2009
10/1/2010
11/1/2007
12/1/2009
10/1/2010
8/1/2006
1/1/2007
6/1/2007
4/1/2008
9/1/2008
2/1/2009
7/1/2009
5/1/2010
3/1/2011
8/1/2011
8/1/2006
1/1/2007
6/1/2007
4/1/2008
9/1/2008
2/1/2009
7/1/2009
5/1/2010
3/1/2011
It is interesting to see the shift in the share of consumer spending that has moved from various buckets. Circa 1Q06, 17.9% of Recreational spending was allotted to Cable & Satellite; today, 21.2% of recreational spending is spent on Cable & Satellite video service (a 330 bps increase, see Exhibit 62 & Exhibit 63). Said another way, Cable & Satellite spending has not only been increasing in real terms (see above), its also grabbing an ever-increasing share of the wallet.

8/1/2011
320 315 310 305 300 295 290 285 280 275
311.55
292.47
316.54 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Exhibit 61: Consumer Annualized Recreational Spending ex. Cable & Satellite Over Time ($Bs, Chained to 2005)
($'B)
($'B)
Exhibit 62: Share of Recreational Spending by Category (3Q11)
Exhibit 63: Cable & Satellite Share of Recreational Spending Trend (Quarterly)
22.0%
Cable & Satellite Share of Rec Spend 17.9% 18.4% 18.0% 18.2% 18.1% 18.6% 18.5% 18.9% 19.4% 19.3% 19.4% 19.6% 20.3% 20.8% 20.8% 20.9% 20.9% 20.9% 20.3% 21.0% 21.2% 21.3% 21.2%
21.0% 20.0% 19.0% 18.0% 17.0% 16.0% 15.0%
R = 0.922
We believe that as the economic status of many Americans has undergone significant (and for many, a permanent) change, so too has their approach to satisfying their basic human desire in achieving leisure (recall Maslow from above). Heres one example: In the United States, the National Football League is (by far) the most popular professional sport. It also happens to be a sport that is conducive to an enjoyable at-home viewing experience. For the football fan, consider the alternative to watching a game on television, actually attending a match. Besides the arguably less attractive viewing experience (not to mention the freezing cold weather), taking a family of four to a live football game costs, on average, $427.21 for four average priced tickets across the league according to the Team Marketing Report2. Thats enough to pay for DIRECTVs Sunday Ticket for an entire season last year, and have enough left over for a nice dinner for two. (this year the Sunday Ticket is Free, discussed in DIRECTV section) Its no wonder, then that consumer spending on live spectator sports declined during the recession, from $20.3B to $19.9B (spending has since recovered nicely).
http://www.fancostexperience.com/ (note that cost includes 2 small draft beers, 4 small soft drinks, 4 hot dogs, parking, 2 caps and 2 programs)

PART III: THE CABLE & SATELLITE CONSUMER THROUGH ISIS MACRO LENS
According to ISIs Macroeconomic team led by Ed Hyman and Nancy Lazar there are a few broad drivers of consumer spending: Real disposable income, real consumer net worth (a combination of housing values & stocks portfolios), bank willingness to loan (an important corollary to historically attractive interest rates), consumer sentiment and energy prices, specifically, prices at the pump. As shown in the exhibits below, the consumer has not been faring particularly well as gauged by these measures. Yet the Cable & Satellite consumer save for the lowest end of the income spectrum, discussed below has thus far held up fairly well. Could it be that Cable & Satellite trends are insulated from weakness in these drivers of consumer spending? For reference, in Exhibit 67 through Exhibit 72 we highlight recent trends in the aforementioned drivers.
Exhibit 64: U.S. Real Disposable Personal Income
12,000 1.2
Exhibit 65: U.S. Consumer Net Worth

70,000 1.2
Recession
U.S. Real Disposable Income ($B)
Recession +1SD
U.S. Consumer Net Worth ($B)
11,500 11,000 10,500 10,000 9,500 9,000 8,500 8,000 7,500

Average +1SD Recession
1 Recession 0.8 0.6 0.4 0.2
65,000 60,000 55,000 50,000 45,000

-1SD Average
1 0.8 0.6 0.4 0.2 0
-1SD
40,000 35,000
8/1/2000 8/1/2001 8/1/2002 8/1/2003 8/1/2004 8/1/2005 8/1/2006 8/1/2007 8/1/2008 8/1/2009 8/1/2010 8/1/2011
8/1/2000 8/1/2001 8/1/2002 8/1/2003 8/1/2004 8/1/2005 8/1/2006 8/1/2007 8/1/2008 8/1/2009 8/1/2010 8/1/2011
Source: U.S. Bureau of Economic Analysis, Bloomberg, L.P., ISI Group
Exhibit 66: Bankrate.com Average 30-Year Fixed Mortgage Interest Rate (2001-present)
8.0% Recession 1.2 1 +1SD 6.0% Average 5.0% -1SD 4.0% 0.4 0.2 0 0.6
Exhibit 67: Consumer Bank Loans (2001-present)

1,400 1,300 Recession +1SD 1.2 1 0.8 0.6 0.4 -1SD 900 800 0.2 0
Consumer Bank Loans ($B)
U.S. 10 Year Treasury Rate
7.0%
0.8
1,200 1,100 1,000
Average
6/1/2001 12/1/2001 6/1/2002 12/1/2002 6/1/2003 12/1/2003 6/1/2004 12/1/2004 6/1/2005 12/1/2005 6/1/2006 12/1/2006 6/1/2007 12/1/2007 6/1/2008 12/1/2008 6/1/2009 12/1/2009 6/1/2010 12/1/2010 6/1/2011
Source: Bankrate.com, Bloomberg L.P., ISI Group

6/1/2001 12/1/2001 6/1/2002 12/1/2002 6/1/2003 12/1/2003 6/1/2004 12/1/2004 6/1/2005 12/1/2005 6/1/2006 12/1/2006 6/1/2007 12/1/2007 6/1/2008 12/1/2008 6/1/2009 12/1/2009 6/1/2010 12/1/2010 6/1/2011
3.0%
Exhibit 68: University of Michigan Consumer Sentiment Survey

U of Michigan Consumer Sentiment
120 110 100 90 80 70 60 50 40
Average Recession +1SD
Exhibit 69: Blended Average Retail Gasoline Prices (Weekly)

$4.50 $4.00
1.2
Recession
Average Gasoline Prices
1 0.8 0.6 0.4

-1SD
$3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

-1SD Average
+1SD
0.2 0
Source: Bloomberg, L.P., ISI Group
10/1/2000 10/1/2001 10/1/2002 10/1/2003 10/1/2004 10/1/2005 10/1/2006 10/1/2007 10/1/2008 10/1/2009 10/1/2010 10/1/2011
Source: Bureau of Transportation, Bloomberg, L.P., ISI Group
Cable & Satellite businesses are surprisingly immune to broad changes in the aforementioned metrics, however, we are not suggesting that the Cable & Satellite subscriber are completely immune from Macro consumer trends, as theres one crucial aspect of the Macroeconomy that has generally driven Cable & Satellite video subscriber trends more than any other metric: housing
Housing: The Most Important Macro Metric for the Cable & Satellite Industry
As detailed in the section above, many of the traditional metrics watched closely by our Macro team to track the health of the consumers ability to spend on discretionary items dont necessarily apply to Cable & Satellite services, except, perhaps, at the very lowest quintile of economic earners (including the unemployed). However, housing growth does matter for the Cable & Satellite consumer. And recent trends have not been inspiring. U.S. housing starts reported monthly on a seasonally adjusted annualized basis have declined sharply since their historic peak at the end of 2005. At the time (widely known as the housing bubble), homes were being formed at an annualized rate of ~1.8MM. Today, housing formation has virtually collapsed to a rate of less than a quarter of what they were the historical peak. Since the Cable & Satellite market is saturated at nearly 90% of eligible homes, natural growth in the housing market has long been a crucial source of organic industry growth. By all accounts, not only has housing growth slowed, but the trends in the types of homes being formed is changing. Multi-family units are now being formed at a faster pace than they have in at least two years, and this seems to be coming at the expense of single-family units. As such, an argument can be made that on a unit-adjusted-basis, household formation in the U.S. has, for the first time ever, essentially ceased. This might not bode well for future video unit growth in the Cable & Satellite industry. Please see Exhibit 70 and Exhibit 71 for an illustration of these industry trends.
10/4/2000 10/4/2001 10/4/2002 10/4/2003 10/4/2004 10/4/2005 10/4/2006 10/4/2007 10/4/2008 10/4/2009 10/4/2010 10/4/2011

Exhibit 70: Single-Family Housing (Seasonally Adjusted Annual Rate, 000s)

2,000
Single Unit Housing Starts (000s)
Starts
1.2
Exhibit 71: Multi-Family Housing Starts (Seasonally Adjusted Annual Rate, 000s)
120
Multi-Fam. Housing Units (000s)
1.2
Recession1
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Recession +1SD
Recession
1 0.8
100 80 60 40 20 0
Average -1SD Spike in 2+ family housing units +1SD
0.8 0.6 0.4 0.2 0
Average -1SD
0.6 0.4 0.2 0
Single Unit housing formation has stagnated
8/1/2000 8/1/2001 8/1/2002 8/1/2003 8/1/2004 8/1/2005 8/1/2006 8/1/2007 8/1/2008 8/1/2009 8/1/2010 8/1/2011
Source: National Association of Realtors, Bloomberg, L.P., ISI Group
Source: National Association of Realtors, Bloomberg, L.P., ISI Group
One problem that growth in multi-family housing formation and the slowing in single-family housing formation might pose for the multichannel video industry is the following: Given the economic backdrop some families often unrelated biologically live under one roof. In many cases, such living situations call for a single pay-TV subscription. To the extent that there continues to be a rise in cost-cutting in the form of multi-family home formation, we believe there could be a risk to the pay-TV incumbents from deriving growth from this traditionally reliable channel.

From the beginning of 2007 through the end of 2008 as the housing market began its historic collapse industry video net additions (on a trailing 12 month basis) slowed from almost 2MM annualized to about 500K. Then, something peculiar happened; although the housing market stabilized (or as some might argue, settled into the new normal), industry video growth temporarily spiked. But this disconnect in the correlation can be explained by an influx of subscribers to the pay-TV industry by the congressionally mandated Digital TV Transition, which took place on June 12, 2009, and was likely responsible for a few quarters of unnatural industry growth. However, post the DTV transition and with a housing market that continues to be anemic, video trends have resumed their prior weak trends (see Exhibit 72).
6/1/2000 6/1/2001 6/1/2002 6/1/2003 6/1/2004 6/1/2005 6/1/2006 6/1/2007 6/1/2008 6/1/2009 6/1/2010 6/1/2011
Exhibit 72: U.S. Housing Starts vs. TTM Industry Video Net Adds (Quarterly)
Source: National Association of Realtors, Company reports, ISI Group.
The Neo-Bear Argument: Is the Widening Income Gap a Game Changer?

One need not look further than the growing influence and grandeur of the Occupy Wall Street movement and its offshoots around the country and the globe to note that the fragile state of the economy has surpassed virtually everything including security, religious ideology, racial tension, moral quarrels and the like to be the top concern of the average American. As shown in Exhibit 73, over the past four quarters, the industry, as a whole, has gone net negative for the first rolling four quarter period in industry history. In the preceding section, we have blamed weak subscriber trends on housing, since we didnt find a meaningful correlation with many of the other drivers of consumer spending that our Macro team tracks. However, theres no doubt that the economy is having some effect (ex. Housing) on some demographic profile whos cutting the cord. In essence, has the economy deteriorated to such an extent that the pay-video business is discretionary for some?
Exhibit 73: U.S. Cable & Satellite Industry Subscribers
All Subscriber Values in 000s Cable Video Subs Net Adds % of Combined Subs DBS Subs Net Adds % of Combined Video Subs Telco TV Subs Net Adds % of Combined Video Subs Combined Video Subs Combined Net Adds
Q209
Q309
Q409
Q110 61,801 (279) 61.6% 32,997 337 32.9% 5,559 422 5.5% 100,357 480
Q210 61,091 (710) 61.0% 33,078 81 33.0% 5,973 414 6.0%
Q310 60,350 (741) 60.3% 33,223 145 33.2% 6,450 476 6.4%
Q410 59,839 (526) 59.8% 33,356 133 33.3% 6,908 458 6.9%
Q111 59,632 (204) 59.3% 33,598 242 33.4% 7,336 428 7.3% 100,566 466
Q211 58,885 (753) 58.8% 33,489 (109) 33.5% 7,739 404 7.7% 100,113 (458)
Are "big losses" really a big deal?
63,100 62,628 62,080 (441) (472) (548) 63.6% 62.9% 62.2% 31,915 32,292 32,660 250 377 368 32.1% 32.4% 32.7% 4,265 569 4.3% 99,280 378 4,706 441 4.7% 99,626 346 5,137 431 5.1% 99,877 251
100,142 100,023 100,103 (215) (120) 65

This question is a relatively new neo-bear case for the pay-TV industry; one that deserves to be addressed, but at the end of the day, is more noise than substance (at lease from an economic perspective). The data, as the saying goes, dont liesure, the pay-TV industry is shrinking in terms of video subscribers. What matters, in our view, is the quality of subscribers that are actually being lost. And from this lens as well, the pay-TV industry is losing subscribers, but the subscribers that are falling off are coming from the lowest end of the demographic spectrum, and are therefore of low economic value to multichannel operators. Poverty is a growing problem, but probably more of a social one than a worry for the pay-TV industry. According to a 95-page report released last month by the U.S. Department of Commerce (using U.S. Census data), the official poverty rate in 2010 was 15.1% (equal to a jaw-dropping total of 46.2MM people), up from 14.3% in 2009. This was the third consecutive annual increase in the national poverty rate since 2007. Although the precise definition of the poverty line varies by source, we believe that its fair to say that a household earning less than $15,000 per year is under the poverty line. The number of households under the $15K/yr income threshold has been on the rise after the Great Recession Moreover, even households that might not technically be below the poverty line (for example, those in the $15-25K per year cohort), are still undoubtedly feeling the squeeze. And according to the Census, this group has also seen an uptick in its ranks over the past few years (see Exhibit 74).
Exhibit 74: U.S. Breakout of HHs Below $15K per/yr and $15k-25k/yr Over Time
Source: U.S. Census Bureau, ISI Group analysis
But, insofar as how poverty relates to the specific stocks in our sector, we believe that the economic and social outcomes outlined above are where the effects end; in other words, poverty, tragic as it may be, should have no broad effect on the variability of outcomes on the performance of the Cable & Satellite equities under our coverage. In fact, counter-intuitive as it might sound, we believe that growing poverty rates might actually present a silver lining for all operators to capture customers and dollars that they might have lost to higher-end leisure activities.

PART IV: FROM MACRO TO MICRO | DEMOGRAPHICS & MARKET SHARE

Understanding the macro environments affects on our stocks is undoubtedly important when establishing an investment thesis on the names, hence our devotion of an entire section to the topic in Part III of this report. But getting down to the micro dynamics of the pay-TV business is equally important, in our view. In the section that follows, we examine market-by-market demographic and geographic trends in the MVPD industry with the goal of determining which multichannel operators might be better positioned than others on a local level. Getting down do the nuts and bolts of a market-level analysis is easier said than done. Consider some numbers: as if our federal government didnt slice up the U.S. in enough ways (50 States, 367 Metropolitan Statistical Areas (MSAs), 3,132 Counties and 40,000 Zip codes), the Nielsen Company an arbiter of all things Media has developed a metric of its own to divide the country into 210 regional tranches, with no precise federal equivalent. Nielsen uses these Designated Market Areas (DMAs) to measure everything from ratings data, population trends, economic shifts and other demographic information to help its customers understand the markets in which they hope to target. As mentioned, although DMAs (by definition) overlap with states and counties, they have no precise federal equivalent, and as such, overlaying subscriber detail by DMA (as counted by third party data used herein) with freely available demographic data provided by the U.S. Census is possible, but also wrought with challenges. Although not an exact science, we attempted to roll-up Census data by county to construct the profile of each DMA in order to make comparisons with the SNL Kagan video subscriber dataset provided as recently as 2Q11 by DMA. The Cable & Satellite Business Skewed Towards Top-25 Largest DMAs It should be noted that video subscribership in the U.S. has a very long-tail in terms of the 210 DMAs that Nielsen has divided the U.S. markets into. For example, the top five markets (New York Metro, Los Angeles, Chicago, Philadelphia, and Dallas), account for 20% of all pay-TV subscribers. The next five largest markets (San Francisco, Boston, Atlanta, Washington D.C. and Houston) account for an incremental 10% of the U.S. pay-TV industry. The two major telecom carriers AT&T (T) and Verizon (VZ) have, in the past few years, begun to offer their own video services as part of their network upgrades. As of 2Q11, T & VZ have captured about 7.7% of the national pay-TV market. Interestingly enough, however, (and perhaps a phenomenon that should not be all that surprising), the Telcos have showed the strongest penetration gains in the largest DMAs, mostly at the expense of the Cable MSOs. In the top-5 DMAs, the Telcos command a 15% share of all pay-TV subscribers (see Exhibit 75).

Exhibit 75: Telco Cable & Satellite Share in top-5 Markets (all Subscriber Values in 000s)
Name of Telco M arket (DM A) New York, NY Los Angeles, CA Chicago, IL Philadelphia, PA Dallas-Ft. Worth, TX Total Telco Top-5 AT&T 22.8 313.2 126.4 301.2 763.5 Verizon 862.8 466.6 473.0 229.8 2,032.1 Total Telco 885.6 779.7 126.4 473.0 531.0 2,795.7
As of the end of 2Q11, in the top-25 DMAs, Cables share of the market was slightly down from its national average, while Telco share was slightly higher (a relic of Telco propensity to overindex in higher-density areas). DBS share was inline with its national average, at 34% of the market. Overall, Cable lost 380bps in share while the DBS providers gained 80bps and the fledgling Telcos captured 300bps of share over the 10 quarter period (see Exhibit 76).
Other Pay-TV Operators in Top-5 M arkets Cable DBS Total Pay-TV Subs in Top-5 M arkets memo: Telco Share
Source: SNL Kagan, Company Reports, ISI Group
11,346.3 5,128.5 19,270.5 14.5%
Exhibit 76: Market share statistics of top-25 DMAs as of 2Q11

S ubscribers HHs Penetration DBS Cable Telco S hare Growth (3Q09-2Q11) DMA (000s) (000s) of Pay-TV S hare S hare S hare DBS Cable Telco New York, NY 6,885.2 7,633.3 90.2% 14.4% 72.8% 12.9% 0.1% -3.7% 3.6% Los Angeles, CA 4,931.2 6,123.2 80.5% 37.5% 46.7% 15.8% -0.8% -6.7% 7.5% Chicago, IL 2,653.2 3,567.0 74.4% 34.2% 61.0% 4.8% 1.2% -3.5% 2.3% Philadelphia, PA 2,576.7 2,990.2 86.2% 17.5% 64.2% 18.4% 0.3% -5.0% 4.6% Dallas-Ft. Worth, TX 2,224.2 2,578.1 86.3% 41.8% 34.3% 23.9% -2.9% -5.4% 8.4% 2,270.3 2,662.0 85.3% 31.4% 61.2% 7.4% 0.7% -3.2% 2.4% San Francisco-Oakland-San J Boston, M A 2,195.4 2,436.5 90.1% 16.9% 71.5% 11.6% 0.6% -3.6% 3.1% Atlanta, GA 1,948.0 2,430.1 80.2% 44.5% 49.3% 6.2% -0.1% -1.9% 2.1% Washington, DC 2,143.0 2,365.6 90.6% 30.0% 48.4% 21.6% -0.2% -6.4% 6.5% Houston, TX 1,725.6 2,190.0 78.8% 36.4% 45.1% 18.4% -2.5% -7.4% 10.0% Detroit, M I 1,495.9 1,926.3 77.7% 30.0% 59.1% 10.9% 0.4% -3.0% 2.6% Phoenix, AZ 1,255.8 1,910.9 65.7% 36.9% 63.1% 0.0% -0.1% 0.1% 0.0% Seattle-Tacoma, WA 1,532.0 1,901.7 80.6% 30.8% 69.2% 0.0% 3.1% -1.4% -1.8% 1,815.3 92.3% 17.1% 64.5% 18.3% 0.4% -4.9% 4.5% Tampa-St. Petersburg-Saraso 1,676.1 M inneapolis-St. Paul, M N 1,318.9 1,780.5 74.1% 42.9% 57.1% 0.0% 2.2% -2.2% 0.0% M iami-Ft. Lauderdale, FL 1,159.7 1,565.0 74.1% 40.4% 51.2% 8.5% 5.7% -11.0% 5.3% Denver, CO 1,276.9 1,583.8 80.6% 42.5% 57.5% 0.0% 1.1% -1.1% 0.0% Cleveland-Akron, OH 1,266.8 1,549.5 81.8% 31.1% 61.9% 7.0% 0.7% -4.6% 4.0% 1,331.1 1,462.7 91.0% 27.4% 70.5% 2.0% 1.9% -2.8% 0.9% Orlando-Daytona Beach-M e Sacramento-Stockton-M odes 1,186.9 1,290.1 92.0% 45.4% 47.3% 7.3% 0.4% -2.6% 2.2% St. Louis, M O 1,012.7 1,263.7 80.1% 48.6% 38.4% 13.0% 0.0% -5.0% 5.0% Portland, OR 902.7 1,212.4 74.5% 40.0% 60.0% 0.0% 3.4% 2.3% -5.7% Charlotte, NC 866.8 1,164.2 74.5% 42.0% 55.0% 3.0% 1.9% -3.5% 1.6% Pittsburgh, PA 953.4 1,171.5 81.4% 29.5% 59.3% 11.2% 0.1% -5.8% 5.7% Raleigh-Durham, NC 871.8 1,131.9 77.0% 40.8% 57.7% 1.5% 2.4% -3.3% 0.9% Total/Average 47,660.5 57,705.5 81.6% 34.0% 57.0% 8.9% 0.8% -3.8% 3.0% Source: SNL Kagan, MediaBiz, ISI Group analysis Note: Heat map indicates relative share-shifts between 3Q-09 and 2Q11. Red indicates loss of subscribers and green indicates subscriber gains.

Though it would too lengthy of an exercise to discuss the trends in each of the top 25 markets (let alone all 210), a few points on some standout markets can be illuminating. For example, in the Washington D.C. market, Cables 6.4% share loss seems to have come almost entirely at the hands of Telco gains (+6.5% share). Yet upon closer inspection, this doesnt entirely paint the whole picture. In Q309, according to SNL Kagan data, the D.C. DMA counted 1.98MM subscribers. By 2Q10, the D.C. DMA counted 2.14MM subscribers, an increase of 160K. It seems that while the incumbent operators Cox and Comcast did lose a few subscribers, Telco overbuilds in the market actually helped increase pay-TV penetration. So the difference between nominal and actual subscriber losses needs to be considered (i.e. there were other factors which were probably at play over the past 10 quarters in the DC area). However there were other markets which didnt see organic pay-TV growth. One example would be Miami, where the Cable MSOs exited 3Q09 with 787K subscribers and just finished 2Q11 with 593K subscribers, a drop of almost 200K. However, it doesnt seem as if this was a Telco share gain story exclusively. AT&T is the only Telco operator in this DMA, and added approximately 50K additional video subscribers during this time period. DBS subscriber numbers were flattish during the period, suggesting that pay-TV declined in this DMA during the period. In our tale of two cities example, cited above, we believe that housing once again explains the disparate trends. Using the monthly S&P/Case-Shiller seasonally adjusted home price indices suggest that home while resale prices have declined by 5.3% in the Miami area, they have actually climbed by 4% in Washington DC (see Exhibit 77). This could perhaps be one explanation why the latter market has experienced organic growth in the pay-TV market while the former market has contracted.
Exhibit 77: A Tale of Two Cities: Miami & Washington DC Single Family Home Resale Prices (S&P Case-Shiller Price Index)
6.0% 4.0%
SYP Case-Shiller Single Family Home Resale Value
2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Miami Washington DC -5.3%
Source: U.S. Census, Bloomberg, L.P., ISI Group
Different incomes paint different stories for each provider Combining our SNL Kagan subscriber data with data from the Census on median income levels paints an interesting story on which Cable/DBS/Telco operator has a better income profile of their subscriber base.

4.0%
For example, 93% of Cablevision households are in the first quintile of income distribution in the United States as of 2Q11 (based on year-end 2010 Census data and 2Q11 subscriber data). The weighted annual median income of a Cablevision subscriber is north of $51,000, and just 2% of CVCs subscribers fall in the lowest quintile of income distribution in the U.S. By contrast, 45% of Charter subscribers fall in the best quintile while almost 11% fall in the worst quintile. Our income distribution findings for Comcast and Time Warner Cable compared to the DBS operators also pointed to some illuminating conclusions. According to our analysis, Comcast counts approximately 85% of its subscribers in the top-two quintiles of income distribution, with TWC at 83%. Both MSOs surpass DISH and DTV for subscribers in the top two quintiles, which we found quite surprising, especially in DIRECTVS case. Not quite as surprising is the high proportion of first quintile households in AT&T and Verizons subscriber bases; since both of these companies represent the most recent overbuilds, one would expect them to target the most attractive areas first, a practice known as red-lining which is of questionable legality. A breakout of each operator subscriber distribution by quintile is presented in Exhibit 78.
Exhibit 78: Median Income Quintiles for Cable, DBS & Telco Pay-TV Subscribers
CVC 92.6% 1.1% 2.3% 2.1% 2.0% CM CSA 69.3% 15.2% 9.2% 4.1% 2.3% CHTR 45.2% 15.5% 17.4% 11.3% 10.6% TWC 49.9% 32.3% 7.0% 7.0% 3.9% DISH 47.2% 18.7% 15.3% 10.5% 8.2% DTV 49.7% 19.3% 13.0% 9.6% 8.3% VZ 80.6% 6.5% 12.8% 0.0% 0.1% T 68.9% 18.9% 6.3% 4.0% 1.9% Average 58.3% 18.4% 11.0% 7.0% 5.2%
Q1 Q2 Q3 Q4 Q5
Source: SNL Kagan, U.S. Census, Company Reports, ISI Group
Income Quitile

PART V: NET NEUTRALITY AND THE EVOLVING REGULATORY ENVIRONMENT

One of the admittedly dryer yet all-too important topics is the regulatory environment, particularly the comings and goings at the Federal Communications Commission (FCC). Recently, many Cable & Satellite providers might justifiably argue that they have been unfairly targeted in the FCCs crosshairs; not necessarily by the current commission, but by the one before it. Former FCC Chairman Kevin J. Martin made his tepid stance against the Cable industry a poorly kept secret, calling for industry reforms such as a la carte programming, rate increase controls and other unprecedented industry regulations with little success in implementing many of his most ambitious initiatives. The FCCs current Chairman, Julius Genachowski has arguably been relatively friendlier towards the industry while at the same time tackling some of the most important industry issues today. Over the 12-18 months , the FCCs mandate vis-a-vis the Cable industry has been on resolving the long-standing Net Neutrality debate, a crucial issue which will have generational consequences depending on how it is ultimately decided. Net Neutrality, broadly defined the idea that ISPs which are the ultimate arbiters of what can and cant flow over their networks not discriminate against any single Internet property nor offer a fast lane for those who are willing to pay for it. The problem that arose in the industry is the nuances involved in this definition; the FCC recently (December, 2010) sought to clarify the precise boundaries of Net Neutrality rules for the industry. The rise of the Internet and of wireless networks has, of course, created a whole new range of challenges for regulators. As it pertains to the Internet, the question of whether regulators can impose net neutrality on service providers is inextricably linked to definitions introduced by the Telecom Act of 1996 drafted at the dawn of the Internet. The law distinguishes between information services, which would be lightly regulated under Title I of the Act; and, telecommunications services, which would be regulated as common carriers under Title II. Common carrier regulations, developed over the past century when the telephone network was largely a monopoly, are much more onerous. Fortunately, the FCC has classified broadband services (both Cable modem and DSL) as information services; as such, they are not subject to what is known as Title II regulation a view upheld by the FCC last December. There was clearly a need for some clarity in what was and wasnt allowed in the world of ISPs and the web companies that use their virtual roads. In December, 2010, chairman of the FCC Julius Genachowski delivered the text of his long-awaited remarks on preserving the Internet and openness. While his remarks were generally in line with our and the markets expectations, there were a few takeaways that we believe are worth mentioning. No to "Title II" reclassification. The chairman backed away from his earlier proposal of Title II reclassification of broadband services, which would have fundamentally altered the playing field in the Internet sphere, and would have likely shifted a significant amount of leverage away from the network owners. Broadband will remain under Title I regulation. We believe that this will portend a much more benign future for network owners. Indeed, the Chairman explicitly acknowledged that his decision supporting milder regulation will give operators the ability and investment incentives to build out and run their networks.

Yes to Usage-Based Pricing. The Chairman acknowledged the merits of usage-based pricing, or the need for network owners to have the ability to charge consumers on a proportionate basis for the data that they consume. To be clear, the FCC has never restricted network operators from evoking usage-based pricing (in fact, many have been doing so for years). However, by stating that the ISPs have the right to do so, we believe that the FCC is preempting the issue (should there even be one) from being brought to the fore by consumer groups now or at some point in the future. Implications for over-the-top video. We believe the Chairmans revised approach to net neutrality provides support to our view that over-the-top video services may be a smaller threat than many investors might believe. As mentioned above, online video consumes an inordinate amount of bandwidth relative to other activities; to the extent that consumers curb their usage due to UBP schemes, we believe that the of the OTT offering might not seem so value oriented as one might have thought. We note that within the FCCs framework was a loophole of sorts for special managed networks that could, in fact, pay for a fast lane. Some examples might be a financial application for high frequency trading or remote medical facilities which need to be ensured of a certain degree of connection quality. It remains to be seen how broad the definition of managed networks ultimately evolves into, but we note that the FCC did include a provision for special treatment of certain traffic. A brief timeline on major milestones in the history of the Net Neutrality saga is provided in Exhibit 79.
Exhibit 79: Timeline of Net Neutrality Evolution
Source: FCC, Public Documents, ISI Group estimates and analysis

Flipping the Net Neutrality debate on its head: the hidden dangers of Reverse Discrimination Much has been made in the Net Neutrality debate about the risks that network operators might abuse their powers by treating certain sites unfairly. What happens when a web property discriminates against a distribution network? If such a concern once only seemed theoretical, News Corp., with a denial of service of Hulu to Cablevision broadband subscribers due to a television carriage spat recently, made what was once unthinkable a reality. In October, 2010, News Corp. (in the midst of a bitter programming dispute with CVC) decided to block Fox content on Hulus website not only from Cablevisions video subscribers, but also the companys ~300K HSI only customers from accessing FOX content on Hulu. Although News Corp. reversed its decision very quickly, it might have crossed a red-line by denying Internet subscribers who had nothing to do with television carriage deals access to an Internet property, News Corp. was arguably rocking the very foundations of the principles of a free and open Internet.

PART VI: SAY HELLO TO AMERICAS MOST HATED INDUSTRY

With such high penetration rates of all three Cable & Satellite (and more recently, Telco) related services (as shown above), one wouldnt expect these players to score anywhere near the low levels that they do on customer service surveys. After all, everybody seems to want no need pay-TV services, as shown in our Macro section on sector spending, even in weak discretionary spending times. But when compared with other consumer facing industries, including the postal service, wireless carriers even airlines (gulp), they find themselves at the bottom of the heap, year after year. Every year, an independent group with prestigious sponsors such as the University of Michigan, the American Society for Quality, and the CFI Group publish the American Customer Satisfaction Index (ACSI), where 45 industries are ranked on a 0-100 scale based on the causes and consequences of customer satisfaction on their relationshipsserving American Households. Over the course of the history of that survey, all industries in aggregate have combined for an ACSI score of 76. The pay-TV industry, by contrast, has ranked dead last, with a 63 average rating since the survey began, ranking below industries such as Airlines, Newspapers and Wireless carriers (see Exhibit 80). Not an esteemed bunch to be grouped with, to state the obvious.
Exhibit 80: Average Historical ACSI Score by Industry Group

90 85 90 85 Average =76 80 75
Average ACSI Score
80 75
62.9
70 65 60 55
70 65 60 55
Pay-TV
Source: American Consumer Satisfaction Index, ISI Group analysis
The recent trends for the pay-TV industry havent been much better. Since 2005, of all industries surveyed, five have held the distinct honor of ranking among the very bottom of the barrel: the Postal Service, Wireless Carriers, Pay-TV companies, Airlines and Newspapers. The 2011 ASCI results have recently been released, and although Cable & Satellite services werent quite at rock-bottom (thank you Airline and Newspapers), they were awfully close, as usual (see Exhibit 81). Of course, lumping the entire Cable/ Satellite/Telco Pay-TV industry together as one entity isnt entirely fair; some operators score better than others either by virtue of trying harder, investing more in their brands and

infrastructure or a combination. In order to measure performance within the industry, we turned to market research firm JD Power and Associates, which ranks individual providers based on customer satisfaction on an annual basis. The most recent rankings available, from 2011, paint a very different picture across operators (averaged across four distinct regions throughout the U.S.). As shown in Exhibit 82, AT&T and Verizon scored highest in the most recent period (though there scores, reported on a 0-1000 scale, were down slightly from 2010). The Telcos were followed most closely by the two DBS providers which, although they are renowned for having superior customer service over Cable, it should also be noted that their national brand awareness probably doesnt hurt their rankings by consumers. By contrast, the four publicly traded Cable MSOs that we cover scored lowest across all regions.
Exhibit 81: American Customer Satisfaction Survey Results for Bottom 5 Industries (20052011) Exhibit 82: Exhibit 83: JD Power and Associates Customer Satisfaction Score for Video Providers (2010, Average for All Regions)
750 JD Power Score 700 650 600 550 500 691 680 679 667 617 604 603 580
Source: ASCI Survey; ISI Group analysis
Source: JD Powers, ISI Group; ISI Group analysis
However, in 2011, although the Cable MSOs continued to bring up the rear in customer satisfaction, but Comcast and Charter showed improvement (up 2.3% and 0.5% YoY respectively). The Telcos showed a decline in customer service rankings (Verizon down 0.3% and AT&T down 4.0% YoY). The DBS players continued their trend of improving customer service (DTV up 0.7% and DISH up 1.1% YoY). We summarize year-over-year trends in Exhibit 84.

Exhibit 84: JD Power Video Customer Satisfaction Scores by Operator

750 JD Power Satisfaction Score 700 650 600 550 500
-0.3% -4.0% +0.7% +1.1% -3.0% +2.3% -0.9% +0.5%
2010
2011
Source: American Consumer Satisfaction Index, ISI Group analysis
One crucial point about customer service as it applies to the stocks in our sector is that based on our research, better customer service does indeed drive incremental share shifts in the video market specifically. We performed a simple regression of the six companies in our Cable & Satellite coverage universe, using average JD Power score as the independent variable in driving share gains in the video market from year-end 2007 through 2Q11. We calculate share shifts in the video market by simply totaling the subscriber tallies of the six companies in our coverage universe and calculating the percentage gained (or lost) in video share (see Exhibit 85). JD Power also measures consumer satisfaction in HSI. Here the results were less dispersed among Telcos and Cable MSOs, and we therefore could not draw any meaningful conclusions on possible correlations with share-shifts in HSI and customer service.
Exhibit 85: Regression of 2007-2011 ACSI Scores vs. YE 2007 Through 2Q11 Video Subscriber Share
690 670 DISH R = 0.8495 DTV
650 630 TWC 610 590 570 CHTR CMCSA 550 -5% 0% 5% 10% Share of Video Subscriber Growth YE 2007 - Q211 CVC
-15%
-10%
15%
20%
Source: American Consumer Satisfaction Index, Company reports, ISI Group analysis

Average JD Power Score
CABLEVISION SYSTEMS (CVC), BUY | 2012YE TARGET $25

Is There Any Room Left for Execution Upside? Time to Block & Tackle
We are initiating coverage of Cablevision Systems Corp. (CVC) shares with a Buy rating and a $25 price target for year-end 2012. Cablevision currently serves 3.3MM basic subscribers within a 5.6MM home footprint in some of the most attractive properties in the United States. The company acquired Bresnan Communications for $1.4B in a deal that closed on December 14th, 2010. Bresnan passes ~640K homes and counts ~300k basic subscribers in Western states such as Colorado, Montana, Utah, and Wyoming. As is typical with many companies in the media space, Cablevision though a publicly traded equity is controlled by a single stakeholder (The Dolan family), which has an 18% economic stake in the company but a whopping 68% voting control. This disjointed economic vs. voting control is achieved through the Dolans sole ownership of 54.1MM non-public Class B super-voting shares (10 votes apiece versus 1 vote per Class A share). Beginning in early 2010, Cablevision began a two-stage strategic transformation, vastly simplifying it into a virtual pure-play cablecompany. In February, 2010, it spun off its Madison Square Garden unit (MSG, not covered). More recently, in July 2011, Cablevision spun-off AMC Networks Inc. (AMCX-not covered) via a distribution to shareholders. These moves have been called for by the investment community for years: both by those who craved another pure-play cable company with a target capital structure that is more optimal for the FCF stability and growth of a subscription business, and by those that sought to unlock the latent value of Cablevisions content-related businesses. On our 2012 estimates, CVC shares trade at 11x P/E, 5.7x EV/EBITDA, supports an 8% unlevered FCF yield and a 17% yield on a levered basis. We estimate the 3-year (2011E-2014E) growth rates for EBITDA, EPS and FCF (levered) at 4.5%, 37% and 8.7%, respectively, when compounded annually. The Bull Thesis: More Residential Growth than you think; FiOS Threat Manageable Better demographics than the national average. As the Bulls point out, Cablevisions core cable properties in New York, New Jersey and Connecticut are as close to beachfront property as one can get. Their footprint has the most attractive household (HH) demographics in the country in terms of income and density, as compared to other cable operators: Household density is about 600 homes per square mile (vs.
Ticker ISI Group Rating Price as of 10/21/2011 Target Price Consensus Average Target Upside/Downside to Target YTD Relative Return1 TTM Relative Return1 52 Week High 52 Week Low M arket Data M arket Cap ($M M ) Enterprise Value ($M M ) Net Debt ($M M ) Shares Outstanding (M M ) Short Interest (as % of Float) Average Daily Volume (3 M o., M M ) Dividend Yield Financial M etrics (ISI Group Estimates) Consolidated Revenues ($MM) 2011PF 2012E 2013E Consolidated EBITDA ($MM) 2011PF 2012E 2013E Consolidated FCF ($MM, Reported) 2011PF 2012E 2013E *Pro forma for AM C Networks Stock Chart
CVC Buy $17.57 $25.00 $25.26 42.3% -25.5% -9.6% $27.60 $14.45
5,004 15,091 10,087 231 3.2% 3.5 3.0%
6,685 6,839 6,947
2,276 2,375 2,481
853 891 940

33 homes per sq/mile nationally); median home values are nearly 2x the national average; and median household income is about 25% above the national average. Along with good management execution, this has resulted in industry-leading subscriber penetration (across Basic Video, Digital Video, HSI, and Voice), the highest revenue and cash flow per home passed (HP), which is 30% higher than its peer group, and the best capital intensity ratio (lowest CAPEX/HP). Theyve got the SMB thing down pat. Any success that the industry sees in targeting the SMB market should over-index for Cablevision the same way they over-index in essentially all of their subscriber metrics. The companys Lightpath division remains the fastest growing segment, with double-digit top line growth, and now represents about 5% of the Telecommunications revenue. Cablevisions tri-state area properties are backed by one of the most sophisticated plants out there. CVC archrival Verizons FiOS has impressed in terms of subscriber penetration. Imagine how much more successful they would be had they not competed with an incumbent like Cablevision?! Cablevisions Hybrid Fiber Coax (HFC) network is as advanced as any Cable plant operating in the U.S. today. Part of this is a function of Cablevisions dense clustering, and part is a function of good old fashioned engineering expertise. Cablevision was the first MSO to go all-digital (the benefits of which were discussed earlier in this report) and offer SDV and DOCSIS 3.0 Wideband to its entire footprint. Further, Cablevision doesnt appear wary of pushing the envelope in order to drive innovationeven going so far as setting legal precedents. The company pioneered the legal utilization of the network DVR (it has publicly disclosed that it has fully ceased purchasing DVR STBs at the beginning of 2011) and is half-way through its $300MM investment in building a Wi-Fi network in its footprint that interconnects with its Wideband network. It also offers iPad owners in-home access to its entire channel guide via those increasingly ubiquitous 9.7 screens. Improving the performance of the Bresnan properties will help overall margins and growth. Cablevisions stewardship of the newly acquired Bresnan properties presents significant upside relative to what the systems are delivering today. For example, cash flow per home passed of $250 is about 40% of legacy Cablevision properties, even though service pricing is similar; hence, the opportunity, in our view, is not in raising rates, but by up-selling the triple-play (now at 55% versus 10% at the time of the acquisition, increasing HD channel availability (100 channels currently), deploying DVRs and other advance services and by improving margins by bringing voice backhaul traffic in-house. A history of empire-building . . . is changing. Cablevision and the controlling Dolan family has a less than stellar history as a fiduciary of public capital. Acquisitions of non-core businesses like The Wiz (some may remember the failed consumer electronics chain) and daily newspaper, Newsday (acquired in July, 2008, well after the secular decline of the Newspaper business began), and a disastrous investment in VOOM (the HD-satellite venture) have resulted in write-offs and destruction of shareholder value. However, the past is the past, and to his credit, Jim Dolan, the companys CEO, is now taking a disciplined, more risk-averse approach on acquisitions and in the general use of the Cable units free cash flow. Moreover, Gregg Seibert, a once well respected investment banker, is now the CFO and is proving to be an astute steward of capital. And lest we forget, theyve still got one of the best Cable executives in the business in COO Tom Rutledge. A leveraged equity shrink strategy could result in a creeping privatization. No one whos followed Cablevision can accuse the Dolans of not believing in the long-term prospects of the Cable business even one that competes with FiOS in 40% of its footprint. In their two attempts at going private the Dolan family was voted down by a special committee who didnt believe that the family was offering shareholders a sufficient premium.

The company has been active in deploying capital in other ways. In 2010, Cablevision announced a $500MM share repurchase program when it disclosed the Bresnan acquisition, and has since re-upped it by another $500MM of which $305MM remains authorized. The $1.25B dividend that Cablevision received as part of the AMC distribution to shareholders was a deleveraging event and the company had since become more aggressive in buying back shares. We think it would be prudent if the pace of buy backs slowed given the current capital raising environment, especially in the high yield market. However, if the company maintained leverage in the 4x range and used the excess liquidity to repurchase the equity (annual equity price increasing at our modeled cost of equity), the Dolan family could potentially take the company private within five years. Will Cablevision EVER be sold? The bid-ask spread likely too wide to close. Given Cablevisions tightly clustered footprint, the M&A debate has always been a lingering theme and remains the case given its simplification into a Cable-only company. Cablevision (despite its super-voting structure) warrants a premium valuation given its strong demographic footprint, in our view, which makes it even more challenging for any potential acquirer to make a case for M&A to its shareholders. In any event, if & when any sale of Cablevision takes place, it will only be at the determination of the controlling Dolan family. The Bear Thesis: Slowing Growth, FiOS, the Dolans (and FiOS and the Dolans) Growth is slowing, nowhere to go but down. Investors that arent fans of Cablevision argue virtually the antithesis to the Bullish view slowing growth (given the past successes), more vulnerable to the competing forces given the high overlap with FiOS, and that the controlling shareholder could still undertake actions that question their stewardship in capital allocation. FiOS is the competitor to watch. Although Verizons fiber-build is essentially finished in terms of new home passings, the Bears like to point out that given Verizons high customer service ratings and purportedly higher-quality video service, they can still be share takers from Cablevision well into the future. Previously, marketing new build-outs was the key source of FiOS subscriber growth. Now with the FiOS network buildout substantially complete, Verizon has become more dependent on legacy markets, and has therefore been more promotional. FiOS now offers two-year contract prices on its bundles which are below Cablevisions one year promotional prices. In 1Q11-2Q11 Cablevision responded to aggressive FiOS pricing by increasing the download speeds of its Optimum Online Boost HSI service from 30Mbps to 50Mbps without increasing prices, launching its iPad app, and offering customers a service to stream PC content to video set-top boxes. Irrational pricing, as anyone who follows this industry knows, cant be good for anyone. What We Think: Low Valuation + Strong FCF = Equity Shrink (aka Buy the Stock) Just as Cablevision arguably the best operating MSO over the past 10 years gets to focus purely on Cable, it appears that the market has soured - CVC shares are down more than 25% YTD. We believe that the shares have been weak as Cablevisions past successes finally catches up with it. Ever since Verizon started its fiber overbuild, there has been wide-spread fear that it spelled the beginning of the end for an outmatched and out-capitalized (yet scrappy) Cablevision, which was going to see 40% of its footprint squarely in Verizons crosshairs by the time the build out was complete. Yet quarter-after-quarter, not only did the wheels not fall off at CVC, but the company actually had some of its best years on record. There were so many good years, in fact, that Cablevision now finds itself with little room to grow. Not helping things are the stagnating housing market, and the impact of some company specific issues like the programming dispute with Fox last October and an interconnection fee dispute with Verizon. Further exacerbating matters is the deteriorating health of the high-yield debt market, which is making relatively more leveraged, hedge-fund heavy stocks like CVC more volatile. To its credit, CVC has been savvy in extending maturities, and now has $2.3B of impending debt maturities through 2014. We believe that Cablevision is one of the best clustered, well managed operators out there, and its strong subscriber demographics give it a particularly appealing back-stop, even in this weakened economy. We also

like the leaner, easier to value Cable-only business, and appreciate the fact that the controlling Dolan family has allowed its COO to manage the business unimpeded. Over the medium term, even with moderate growth, the declining capital intensity allows a growing FCF profile which we think will be primarily used to shrink the equity base. We therefore believe that at these valuations the risk/reward of owning the shares skews toward rewardespecially if the market cooperates. We rate Cablevision shares Buy with a $25 Price Target.

Exhibit 86: Cablevision Subscriber Net Additions
Exhibit 87: Cablevision Subscribers and Total ARPU
*Pro forma for Bresnan, includes commercial and residential Source: ISI Group estimates, company documents
*Pro forma for Bresnan, includes commercial and residential Source: ISI Group estimates, company documents
Exhibit 88: Cablevision Revenues and Profitability
Exhibit 89: Cablevision Capital Expenditures
*Pro forma for AMC Networks Source: ISI Group estimates, company documents
Exhibit 90: Cablevision Free Cash Flow, Debt Maturities, and Return of Capital
Exhibit 91: Cablevision Revenue Mix (2011E)
Source: ISI Group estimates, Bloomberg, company documents

Exhibit 92: Cablevision Estimates vs. Consensus (in millions except per share values)
Annual 2012E $6,839 $6,851 -0.2% $2,375 $2,385 -0.4% 34.7% 34.8% -0.1% $1,380 $1,388 -0.6% $1.57 $1.50 4.6% $812 $709 14.5% Quarterly 3Q11E 4Q11E $1,666 $1,667 0.0% $582 $590 -1.3% 34.9% 35.4% -0.4% $336 $345 -2.6% $0.32 $0.32 0.2% $208 $203 2.8% $1,675 $1,686 -0.7% $591 $591 -0.1% 35.3% 35.1% 0.2% $345 $344 0.3% $0.35 $0.33 3.5% $245 $206 18.6%
2011PF ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. CAPEX Consensus Delta $6,685 $6,779 -1.4% $2,276 $2,346 -3.0% 34.0% 34.6% -0.6% $1,291 $1,353 -4.6% $1.14 $1.24 -7.6% $798 $764 4.5%
2013E $6,947 $7,035 -1.3% $2,481 $2,421 2.5% 35.7% 34.4% 1.3% $1,514 $1,500 0.9% $2.15 $1.98 8.8% $788 $762 3.5%
*Pro forma for AMC Networks Source: ISI Group estimates, Bloomberg, L.P., company documents

Exhibit 93: Cablevision Discounted Cash Flow Valuation (in millions)

FV 2012E DCF Valuation for Consolidated Business PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Add: Option Proceeds Less: Debt (includes Exchangeables) Equity Value of Core Business Add: Other Assets NPV of NOLs Other Investments Total Equity Value Diluted Shares Fair Value per Share Current Share Price Potential Upside $4,759 10,793 $15,552 1,309 37 (10,984) $5,915 $102 571 $674 $6,588 258.5 $25 $17.57 45.0% Valuation Assumptions Risk Free Rate Equity Risk Premium Stock Beta Cost of Equity Marginal Cost of Debt Nominal Tax Rate Post-Tax Cost of Debt Debt/Total Capitalization Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
3.15% 6.0% 1.20 10.4% 7.7% 40.0% 4.6% 40.0% 8.1% --12.4x

Exhibit 94: Cablevision Valuation Multiples

2011E Per Share Valuation Multiples Per Share Metrics Diluted EPS Fully Taxed FCF per Share Dividend per Share Per Share Multiples Price Earnings (P/E) Ratio Fully Taxed FCF Yield Unlevered Fully Taxed FCF Yield Dividend Yield Enterprise Value Multiples (In Millions) Enterprise Value Fully Diluted Shares Current Share Price Market Cap Add: Debt Less: Cash & Equivalents Less: Option Proceeds Enterprise Value Less: NPV of NOLs & Tax Assets/Liabilities Less: Value of Other Investments Cable Adjusted Enterprise Value Cable EBITDA (including stock based comp) Cable EV/EBITDA Ending Basic Subscribers ('000s) Value per Basic Subscriber Ending PSUs ('000s) Value per PSU Capital Returned to Shareholders Dividends Share Repurchases Cash Returned to Shareholders Free Cash Flow Shareholders' Returns as % of FCF Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Leverage Consolidated net debt to AOCF leverage ratio Restricted Group leverage ratio (Bank Test) CSC Holdings notes and debentures leverage ratio Cablevision senior notes leverage ratio
2012E
2013E
2014E
2015E
$1.14 2.07 0.58 15.4x 14.3% 7.2% 3.3%
$1.57 2.48 0.68 11.2x 16.6% 8.1% 3.8%
$2.15 3.05 0.78 8.2x 19.7% 8.9% 4.4%
$2.93 3.53 0.87 6.0x 23.6% 9.6% 5.0%
$3.65 4.01 0.96 4.8x 27.9% 10.4% 5.5%
285 $17.57 $5,004 10,987 (838) (37) $15,115 (326) (544) $14,245 $2,276 6.3x 3,237 $4,401 9,184 $1,551
259 $17.57 $4,542 10,984 (1,309) (37) $14,180 (102) (571) $13,506 $2,375 5.7x 3,166 $4,266 9,244 $1,461
236 $17.57 $4,140 11,038 (1,643) (37) $13,497 111 (600) $13,009 $2,481 5.2x 3,099 $4,198 9,281 $1,402
215 $17.57 $3,775 11,484 (2,138) (37) $13,084 72 (630) $12,526 $2,595 4.8x 3,035 $4,127 9,304 $1,346
196 $17.57 $3,444 11,871 (2,615) (37) $12,663 42 (662) $12,043 $2,694 4.5x 2,975 $4,048 9,315 $1,293
$158 603 $762 590 129.1% 9.5% 13.9% 10.1% NM 4.0x 2.6x 2.6x 4.5x
$155 500 $655 641 102.1% 11.1% 16.9% 11.8% NM 3.8x 2.6x 2.6x 4.5x
$160 500 $660 718 91.9% 12.0% 19.2% 12.7% NM 3.9x 2.8x 2.8x 4.4x
$162 500 $662 759 87.3% 12.9% 20.8% 13.7% NM 3.9x 2.8x 2.8x 4.3x
$160 500 $660 787 83.9% 13.3% 20.8% 14.1% NM 3.9x 2.9x 2.9x 4.3x

Exhibit 95: Cablevision Subscriber Statistics

2010PF Subscribers ('000s) Homes Passed Subscribers Basic Video High-Speed Internet Voice Primary Service Units Penetration Basic Subs as % of Homes Passed High-Speed Internet as % of Basic Telephony as % of Basic Net Additions Basic Video High-Speed Internet Voice Primary Service Units Average Revenue Per Subscriber (ARPU) Video ARPU per Basic Sub (Incl. Advertising & Other) High-Speed Internet Voice Average Monthly Revenue per Basic Subscriber YoY Growth Video ARPU per Basic Sub (Incl. Advertising & Other) High-Speed Internet Voice Average Monthly Revenue per Basic Subscriber 5,536 3,314 2,895 2,879 9,088 59.9% 87.4% 86.9% (55) 86 136 167 $94.29 $37.65 $31.94 $148.75 6.5% (1.4)% (2.3)% 6.0% 2011E 5,596 3,237 2,948 2,999 9,184 57.8% 91.1% 92.6% (77) 53 120 96 $96.31 $37.40 $31.32 $152.01 2.1% (0.7)% (1.9)% 2.2% 2012E 5,654 3,166 2,982 3,096 9,244 56.0% 94.2% 97.8% (71) 34 97 60 $100.44 $37.27 $30.67 $157.55 4.3% (0.4)% (2.1)% 3.6% 2013E 5,715 3,099 3,009 3,174 9,281 54.2% 97.1% 102.4% (67) 27 78 37 $104.15 $37.64 $30.30 $163.07 3.7% 1.0% (1.2)% 3.5% 2014E 5,798 3,035 3,031 3,238 9,304 52.4% 99.9% 106.7% (64) 22 64 23 $107.97 $37.95 $29.94 $168.40 3.7% 0.8% (1.2)% 3.3% 2015E 5,881 2,975 3,050 3,290 9,315 50.6% 102.5% 110.6% (60) 18 53 11 $111.61 $38.21 $29.58 $173.27 3.4% 0.7% (1.2)% 2.9% 3.4% 0.3% (1.5)% 3.1% '10A-'15E CAGR 1.2% (2.1)% 1.0% 2.7% 0.5%
*Includes residential and commercial subscribers Source: ISI Group estimates, company documents

Exhibit 96: Cablevision Business Segment Results (in millions)

2010PF Cablevision Total Revenues Technical & Operating Expenses Selling, General & Administrative Expenses Restructuring & Other Depreciation & Amortization OPERATING INCOME/(LOSS) Depreciation & Amortization Restructuring & Other Share Based Compensation ADJUSTED OPERATING CASH FLOW (AOCF) Telecommunications Revenues Technical & Operating Expenses Selling, General & Administrative Expenses Depreciation & Amortization Operating Income Depreciation & Amortization Share-Based Compensation Adjusted Operating Cash Flow (AOCF) Other, Including Eliminations Revenues Technical & Operating Expenses Selling, General & Administrative Expenses Restructuring & Other Depreciation & Amortization Operating Income Depreciation & Amortization Restructuring & Other Share-Based Compensation Adjusted Operating Cash Flow (AOCF) Capex Telecommunications Other, Including Eliminations Total Cablevision YoY Growth $6,187 2,664 1,441 (0) 887 $1,196 887 (0) 49 $2,132 $5,736 2,334 1,077 824 $1,500 824 34 $2,358 $451 329 364 (0) 63 $(305) 63 (0) 15 $(226) $780 38 $818 2011E $6,685 2,914 1,494 0 985 $1,291 985 0 52 $2,329 $6,272 2,615 1,157 925 $1,576 925 35 $2,535 $414 300 338 0 60 $(285) 60 0 17 $(207) $752 46 $798 (2.4)% 2012E $6,839 2,988 1,475 --995 $1,380 995 --47 $2,422 $6,384 2,642 1,171 935 $1,637 935 35 $2,607 $454 347 304 --60 $(257) 60 --12 $(185) $763 49 $812 1.7% 2013E $6,947 2,987 1,476 --970 $1,514 967 --48 $2,529 $6,483 2,633 1,187 910 $1,753 910 36 $2,699 $464 354 289 --60 $(239) 57 --12 $(170) $738 51 $788 (2.9)% 2014E $7,056 2,988 1,467 --910 $1,691 904 --48 $2,643 $6,583 2,627 1,193 850 $1,913 850 36 $2,799 $473 361 274 --60 $(222) 54 --12 $(156) $737 53 $789 0.1% 2015E $7,149 2,990 1,457 --869 $1,834 860 --49 $2,742 $6,667 2,622 1,197 809 $2,040 809 37 $2,885 $483 368 261 --60 $(206) 51 --12 $(143) $734 55 $788 (0.1)% '10A-'15E CAGR 2.9% 2.3% 0.2% (0.4)% 8.9% (0.6)% (0.3)% 5.2% 3.1% 2.3% 2.1% (0.4)% 6.3% (0.4)% 1.6% 4.1% 1.3% (6.4)% (1.0)% (4.0)% (4.9)% (8.7)% (1.2)% 7.8% (0.7)%

Exhibit 97: Cablevision Income Statement (in millions)

2010PF $6,187 $2,132 (49) 0 $2,083 887 $1,196 (711) (163) $322 (116) $205 156 $362 (1) $361 $1.23 1.20 $0.70 0.68 $0.475 (9.6)% (11.9)% (11.7)% 14.1% 33.7% 19.3% 36.2% 5.8% 2011E $6,685 $2,329 (52) (0) $2,276 985 $1,291 (750) 20 $561 (237) $325 54 $378 (1) $378 $1.37 1.33 $1.18 1.14 $0.575 8.0% 9.3% 8.0% 4.7% 34.0% 19.3% 42.1% 5.7% 2012E $6,839 $2,422 (47) --$2,375 995 $1,380 (756) --$624 (250) $374 --$374 (1) $374 $1.63 1.57 $1.63 1.57 $0.675 2.3% 4.3% 6.9% (1.1)% 34.7% 20.2% 40.0% 5.5% 2013E $6,947 $2,529 (48) --$2,481 970 $1,514 (743) --$771 (308) $462 --$462 (1) $462 $2.24 2.15 $2.24 2.15 $0.776 1.6% 4.5% 9.7% 23.6% 35.7% 21.8% 40.0% 6.6% 2014E $7,056 $2,643 (48) --$2,595 910 $1,691 (743) --$948 (379) $569 --$569 (1) $568 $3.06 2.93 $3.06 2.93 $0.873 1.6% 4.6% 11.7% 23.0% 36.8% 24.0% 40.0% 8.0% 2015E $7,149 $2,742 (49) --$2,694 869 $1,834 (768) --$1,066 (426) $639 --$639 (1) $639 $3.83 3.65 $3.83 3.65 $0.961 1.3% 3.8% 8.4% 12.5% 37.7% 25.6% 40.0% 8.9% '10A-'15E CAGR 2.9% 5.2% (0.3)% 5.3% (0.4)% 8.9%
Revenues Adjusted Operating Cash Flow Share-Based Compensation Restructuring & Other Operating Income before D&A Depreciation & Amortization Operating Income (EBIT) Interest Expense, net Other Income/Expenses Pre-Tax Income Provision for income taxes Net Income from Continuing Operations Income from Discontinued Operations, net Net Income Less: Net income attributable to noncontrolling interest Net Income attributable to Cablevision Earnings per Share (EPS) Basic EPS Diluted EPS Earnings per Share (EPS) (from Continuing Operations) Basic EPS Diluted EPS Dividends per Share YoY Growth Revenues Consolidated OCF Operating Income (EBIT) Net Income attributable to Cablevision Margins OIBDA Margins Operating Margins Tax Rate Net Income attributable to Cablevision
27.1%
12.1% 12.1% 25.5% 25.0% 40.6% 40.1% 15.1%

Exhibit 98: Cablevision Cash Flow Statement (in millions)

2010A Cash Flow From Operating Activities Net Income from Continuing Operations Adjustments for noncash and nonoperating items Depreciation & Amortization Share-Based Compensation Amortization of deferred financing costs Deferred Income Taxes Amortization and writeoff of program rights Provision for doubtful accounts Other Changes in operating assets and liabilities Net Cash Provided by Operating Activities Cash Flow from Investing Activities Capital Expenditures Acquisitions, net of Cash Purchases/Sale of Investments Other Net Cash Provided by Investing Activities Cash Flow from Financing Activities Debt Net Borrowings/(Repayments) Issuance/Buyback of Common Stock & Dividends Other Net Cash Provided by Financing Activities Beginning Cash Cash from Discontinued Operations, net Net Change in Cash from Continuing Operations Ending Cash Free Cash Flow Net Cash Provided by Operating Activities Capital Expenditures Free Cash Flow Less: Impact of Deferred Income Taxes Fully Taxed Free Cash Flow Add: Interest expense, net Less: Adjusted Taxes Unlevered Free Cash Flow Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance Consolidated Net Debt to AOCF Ratio $362 887 49 45 201 --65 --(22) $1,430 $(818) (1,357) 0 8 $(2,166) $1,165 (441) (72) $651 $355 124 (85) $394 $1,430 (818) $612 (201) $411 711 (253) $869 $316 $29.23 10.8 $184 5.7x 2011E $378 985 52 36 263 --66 --(76) $1,651 $(798) ----(9) $(807) $709 (1,455) 339 $(406) $394 7 438 $838 $1,651 (798) $853 (263) $590 750 (318) $1,022 $603 $28.43 21.2 $80 4.2x 2012E $374 995 47 36 250 --67 --(67) $1,703 $(812) ------$(812) --(655) --$(655) $838 --471 $1,309 $1,703 (812) $891 (250) $641 756 (302) $1,095 $500 $19.04 26.3 --3.8x 2013E $462 970 48 33 222 --68 --(74) $1,729 $(788) ------$(788) $54 (660) --$(607) $1,309 --334 $1,643 $1,729 (788) $940 (222) $718 743 (297) $1,164 $500 $21.81 22.9 --3.5x 2014E $569 910 48 30 (48) --69 --(78) $1,500 $(789) ------$(789) $446 (662) --$(216) $1,643 --495 $2,138 $1,500 (789) $710 48 $759 743 (297) $1,204 $500 $24.07 20.8 --3.4x 2015E $639 869 49 27 (36) --70 --(78) $1,539 $(788) ------$(788) $387 (660) --$(274) $2,138 --477 $2,615 $1,539 (788) $751 36 $787 768 (307) $1,248 $500 $26.56 18.8 --3.2x '10A-'15E CAGR 12.1%
1.5% (0.7)%
(18.3)%
(184.1)%
4.2% 13.9%
7.5%

Exhibit 99: Cablevision Balance Sheet (in millions)

2010A ASSETS Current Assets Cash & Equivalents Restricted Cash Receivables Deferred Tax Asset Other Current Assets Total Current Assets Property, Plant & Equipment, net Investments Franchise Rights Intangible Assets subject to Amortization Goodwill Other Non-current Assets Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts Payable Accrued Expenses and Other Bank Debt Collaterized Indebtedness Capital Lease Obligations Liabilities Under Derivative Contracts Senior Notes and Debentures Subordinated Notes and Debentures Total Current Liabilities Deferred Income Taxes Bank Debt, Long Term Collateralized Indebtedness/Prepaid Forwards Capital Lease Obligations Senior Notes and Debentures Subordinated Notes and Debentures Other Non-current Liabilities Total Liabilities Redeemable noncontrolling interests Equity Class A Common Class B Common Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated other comprehensive loss, net Total Cablevision Shareholders' Equity Noncontrolling interests Total Equity Total Liabilities and Equity 2011E 2012E 2013E 2014E 2015E '10A-'15E CAGR
$394 1 538 109 598 $1,640 3,431 236 1,240 657 525 1,112 $8,841
$838 3 304 178 457 $1,780 3,257 272 1,240 216 442 245 $7,452
$1,309 3 172 178 349 $2,011 3,168 272 1,240 122 442 245 $7,500
$1,643 3 175 178 354 $2,353 3,013 272 1,240 96 442 245 $7,661
$2,138 3 178 178 360 $2,856 2,918 272 1,240 70 442 245 $8,043
$2,615 3 180 178 365 $3,340 2,863 272 1,240 45 442 245 $8,448
46.0%
15.3%
(0.9)%
$482 932 207 161 6 47 326 --$2,162 --6,024 191 45 5,542 324 833 $15,121 ---
$542 729 ------169 ----$1,440 230 5,300 426 36 5,226 --329 $12,986 $16
$608 571 ------169 ----$1,349 479 5,569 426 36 4,954 --475 $13,287 $16
$609 572 ------169 764 --$2,115 701 5,622 426 36 4,190 --507 $13,597 $16
$609 572 ------169 500 --$1,851 653 6,833 426 36 3,690 --537 $14,025 $16
$609 571 ------169 ----$1,350 617 7,719 426 36 3,690 --563 $14,401 $16
(9.0)%
(1.0)%
$3 1 6 (5,495) (789) (23) $(6,297) 16 $(6,281) $8,841
$3 1 1,107 (5,214) (1,425) (23) $(5,552) 3 $(5,549) $7,452
$3 1 1,107 (4,968) (1,925) (23) $(5,805) 3 $(5,802) $7,500
$3 1 1,107 (4,618) (2,425) (23) $(5,956) 4 $(5,952) $7,661
$3 1 1,107 (4,164) (2,925) (23) $(6,001) 5 $(5,997) $8,043
$3 1 1,107 (3,637) (3,425) (23) $(5,974) 5 $(5,969) $8,448 (0.9)%

CHARTER COMMUNICATIONS (CHTR), BUY | 2012YE TARGET $60

Prospects of an Operational Turnaround; Attractive Tax Attributes on Asset Sales
We are initiating coverage of Charter Communications (CHTR) with a Buy rating and a $60 target price for year-end 2012. Charters footprint covers about 11.8MM homes and serves 4.9MM basic subscribers in 25 states with the largest clusters in Missouri, California, Texas and the Carolinas. Paul Allen (aka the co-founder of Microsoft) now has 40% voting control via Class B shares but has less than a 10% economic stake. The two largest shareholders since the companys bankruptcy reorganization are Apollo Management and Oaktree Capital, who together own about 50% of the equity and together (as of 6/30/2011) have five of the eleven board seats. Recently, CEO Mike Lovett announced he will be leaving Charter by April 2012 or sooner if the board can find a replacement. No reason was given for his pending departure. On our 2012 estimates, Charter shares trade at 5.5x EV/EBITDA and support a 7% unlevered FCF yield and a 12% yield on a levered basis. We estimate the 3-year (2011E-2014E) growth rates for EBITDA and FCF (levered) at 3.6% and 10%, respectively, when compounded annually. Our discounted cash flow valuation yields a fair value of $60 per share though we note that close to 1/3rd of the value is attributed to the NPV of the tax assets which may not be fully or immediately recognized by the market. The Bull Thesis: Operational Turnaround and the Prospect of a Sale (System or Company) Playing Catch up, but at least theyre in the game. Theres a famous clich which says, life is a marathon and not a sprint. In Charters case, they might have applied this dictum a little too literally (marathon is probably too generous of a word to capture the pace at which Charter has rolled out products in the past). However, with its recapitalization now behind it, Charter has definitely kicked it up a notch, at least from a slow jog to a moderate sprint. As it stands, while Charter has lagged the industry in deploying some of the advanced technologies (e.g., Switched Digital Video and DOCSIS 3.0), it expects to catch up by the end of this year. In July 2011, they announced an across-the-board rate increase in video and for possibly the first time in the HSI segment. Also, the company is testing the integrated TiVo box which is expected to be rolled out across the footprint in the first half of 2012. TiVos next-generation IP-TV enabled video platform includes an HD user-interface that
Ticker ISI Group Rating Price as of 10/21/2011 Target Price Consensus Average Target Upside/Downside to Target YTD Relative Return1 TTM Relative Return1 52 Week High 52 Week Low M arket Data M arket Cap ($M M ) Enterprise Value ($M M ) Net Debt ($M M ) Shares Outstanding (M M ) Short Interest (as % of Float) Average Daily Volume (3 M o., M M ) Dividend Yield Financial M etrics (ISI Group Estimates) Consolidated Revenues ($MM) 2011E 2012E 2013E Consolidated EBITDA ($MM) 2011E 2012E 2013E Consolidated FCF ($MM, Reported) 2011E 2012E 2013E
CHTR Buy $49.75 $60.00 $65.22 20.6% 27.6% 44.0% $61.15 $31.36
5,585 18,039 12,454 110 0.7% 0.4 nm
7,201 7,317 7,525
2,718 2,791 2,909
505 597 702
Stock Chart

allows search over different platforms, web applications on TV, on-demand video, content storage and automated/remote recording features, among other things. Charter is seeing continued strength in the commercial business which could be a boon to top-line growth in 2012. Best of all, margins could improve as certain customer-care initiatives are implemented company-wide, which should have the impact of reducing truck rolls, billing and servicing calls. Raising rates to drive top-line. In July, Charter announced a $3 rate increase on the advanced analog tier of programming, making it largely uncompetitive with its entry digital tier. This was likely done not to punish analog customers, but instead to induce them to migrate to digital, which benefits the entire plant by freeing up valuable capacity. In addition, sports tier rates were increased by $5/month though the increase brought some additional programming; finally, modem rental costs were increased by $2/month. Note that these increases were for customers that were not part of price guarantee programs. Focus is on high margin HSI, not video. The company has established a plan to drive penetration in nonvideo customer homes within its footprint (today, 9% of those non-video homes take HSI). The company recently announced a partnership to sell voice and data to DISH Network video customers (a little strange, well admit, but we refreshingly note that pragmatism sometimes wins out). Crucially, Charter has removed the previously instituted $10/month penalty for customers that took a voice or data service without taking the companys video service. For a company of this size a $2.0B NPV in tax assets will get your attention. We estimate the net present value (NPV) of the tax shields from Charters NOLs and accelerated depreciation of its high asset tax basis at $2.0B ($18 per share), which is about 30% of our equity fair value estimate. Charter wont be a meaningful tax payer until after 2019, by our estimate (past our forecasting period). The appropriate discount rate for these tax assets is debatable but because of Charters relatively high operating and financial leverage, we settled on its levered cost of equity. At the end of 2010, Charter had $6.9B of federal NOLs and $228M of indirect corporate subsidiary and state NOLs to offset taxable income until 2028. $1.3B of the tax loss carryforward was unrestricted, with the balance subject to annual limitations. By our estimate, ~$700M of additional NOLs become unrestricted each year from 2011 to 2014, and ~$190MM become unrestricted each year from 2015 to 2028. In addition to NOLs, Charter can offset cash taxes with accelerated depreciation on its relatively high asset tax basis since coming out of bankruptcy. The tax basis of Charters PP&E and intangibles was $9.8B at the end of 2010. Could Charters tax assets be worth substantially more in a transaction? The thinking here is that Charters largest shareholders who have a private equity pedigree could look to drive asset sales as one way of helping the company monetize the tax shields. Under certain transaction structures, a potential acquirer could step up Charters tax basis and Charter could shield part of any capital gains with its $10B asset tax basis and $7B in NOLs. A transaction would have to address a) whether and under what limitations NOLs are transferred to the acquirer, and b) tax liabilities. Stock sale treatment limits the value of NOLs to the acquirer and asset sale treatment results in effective double taxation of capital gains (on both the inside and outside basis). With Comcast still integrating NBCU (even though its a separate pool of assets and liquidity) and TWC waiting to close on Insight, it remains unclear if there is M&A appetite unless the benefits are visible and immediate. The Bear Story: Rebutting the Fundamental Turnaround and the Attractiveness of a Sale Shaking the stigma isnt going to be easy (if its even possible). Once a reputation is sullied, its very, very difficult to turn perception aroundeven if you try really hard. A case can be made that for Charter, the many years of under-investment (when operations were hostage to a leveraged balance sheet), inferior service offerings and under-trained customer care call-centers have put a long-term stigma on business. Changing perceptions isnt easy, if even possible. It should be noted that in recent customer service surveys, Charters

scores have been improving; though things are all relative, as the MSO still sits at the bottom of the industry in terms of customer satisfaction. Selling in whole or in part is easier said than done. On the strategic side, we believe that it would be unlikely that there would be a total company sale to any one operator given the companys less-than-ideal clustering in a wide swath of 25 states. We believe that to the extent Charter engages in any transactions, system sales are more likely. The question is which systems? Two of its clusters where they do not control the DMA are its Los Angeles and Dallas markets, which would almost certainly be attractive to TWC. But if Charter sells some of its crown jewels, what might be left? Nothing great, in our view. What We Think: A (Still) Levered Company on the Mend If Cablevision can be considered a case-study in how to execute for a Cable business (dense clustering, good demographics, unrelenting competitive spirit, decent customer service and aggressive but manageable financial engineering), Charter has, in many ways, behaved as the polar opposite. As suggested above, it has a very wide footprint with subscribers coming from half of the States in the U.S. Penetration of all services is significantly below industry averages. And it has a history of being over-leveredall factors contributing to its road to bankruptcy in 2009. However, all is not so gloomy nowadays. Since exiting bankruptcy in late 2009, the investment communitys overriding concern about Charters high debt leverage seems to have dissipated as the balance sheet was recapitalized, and the company started generating positive FCF. Moreover, managements focus is now where it should be, on managing a cable business, as opposed to managing day-to-day financial liquidity just to keep the lights on for another quarter. On fundamentals, we think the company will be successful in controlling costs (& improving margins). Tax shields make Charter attractive to an acquirer. With the recent $200M buyback and a target leverage ratio of 4-4.5x, there is an equity shrink opportunity, yet given the lower FCF conversion profile (relatively lower cash flow per customer coupled with relatively higher CAPEX per customer), the magnitude of buybacks is lower than its peer group. Although the company has been aggressively pushing out maturities and has become FCF positive since the reorganization, Charter is currently levered at 4.7x gross debt/EBITDA. The company has debt maturities aggregating $2.3B through 2014. The sensitivity of debt leverage is so substantial that we calculate a 1x change in the EV/EBITDA multiple represents a ~45% move in equity value. Given our positive view on the group and our belief that a rising tide lifts all boats (in the Cable sector), Charter could be a beneficiary, especially given its higher debt leverage.

Exhibit 100: Charter Subscriber Net Additions
Exhibit 101: Charter Subscribers and Total ARPU
Exhibit 102: Charter Revenues and Profitability
Exhibit 103: Charter Capital Expenditures
Exhibit 104: Charter Free Cash Flow, Debt Maturities, and Return of Capital
Exhibit 105: Charter Revenue Mix (2011E)

Exhibit 106: Charter Estimates vs. Consensus (in millions except per share values)
Annual 2012E $7,317 $7,458 -1.9% $2,791 $2,783 0.3% 38.1% 37.3% 0.8% $1,380 $1,218 13.3% $2.52 $1.87 35.0% $1,359 $1,252 8.5% Quarterly 3Q11E 4Q11E $1,813 $1,799 0.8% $669 $653 2.5% 36.9% 36.3% 0.6% $255 $253 1.1% $0.05 $0.17 -72.5% $356 $342 4.3% $1,827 $1,827 0.0% $713 $689 3.5% 39.0% 37.7% 1.3% $284 $289 -1.6% $0.21 $0.29 -28.9% $320 $329 -2.8%
2011E ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. CAPEX Consensus Delta $7,201 $7,198 0.0% $2,718 $2,673 1.7% 37.8% 37.1% 0.6% $1,079 $1,072 0.6% ($1.73) ($1.42) 22.4% $1,356 $1,350 0.5%
2013E $7,525 $7,736 -2.7% $2,909 $2,884 0.9% 38.7% 37.3% 1.4% $1,552 $1,428 8.6% $4.81 $3.46 39.3% $1,323 $1,212 9.1%
Exhibit 107: Charter Discounted Cash Flow Valuation (in millions)

FV 2012E DCF Valuation PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Add: Option/Warrant Proceeds Add: NPV of NOLs and Other Tax Assets Less: Debt Equity Value Diluted Shares Fair Value per Share Current Share Price Potential Upside $4,581 11,889 $16,470 500 393 2,031 (12,559) $6,834 113.6 $60 $49.75 20.9% Valuation Asssumptions Risk Free Rate 3.2% Equity Risk Premium 6.0% Stock Beta 1.20 Cost of Equity 10.4% Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
Marginal Cost of Debt Nominal Tax Rate Post-Tax Cost of Debt Debt/Total Capitalization
7.2% 40.0% 4.3% 50.0% 7.3% --13.6x

Exhibit 108: Charter Valuation Multiples

2011E Per Share Valuation Multiples Per Share Metrics Diluted EPS Fully Taxed FCF per Share Per Share Multiples Price Earnings (P/E) Ratio Fully Taxed FCF Yield Unlevered Fully Taxed FCF Yield Enterprise Value Multiples (In Millions) Enterprise Value Fully Diluted Shares Current Share Price Market Cap Add: Debt Less: Cash & Equivalents Less: Option/Warrant Proceeds Enterprise Value Less: NPV of NOLs and Other Tax Assets Adjusted Enterprise Value EBITDA EV/EBITDA Ending Basic Subscribers ('000s) Value per Basic Subscriber Ending PSUs ('000s) Value per PSU Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Leverage & Coverage Net Debt/EBITDA EBITDA/Interest Expense (EBITDA-Capex)/Interest Expense
2012E
2013E
2014E
2015E
$(1.73) 2.79 (28.7)x 8.5% 5.7%
$2.52 3.74 19.7x 11.7% 6.5%
$4.81 4.67 10.3x 16.3% 6.5%
$6.97 5.88 7.1x 23.7% 7.0%
$9.95 8.52 5.0x 43.4% 7.8%
119 $49.75 $5,911 12,660 (296) (393) $17,883 (1,996) $15,886 $2,718 5.8x 4,277 $3,714 9,725 $1,634 4.1% 4.7% 5.0% NM 4.5x 2.8x 1.4x
114 $49.75 $5,651 12,559 (500) (393) $17,318 (2,031) $15,287 $2,791 5.5x 4,095 $3,733 9,799 $1,560 5.2% 6.0% 6.2% 22.8% 4.3x 2.9x 1.5x
94 $49.75 $4,659 13,089 (500) (393) $16,855 (1,977) $14,879 $2,909 5.1x 3,941 $3,776 9,874 $1,507 5.8% 6.7% 6.8% 40.0% 4.3x 3.3x 1.8x
75 $49.75 $3,755 13,587 (500) (393) $16,448 (1,884) $14,565 $3,019 4.8x 3,809 $3,824 9,949 $1,464 6.3% 7.4% 7.3% 96.2% 4.3x 3.2x 1.8x
59 $49.75 $2,916 14,042 (500) (393) $16,065 (1,765) $14,300 $3,120 4.6x 3,698 $3,867 10,022 $1,427 6.8% 7.9% 7.7% NM 4.3x 3.0x 1.8x

Exhibit 109: Charter Subscriber Statistics (000s)

2010PF Homes Passed Video HSI Homes Passed Charter PhoneHomes Passed Subscribers Residential PSUs: Video Internet Phone Residential PSUs Residential PSU / Customer Relationships Commercial PSUs: Video Internet Phone Commercial PSUs Penetration Basic Subs as % of Homes Passed Digital Subs as % of Basic DVR as % of Digital HDTV as % of Digital HSI as % of Homes Passed Voice as % of Homes Passed Subscriber Net Adds Video Customers High Speed Internet (HSI) Charter Phone Primary Service Units Digital Video Total Revenue Generating Units (RGUs) Average Revenue Per Subscriber (ARPU) Video ARPU per Basic Sub - Residential High Speed Internet (HSI) - Residential Charter Phone - Residential Total ARPU per Basic Subscriber YoY Growth Video ARPU per Basic Sub - Residential High Speed Internet (HSI) - Residential Charter Phone - Residential Total ARPU per Basic Subscriber 11,769 11,404 10,566 2011E 11,910 11,612 10,838 2012E 12,053 11,806 11,042 2013E 12,234 12,024 11,245 2014E 12,417 12,236 11,432 2015E '10PF-'15E CAGR 12,604 12,443 11,614 1.4% 1.8% 1.9%
4,278 3,246 1,717 9,242 1.90 242 129 60 431 38.4% 74.4% 30.0% 35.0% 29.6% 16.8% (227) 223 183 179 183 362 $69.12 $42.06 $41.56 $125.52 4.9% 1.5% (3.9)% 9.5%
4,038 3,423 1,790 9,251 1.96 239 158 78 475 35.9% 80.0% 35.0% 45.0% 30.8% 17.2% (243) 196 90 43 59 102 $71.92 $40.93 $40.51 $135.96 4.1% (2.7)% (2.5)% 8.3%
3,858 3,581 1,855 9,295 2.05 237 174 93 505 34.0% 87.1% 48.1% 58.1% 31.8% 17.6% (182) 175 81 74 146 220 $74.87 $41.34 $39.63 $145.65 4.1% 1.0% (2.2)% 7.1%
3,705 3,724 1,914 9,343 2.13 235 188 108 531 32.2% 92.2% 57.5% 67.5% 32.5% 18.0% (155) 157 73 75 66 141 $77.87 $41.62 $38.99 $156.08 4.0% 0.7% (1.6)% 7.2%
3,575 3,853 1,967 9,395 2.21 234 200 120 554 30.7% 95.6% 63.8% 73.8% 33.1% 18.3% (131) 140 66 75 8 83 $80.90 $41.76 $38.52 $166.40 3.9% 0.3% (1.2)% 6.6%
3,465 3,968 2,014 9,448 2.28 233 210 132 575 29.3% 97.6% 67.5% 77.5% 33.6% 18.5% (111) 126 59 73 (31) 42 $83.97 $41.76 $38.17 $176.05 3.8% 0.0% (0.9)% 5.8%
(4.1)% 4.1% 3.2% 0.4% 3.7% (0.8)% 10.2% 17.1% 5.9%

4.0% (0.1)% (1.7)% 7.0%
Exhibit 110: Charter Income Statement (in millions)

2010PF $7,003 $3,033 1,383 1,524 26 22 $5,988 $1,015 (877) --(6) (80) $52 (282) $(230) $(2.03) (2.03) 113 113 4.8% 4.5% (12.7)% (102.3)% 56.7% 36.9% 14.5% 40.0% (3.3)% 2011E $7,201 $3,123 1,359 1,602 31 6 $6,122 $1,079 (968) ----(122) $(11) (178) $(190) $(1.73) (1.73) 109 109 2.8% 5.1% 6.3% NM 56.6% 37.8% 15.0% (1552)% (2.6)% 2012E $7,317 $3,160 1,366 1,370 36 5 $5,936 $1,380 (950) ------$430 (172) $258 $2.52 2.52 102 102 1.6% 2.7% 28.0% (236.0)% 56.8% 38.1% 18.9% 40.0% 3.5% 2013E $7,525 $3,221 1,396 1,318 34 5 $5,974 $1,552 (891) ------$660 (264) $396 $4.81 4.81 82 82 2.9% 4.2% 12.4% 53.6% 57.2% 38.7% 20.6% 40.0% 5.3% 2014E $7,737 $3,292 1,426 1,282 36 5 $6,041 $1,697 (952) ------$745 (298) $447 $6.97 6.97 64 64 2.8% 3.8% 9.3% 12.8% 57.5% 39.0% 21.9% 40.0% 5.8% 2015E '10PF-'15E CAGR 2.5% $7,930 $3,357 1,453 1,261 37 5 $6,112 $1,818 (1,034) ------$783 (313) $470 $9.95 9.95 47 47 2.5% 3.3% 7.1% 5.2% 57.7% 39.4% 22.9% 40.0% 5.9% 2.0% 1.0% (3.7)%
Revenues Costs and Expenses Operating Expenses Selling, General & Administrative Expenses Depreciation & Amortization Stock Compensation Expense Other Operating Expenses Total Costs and Expenses Operating Income (EBIT) Interest Expense, net Impairment Charges Gain/Loss due to bankruptcy-related items Other Income/Expenses Pre-Tax Income Provision for income taxes Net Income Earnings per Share (EPS) Basic EPS Diluted EPS Average common shares outstanding Basic Diluted YoY Growth Revenues Adjusted EBITDA Operating Income (EBIT) Net Income Margins Gross Margins Adjusted EBITDA Margin Operating Margins Tax Rate Net Income
0.4% 12.4%
72.0%

Exhibit 111: Charter Cash Flow Statement (in millions)

2010PF Cash Flow From Operating Activities Net Income Adjustments for noncash and nonoperating items Depreciation Non-cash Interest Expense Noncash reorganization items, net Deferred Income Taxes Other, net Changes in operating assets and liabilities Receivables Prepaid expenses and other assets Accounts payable and other liabilities Net Cash Provided by Operating Activities Cash Flow from Investing Activities Capital Expenditures Change in accrued expenses related to Capex Other, net Net Cash Provided by Investing Activities Cash Flow from Financing Activities Debt Net Borrowings/(Repayments) Payments for debt issuance costs Share repurchases Other, net Net Cash Provided by Financing Activities Beginning Cash Net Increase (Decrease) in Cash Ending Cash Reported Free Cash Flow Net Cash Provided by Operating Activities Capital Expenditures Change in accrued expenses related to Capex Reported Free Cash Flow Less: Impact of Deferred Income Taxes Fully Taxed Free Cash Flow Add: Interest expense Less: Adjusted Taxes Unlevered Fully Taxed Free Cash Flow Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance Gross Debt/EBITDA $(230) 1,524 74 --287 115 --22 126 $1,918 $(1,209) 8 31 $(1,170) $(1,375) (76) (6) (6) $(1,463) $754 (722) $32 $1,918 (1,209) 8 $717 (287) $430 877 (351) $956 --------2011E $(190) 1,602 60 173 152 (6) (1) 69 $1,861 $(1,356) --(65) $(1,421) $195 (43) (332) 4 $(176) $32 264 $296 $1,861 (1,356) --$505 (173) $332 968 (387) $913 $332 $47.31 7 --4.4x 2012E $258 1,370 86 --172 36 (4) (0) 39 $1,956 $(1,359) ----$(1,359) $(101) --(293) --$(393) $296 204 $500 $1,956 (1,359) --$597 (172) $425 950 (380) $996 $293 $55.98 5 --4.5x 2013E $396 1,318 (3) --264 34 (7) (1) 23 $2,025 $(1,323) ----$(1,323) $530 --(1,232) --$(702) $500 --$500 $2,025 (1,323) --$702 (264) $438 891 (357) $973 $1,232 $61.77 20 --4.5x 2014E $447 1,282 (53) --298 36 (7) (1) 26 $2,027 $(1,285) ----$(1,285) $498 --(1,240) --$(742) $500 --$500 $2,027 (1,285) --$742 (298) $444 952 (381) $1,015 $1,240 $68.16 18 --4.5x 2015E '10PF-'15E CAGR $470 1,261 (47) --313 37 (7) (1) 23 $2,050 $(1,237) ----$(1,237) $455 --(1,268) --$(813) $500 --$500 $2,050 (1,237) --$813 (313) $499 1,034 (414) $1,120 $1,268 $75.22 17 --4.5x
1.3% 0.5%
73.3% 1.3% 0.5% 2.5% 1.8% 3.0% 3.4% 3.4% 3.2%

Exhibit 112: Charter Balance Sheet (in millions)

2010PF ASSETS Current Assets Cash & Equivalents Restricted cash and equivalents Receivables Prepaid expenses and other current assets Total Current Assets Property, Plant & Equipment, net Franchises, net Customer relationships, net Goodwill Other Non-current Assets Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Current Portion of Long-Term Debt Total Current Liabilities Long-Term Debt, Net of Current Portion Other Long-term Liabilities Total Liabilities Minority Interest Preferred Stock Temporary equity and Other Equity Class A Common Class B Common Additional Paid-In Capital Treasury stock at cost Accumulated deficit Accumulated other comprehensive loss, net Total equity Total liabilities and equity 2011E 2012E 2013E 2014E 2015E '10PF-'15E CAGR
$4 28 247 47 $326 6,819 5,257 2,000 951 354 $15,707
$268 28 254 48 $597 6,885 5,257 1,690 1,002 386 $15,817
$472 28 258 48 $806 7,161 5,257 1,403 1,002 386 $16,015
$472 28 265 49 $814 7,427 5,257 1,142 1,002 386 $16,028
$472 28 272 50 $823 7,665 5,257 908 1,002 386 $16,040
$472 28 279 51 $830 7,849 5,257 700 1,002 386 $16,024
159.6%
20.6%
0.4%
$1,049 --$1,049 12,306 874 $14,229 ----------1,776 (6) (235) (57) $1,478 $15,707
$1,118 --$1,118 12,660 1,038 $14,816 ----------1,785 (470) (171) (143) $1,001 $15,817
$1,157 --$1,157 12,559 1,038 $14,754 ----------1,785 (763) 381 (143) $1,260 $16,015
$1,180 --$1,180 13,089 1,038 $15,307 ----------1,785 (1,994) 1,073 (143) $720 $16,028
$1,206 --$1,206 13,587 1,038 $15,831 ----------1,785 (3,234) 1,801 (143) $209 $16,040
$1,230 --$1,230 14,042 1,038 $16,310 ----------1,785 (4,502) 2,574 (143) $(286) $16,024
2.8%
(172.0)%

0.4%
COMCAST CORPORATION (CMCSA/K), BUY | 2012YE TARGET $29

The Industry Behemoth Makes the Case for Vertical Integration But is it a Good Case?
We are initiating coverage of Comcast Corp. (CMCSA/CMCSK) shares with a Buy rating and a $29 target price for year-end 2012. Like many other companies in our coverage universe, Comcast is publicly traded, but still effectively controlled by a single stakeholder in this case the Roberts family (the long-time Chief Executive and Chairman is Brian Roberts). As the largest MSO in the U.S., Comcast become emblematic of the health &/or sickness of the broader Cable industry. As of the end of 2Q11, the company counted 22.5MM basic subscribers, with a footprint of 52.2MM homes passed (43% penetration). It is also the largest HSI provider in the country with 17.6MM subscribers at the end of 2Q11 (AT&T is second with 16.5MM subs). In recent years, Comcast veered in the opposite direction of its Cable peers, and instead of shedding its content assets, it went the way of vertical integration by acquiring a majority stake in NBC Universal (NBCU) a deal that took more than a year to gain regulatory approval, but which finally closed in January of 2011. Under the terms of the deal, Comcast acquired 51% of NBC Universal (NBCU) from General Electric (GE) by contributing its content assets into the JV and separately adding $6.2B in cash. As discussed later in this section, Comcast likely will buy-in the rest of NBCU, as it has the ability to use the content businesses FCF to buyout GEs stake over a seven year period in two installments. Importantly, investors should treat Comcasts FCF as two separate pools that dont intertwine Cable & NBCU, the latter of which will be used exclusively to buy-in the rest of the content assets. Comcast, like many other media companies, has multiple share classes. However, unlike the other Cable & Satellite companies with super voting shares, Comcasts multiple shares come with an additional twist. The company has three share classes. There are two publicly traded share classes, the K shares and the A shares (CMCSK vs. CMCSA), with the former carrying no voting rights whatsoever, and the latter carrying a dynamically changing voting stake. The third non-publicly traded share class, the B shares are controlled by the Roberts family. Although there are only 9.4MM such shares outstanding (just 0.3% of the entire float), each carries 15 votes, with a provision that the Class B shares will never amount to less than a 33% voting stake in the company. As a result, the precise number of votes that the A shares carry can vary depending on the
Ticker ISI Group Rating Price as of 10/21/2011 Target Price Consensus Average Target Upside/Downside to Target YTD Relative Return1 TTM Relative Return1 52 Week High 52 Week Low M arket Data M arket Cap ($M M ) Enterprise Value ($M M ) Net Debt ($M M ) Shares Outstanding (M M ) Short Interest (as % of Float) Average Daily Volume (3 M o., M M ) Dividend Yield
CM CSA/K Buy $24.33 $29.00 $30.72 19.2% 11.1% 20.0% $27.16 $19.19
66,620 119,953 53,333 2,090 2.0% 21.2 1.6%
Financial M etrics (ISI Group Estimates)

Consolidated Revenues ($MM)
2011PF 2012E 2013E

Consolidated EBITDA ($MM)
56,552 59,634 62,522
2011PF 2012E 2013E

Consolidated FCF ($MM, Reported)
18,600 19,765 21,002
2011E 2012E 2013E *Pro forma NBCU Stock Chart
7,170 7,678 8,282

public float at any given time (currently, each A share carries 0.1368 of a vote). Over the past six years, Comcasts voting shares have averaged a 3% premium (in nominal $ value) over the non-voting shares. The gap between the two share classes peaked at a startling 8.6% in mid-2009. Today, the gap has closed to a mere 1%, close to 1 standard deviation below the six year historical mean (see Exhibit 113). As such, we now favor the As since theyre basically at parity with the Ks. On our 2012 estimates, shares trade at 13.5x P/E and on a proportionate basis for NBCU trade at 6.0x EV/EBITDA, 12% fully taxed levered proportionate FCF yield, and 7% unlevered proportionate FCF yield. We estimate the 3-year (2011E-2014E) growth rates for proportionate EBITDA, EPS and proportionate FCF/share (levered) at 6%, 20% and 8%, respectively, when compounded annually.
Exhibit 113: CMCSA/CMCSK Historical Spread (2005-Present)
8.0% 6.0% Spread peaks at 8.6%
CMCSA/CMCSK Spreak
4.0% 2.0% 0.0% -2.0% -4.0% Spread (CMCSA/CMCSK) Shares currently trading close to parity Average
+1 SD
-1 SD
Source: Bloomberg, L.P., ISI Group analysis
The Bull Thesis Improving Cable Operations, Return of Capital, Improving NBCU not Baked in Better trends going forward. Comcasts Cable business is poised to show relatively better subscriber and margin trends given that by year-end 2011 the company will have completed its network transition to alldigital. This will first and foremost help reduce signal piracy, which should have a positive impact on subscriber additions and churn trends. Moreover, margins should see a bit of an uptick as truck-roll costs are reduced. Comcast offers DOCSIS 3.0 HSI across its entire footprint, improving broadband speeds and giving it another marketing feather in its cap (flagship service was recently increased to 15Mbps from 12Mbps at no incremental cost to subscribers). Finally, after many starts-and-stops, Comcasts Xfinity TV subscriber entitlement platform finally seems to be gaining critical mass. Business services presents additional upside. Although Comcast has been talking up SMB for a while now, the lions share of the opportunity probably exists in future periods. While the success in Business services has predominantly been in the small business segment so far, Metro Ethernet & Cellular Backhaul are expected to be key drivers of future growth. The NBCU transaction will basically pay for itself; besides, how much worse can things get? NBCU generates material and growing cash flows, which would allow Comcast to pay for GEs stake of the business within seven years just by using NBCUs free cash flows. As the multi-step acquisition is completed over

seven years, Comcasts appetite for major M&A activity at the NBCU level likely will be limited. Moreover, the timing of the transaction even if youre not a fan of vertical integration couldnt have been better. It has been widely noted that the transaction was structured at the bottom of the economic cycle. True, while the purchase EBITDA multiple was high, we think the company has set expectations low, and as the business cycle turns, this could prove to be an even more accretive transaction than initially believed. And in terms of performance, NBCU especially its Broadcast division has eroded so much, things really have nowhere to go but up. We do, however, think that local advertising remains weak. NBCU a hedge on content-distribution balance of power. Whether or not vertical integration is a favorable strategic direction, consider that in some of the more prominent split-offs of the content and distribution businesses, it has always been the content parent that let go of the distribution franchise. Comcast has been thoughtful not to highlight synergies from the NBCU vertical integration (an area of pushback during the Disney acquisition attempt). While merger conditions do put some limitations on how Comcast will be able to leverage an exclusive relationship with its NBCU subsidiary, we believe that there are numerous opportunities to rework the copyright distribution windows to maximize total revenues for the enterprise. Moreover, the ability to cross-promote a copyright in a coordinated fashion across the companys various distribution platforms online, Cable networks, Broadcast networks improve chances of success. Perhaps most important, the NBCU deal provides a hedge against the growing power of content (i.e. rising programming costs) as well as increasing competition from traditional (DBS and Telco) and non-traditional sources (like Over-the-Top video). An expectation of increasing return of capital as Cable and NBCU tap different liquidity pools. Comcast has been paying quarterly cash dividends since 1Q08 and in aggregate has paid about $3.5B in dividends to date. The company has also repurchased more than $9B of stock since 2007. While the NBCU FCF is sacrosanct until the GE redemption, the Cable units deleveraging balance sheet and growing FCF should continue to be used to fund return of capital to shareholders, according to the Bulls. With just over $2B in estimated share repurchases in 2011 and 2x Cable debt to trailing EBITDA, the company could theoretically buy back $6B in stock (an admittedly unlikely event) and still keep leverage constant. The Bear Thesis: Return of Capital Disappointment Vertical integration synergies still a show me story. As the Bears might argue, no prior attempts at vertical integration (examples include Time Warner-Time Warner Cable; News Corporation-DIRECTV) have driven excess returns for shareholders. We note, in all fairness, that in the aforementioned cases, the content arms spun-off the distribution arms; here, it is distribution that bought content. Is this the best use of capital? The opportunity cost on the use of capital for NBCU is the alternative of returning capital to equity owners, a relatively more accretive action to valuation given the lower relative valuation of Cable assets as compared with content assets. Moreover, the Bears could point out that Comcasts track record of efficiently deploying capital is suspect, especially when compared with peers. With about $30B of Cable debt and $15B of Cable EBITDA that math looks easy for substantial return of capital. Next February, Comcast will likely announce its return of capital plans for 2012. Both the Bulls and the Bears will be waiting in eager anticipation. What We Think: Reasonable Valuation, Improving Metrics & Vertical Integration Could Work at a Company of this Size We like the stock at current levels and think the reward/risk profile on valuation to be modestly favorable. We think the Cable segment, operationally, will see the benefits of its technological initiatives and NBCU will be in a protracted period of measured reinvestment in its content cycle.

The decision to purchase NBCU remains a controversial one; there are champions of both sides of the vertical integration argument. Regardless, Comcast likely bought NBCU at a bargain basement price, in part due to the weakness in business segments, especially its broadcast networks. (The economic environment didnt hurt either.) To the extent it can turn NBCU around under the leadership of industry veteran Steve Burke (who has an excellent track record on the Cable side), NBCU could present Comcast with upside. On a proportionate ownership basis, Comcast still very much remains a Cable company. Looking at the business holistically, the Cable division represents 80% of revenues and 90% of EBITDA on our 2011 estimates. NBCU definitely makes it a more complicated company to analyze. Even if we were to assume that the Cable assets represent ~80% of Comcasts value, NBCU brings with it four distinct operating divisions (Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks), making a possible case for a slight conglomerate discount to valuation. On return of capital, we think Comcast is unlikely to borrow to return capital. Moreover, we think the company is more inclined to increase the recurring dividend than increase share buybacks. So expect the return of capital to aggregate to approximately the recurring cable FCF level. We rate Comcast Buy with a $29 Price Target Analysis of the GE Redemption For a six month window after the 3.5-year anniversary of the original transaction closing, GE has the right to put 50% of its stake to NBCU. GE will have a second redemption right at the seven-year anniversary for the remaining ownership. The redemption value will be based on the fair market valuation of the enterprise. If cash on the NBCU balance sheet is not sufficient to pay the redemption amount, NBCU can lever up only to 2.75x EBITDA (on a gross debt basis) to finance that redemption. Assuming NBCUs minimum cash requirement is $250MM, our model suggests it will be able to fund the first redemption given they will be able to finance within the 2.75x debt-leverage limit. Under the agreement, Comcast is required to backstop any excess redemption amount up to $2.875B at the first redemption date, and up to an aggregate of $5.75B for both redemptions. In the unlikely event that even the backstop amount is not sufficient to defray the redemption amount, Comcast has the option to pay GE directly. However, the transactions have been structured in a way that the joint venture itself buys GEs stake with Comcast making only limited investments. After the first redemption, the joint venture will cancel the repurchased shares, effectively calculating GEs remaining stake at 32.5% (equal to 24.5% divided by 1 24.5%). Our model suggests GEs total redemption over the seven years will aggregate to about $21B.

Exhibit 114: Comcast-NBU Assets

Comcast
Cable/Distribution Homes Passed: 52M Subscribers Basic Video 23M Digital Video 20M High Speed Data 17.5M Voice 9M Wireless Broadband (Clearwire), 9% Cable Networks iN DEMAND Networks, 53.7% Pittsburgh Cable News, 30% NHL Network, 15.6% Current Media, 10% MLB Network, 8.3% Comcast Entertainment Television Comcast Hometown Television C2 CN100 Comcast Television Network Local Channels in CA, CO, CT, DE, ME, MD, MA, MI, NH, NJ, NM, PA, SC, VI, DC Films MGM, 18.8% Digital Media Comcast.net Plaxo Fancast Fancast Xfinity TV Comcast Spectacor Philadelphia Flyers -- NHL Philadelphia 76ers -- NBA Wells Fargo Center Global Spectrum Ovations Food Services Front Row Marketing Services Paciolan New Era Tickets Flyers Skate Zone Broadcast Broadcast Networks NBC Telemundo Owned-and-Operated Stations NBC New York (WNBC): DMA 1 Telemundo WNJU (New York): DMA 1 NBC Los Angeles (KNBC): DMA 2 Telemundo KVEA (Los Angeles): DMA 2 Independent KWHY (Los Angeles): DMA 2 NBC Chicago (WMAQ): DMA 3 Telemundo WSNS (Chicago): DMA 3 NBC Philadelphia (WCAU): DMA 4 NBC Dallas/Fort Worth (KXAS): DMA 5 Telemundo KXTX (Dallas/Ft Worth): DMA 5 NBC Bay Area (KNTV): DMA 6 Telemundo KSTS (San Francisco): DMA 6 Telemundo WNEU (Boston): DMA 7 NBC Washington (WRC): DMA 9 Telemundo KTMD (Houston): DMA 10 Telemundo KTAZ (Phoenix): DMA 12 Telemundo KDEN (Denver): DMA 16 NBC Miami (WTVJ): DMA 17 Telemundo WSCV (Miami): DMA 17 NBC San Diego (KNSD): DMA 28 NBC Connecticut (WVIT): DMA 30 Telemundo KVDA (San Antonio): DMA 37 Telemundo KBLR (Las Vegas): DMA 42 Telemundo KNSO (Fresno): DMA 55 Telemundo KHRR (Tucson): DMA 66 Telemundo WKAQ (Puerto Rico) TV Production NBC Entertainment NBC News NBC Universal Sports & Olympics
General Electric
51% 49%
The NBC Universal JV

Cable Networks Bravo Chiller CNBC CNBC World MSNBC mun2 Oxygen Media Sleuth Syfy Universal HD USA Network A&E, 25% The History Channel, 25% The Weather Channel, 25% Biography, 25% Lifetime Television, 25% ShopNBC CNBC Europe CNBC Asia-Pacific Syfy Universal Diva Universal Studio Universal Universal Channel 13th Street Universal Movies 24 Hallmark Channel KidsCo Comcast Contribution E! Entertainment Television G4 Golf Channel The Style Network VERSUS The Comcast Network New England Cable News Exercise TV, 65% PBS KIDS Sprout, 40% TV One, 33.5% FEARnet, 33.3% Retirement Living Television, 3.4% Comcast SportsNet California Comcast SportsNet New England Comcast SportsNet Northwest Comcast SportsNet Philadelphia Comcast SportsNet Washington Comcast/Charter Sports Southeast, 81% Comcast SportsNet Bay Area, 67% MountainWest Sports Network (The Mtn), 50% Comcast SportsNet Chicago, 30% SportsNet New York, 8.2% Films Universal Pictures Focus Features Universal Studios Home Entertainment Digital Media Hulu.com, 32% iVillage NBC.com CNBC.com Comcast Contribution Fandango Daily Candy Parks & Resorts Universal Studios Hollywood Universal Studios Islands of Adventure Universal Studios Japan JV Universal Studios Singapore -- Licensed Universal Studios Dubai -- Licensed

Exhibit 115: Comcast Subscriber Net Additions
Exhibit 116: Comcast Subscribers and Total ARPU
Exhibit 117: Comcast Consolidated Revenues and Profitability
Exhibit 118: Comcast Cable Capital Expenditures
*Pro forma for NBCU Source: ISI Group estimates, company documents
Exhibit 119: Comcast Free Cash Flow, Debt Maturities, and Return of Capital
Exhibit 120: Comcast Cable Revenue Mix (2011E)

Exhibit 121: Comcast Estimates vs. Consensus (in millions except per share values)
Annual 2012E $59,634 $60,756 -1.8% $19,765 $19,604 0.8% 33.1% 32.3% 0.9% $11,767 $12,122 -2.9% $1.72 $1.92 -10.2% $5,617 $5,164 8.8% Quarterly 3Q11E 4Q11E $14,258 $14,232 0.2% $4,742 $4,586 3.4% 33.3% 32.2% 1.0% $2,829 $2,668 6.1% $0.37 $0.39 -6.4% $1,415 $1,349 4.9% $14,672 $14,944 -1.8% $4,891 $4,809 1.7% 33.3% 32.2% 1.2% $2,977 $2,903 2.5% $0.41 $0.45 -7.2% $1,591 $1,416 12.3%
2011PF ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. CAPEX Consensus Delta $56,552 $56,254 0.5% $18,600 $18,317 1.5% 32.9% 32.6% 0.3% $10,968 $10,830 1.3% $1.45 $1.59 -8.6% $5,383 $5,185 3.8%
2013E $62,522 $62,383 0.2% $21,002 $20,576 2.1% 33.6% 33.0% 0.6% $13,174 $13,217 -0.3% $2.02 $2.22 -8.6% $5,847 $5,193 12.6%
*Pro forma for NBCU Source: ISI Group estimates, Bloomberg, L.P., company documents

Exhibit 122: Comcast Discounted Cash Flow Valuation (in millions)

NBCUniversal Valuation DCF Valuation for NBC Universal JV PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Less: Debt Add: Value of Non-Controlling Stakes Equity Value of NBC Universal Less: Value of GE's Stake Value of Comcast's Equity in NBC Universal FV 2011E FV 2012E $13,726 32,439 $46,166 1,489 (10,329) 1,826 $39,152 (19,184) $19,967 $12,591 35,008 $47,599 4,338 (10,329) 1,993 $43,602 (21,365) $22,237 NBCUniversal Valuation Assumptions Risk Free Rate Equity Risk Premium Stock Beta Cost of Equity Marginal Cost of Debt Nominal Tax Rate Post-Tax Cost of Debt Debt/Total Capitalization Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g) Cable Valuation Assumptions Risk Free Rate Equity Risk Premium Stock Beta Cost of Equity Marginal Cost of Debt Nominal Tax Rate Post-Tax Cost of Debt Debt/Total Capitalization Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
3.2% 6.0% 1.00 9.2% 5.0% 40.0% 3.0% 20.0% 7.9% 0.5% 13.5x
Cable Communications & Consolidated Valuation DCF Valuation for Core Cable Business PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Add: Option Net Proceeds Less: Debt Equity Value of Core Cable Business Add: NBC Universal Equity Value Add: Value of Non-Controlling Stakes Equity Value Less: 5% Conglomerate Discount Fair Equity Value Diluted Shares Fair Value per Share Wt. Average Share Price Potential Upside
FV 2011E FV 2012E $27,914 56,700 $84,614 686 645 (28,406) $57,539 19,967 2,338 $79,844 (3,992) $75,852 2,784.3 $27 24.23 12.4% $23,905 60,931 $84,836 1,000 645 (28,512) $57,970 22,237 2,551 $82,758 (4,138) $78,620 2,672.8 $29 24.23 21.4%
3.2% 6.0% 1.00 9.2% 4.0% 40.0% 2.4% 25.0% 7.5% --13.4x

Exhibit 123: Comcast Valuation Multiples

2011E Per Share Valuation Multiples Per Share Metrics Diluted EPS Dividend per Share Cable Fully Taxed FCF per Share Proportionate Fully Taxed FCF per Share Per Share Multiples Price/Earnings (P/E) Ratio Dividend Yield Cable Fully Taxed FCF Yield Cable Unlevered Fully Taxed FCF Yield Proportionate Fully Taxed FCF Yield Proportionate Unlevered Fully Taxed FCF Yield Core Cable Enterprise Value Multiples (In Millions) Enterprise Value Fully Diluted Shares Wt. Average Share Price Market Cap Add: Cable Debt Less: Cable Cash & Equivalents Less: Option Proceeds Enterprise Value Less: Comcast's Equity Stake in NBCU Less: Value of Unconsolidated Assets Cable Enterprise Value Cable EBITDA, incl Proportionate Corp Overhead Cable EV/EBITDA Ending Basic Subscribers ('000s) Value per Basic Subscriber Ending PSUs ('000s) Value per PSU Proportionate Enterprise Value Multiples (In Millions) Proportionate EBITDA Proportionate EV/EBITDA Capital Returned to Shareholders Dividends Share Repurchases Cash Returned to Shareholders Free Cash Flow Shareholders' Returns as % of FCF Consolidated Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Consolidated Leverage & Coverage Ratios Net Debt/EBITDA EBITDA/Interest Expense (EBITDA-Capex)/Interest Expense 2012E 2013E 2014E 2015E
$1.48 0.45 $1.60 $2.06 15.8x 1.9% 8.0% 6.9% 11.3% 6.4%
$1.72 0.53 $1.73 $2.28 13.5x 2.2% 9.3% 7.6% 12.0% 7.0%
$2.02 0.61 $1.78 $2.48 11.4x 2.5% 10.7% 8.1% 12.5% 7.5%
$2.54 0.68 $1.83 $2.93 9.1x 2.8% 12.5% 8.7% 14.5% 8.2%
$2.76 0.75 $1.91 $3.11 8.3x 3.1% 14.9% 9.6% 15.2% 8.8%
2,784 24.232511 $67,470 28,406 (686) (645) $94,545 (9,631) (2,338) $82,577 $15,027 5.5x 22,160 $3,726 49,703 $1,661 $16,787 6.6x $1,185 2,141 $3,326 6,963 47.8% 4.8% 7.4% 6.2% 9.0% 2.0x 7.5x 5.1x
2,673 $24.23 $64,759 28,512 (1,000) (645) $91,625 (12,385) (2,551) $76,689 $15,859 4.8x 21,614 $3,548 50,908 $1,506 $17,785 6.0x $1,393 3,000 $4,393 7,478 58.7% 4.5% 6.8% 6.2% 9.6% 1.8x 8.0x 5.5x
2,571 $24.22 $62,274 28,977 (1,000) (645) $89,606 (16,615) (2,785) $70,206 $16,439 4.3x 21,150 $3,319 51,845 $1,354 $18,696 5.5x $1,540 3,000 $4,540 8,102 56.0% 4.9% 7.6% 6.7% 10.7% 1.5x 8.9x 6.2x
2,477 $24.22 $59,998 29,346 (1,000) (645) $87,699 (20,781) (3,040) $63,879 $16,907 3.8x 20,756 $3,078 52,470 $1,217 $20,125 5.1x $1,668 3,000 $4,668 8,587 54.4% 5.3% 8.3% 7.3% 13.6% 1.7x 10.1x 7.0x
2,391 $24.22 $57,913 29,676 (1,000) (645) $85,944 (24,100) (3,318) $58,526 $17,203 3.4x 20,421 $2,866 52,805 $1,108 $20,466 4.8x $1,770 3,000 $4,770 8,808 54.2% 5.6% 8.8% 7.6% 14.9% 1.4x 10.2x 7.1x

Exhibit 124: Comcast Cable Subscriber Statistics and Financials

2010PF Subscribers ('000s) Homes & Businesses Passed Subscribers Basic Video High-Speed Internet (HSI) Digital Voice Primary Service Units (PSUs) Average PSUs Advanced Services Subscribers Advances Services as % of Basic Video Subs Net Additions Basic Video High-Speed Internet (HSI) Digital Voice Primary Service Units (PSUs) YoY Growth Total ARPU per Basic Subscriber YoY Growth Financials (In Millions) Revenues Video High-Speed Internet (HSI) Voice Advertising Business Services Other Total Revenues YoY Growth Operating Costs & Expenses Video Programming Technical Labor Customer Service Sales & Marketing Other Total Operating Costs & Expenses Operating Cash Flow (OCF) OCF Margins YoY Growth 51,925 22,802 16,988 8,610 48,400 47,807 10,120 44.4% (757) 1,058 990 1,291 (15.5)% $127.01 7.6% 2011E 52,597 22,160 18,075 9,468 49,703 49,143 10,679 48.2% (642) 1,087 858 1,303 0.9% $138.01 8.7% 2012E 53,277 21,614 19,053 10,241 50,908 50,306 11,065 51.2% (546) 978 772 1,205 (7.5)% $149.01 8.0% 2013E 53,967 21,150 19,836 10,859 51,845 51,377 11,494 54.3% (464) 783 618 937 (22.3)% $158.63 6.5% 2014E 54,665 20,756 20,423 11,291 52,470 52,158 11,966 57.6% (394) 587 433 625 (33.3)% $167.24 5.4% 2015E '10PF-'15E CAGR 55,373 20,421 20,834 11,551 52,805 52,638 12,482 61.1% (335) 411 260 335 (46.4)% $174.47 4.3% 6.6% 1.3% (2.2)% 4.2% 6.1% 1.8% 1.9% 4.3%
$19,364 7,958 3,300 2,020 1,267 1,454 $35,363 4.4% $7,438 2,263 1,833 2,161 7,366 $21,061 $14,302 40.4% 4.5%
$19,621 8,748 3,547 2,028 1,806 1,538 $37,288 5.4% $7,818 2,339 1,858 2,445 7,555 $22,016 $15,272 41.0% 6.8%
$19,790 9,459 3,755 2,169 2,348 1,617 $39,138 5.0% $8,169 2,407 1,921 2,717 7,810 $23,023 $16,115 41.2% 5.5%
$19,986 10,081 3,923 2,204 2,818 1,693 $40,704 4.0% $8,518 2,469 1,979 2,976 8,056 $23,999 $16,705 41.0% 3.7%
$20,181 10,528 4,028 2,310 3,240 1,764 $42,051 3.3% $8,854 2,517 2,026 3,209 8,260 $24,865 $17,186 40.9% 2.9%
$20,372 10,836 4,076 2,361 3,629 1,830 $43,105 2.5% $9,174 2,549 2,059 3,408 8,419 $25,610 $17,494 40.6% 1.8%
1.0% 6.4% 4.3% 3.2% 23.4% 4.7% 4.0%
4.1%

4.3% 2.4% 2.4% 9.5% 2.7% 4.0%
Exhibit 125: NBC Universal Operating Segments (in millions)

2010PF Revenues Cable Networks Advertising Distribution Other Total Cable Networks Broadcast Television Advertising Content Licensing Other Total Broadcast Television Filmed Entertainment Theatrical Content Licensing Home Entertainment Other Total Filmed Entertainment Theme Parks Headquarters, Other & Eliminations Total NBCUniversal YoY Growth Operating Cash Flow (OCF) Cable Networks Broadcast Television Filmed Entertainment Theme Parks Headquarters, Other & Eliminations Total NBCUniversal YoY Growth OCF Margins Cable Networks Broadcast Television Filmed Entertainment Theme Parks Total NBCUniversal 2011E 2012E 2013E 2014E 2015E '10PF-'15E CAGR
$3,084 3,965 630 $7,679 $4,813 1,231 844 $6,888 $900 1,336 1,732 608 $4,576 521 (349) $19,315 --3,166 118 230 258 (480) $3,292 --41.2% 1.7% 5.0% 49.5% 17.0%
$3,470 4,398 864 $8,732 $3,924 1,436 460 $5,820 $1,203 1,331 1,403 532 $4,469 1,281 (361) $19,941 3.2% 3,398 334 60 575 (667) $3,700 12.4% 38.9% 5.7% 1.3% 44.9% 18.6%
$3,900 4,758 741 $9,399 $4,827 862 460 $6,148 $1,239 1,371 1,192 506 $4,308 1,733 (388) $21,200 6.3% $3,713 (56) 215 693 (525) $4,040 9.2% 39.5% (0.9)% 5.0% 40.0% 19.1%
$4,255 5,044 778 $10,077 $5,550 889 483 $6,922 $1,276 1,413 1,013 480 $4,183 1,785 (416) $22,550 6.4% $4,081 279 209 714 (577) $4,706 16.5% 40.5% 4.0% 5.0% 40.0% 20.9%
$4,579 5,336 817 $10,732 $5,523 918 505 $6,946 $1,315 1,455 912 456 $4,138 1,838 (443) $23,210 2.9% $4,400 264 207 735 (622) $4,984 5.9% 41.0% 3.8% 5.0% 40.0% 21.5%
$4,762 5,502 833 $11,096 $5,865 945 515 $7,326 $1,354 1,499 821 434 $4,107 1,893 (459) $23,964 3.2% $4,605 147 205 757 (651) $5,063 1.6% 41.5% 2.0% 5.0% 40.0% 21.1%
9.1% 6.8% 5.7% 7.6% 4.0% (5.1)% (9.4)% 1.2% 8.5% 2.3% (13.9)% (6.5)% (2.1)% 29.4% 4.4%
7.8% 4.4% (2.2)% 24.0% 9.0%

Exhibit 126: Comcast Consolidated Income Statement (in millions except per share values)
2010A $37,937 $14,596 5,539 1,077 $7,980 (2,156) 288 (141) 133 $6,104 (2,436) $3,668 (33) $3,635 $1.29 1.29 2,808 2,817 $0.38 6.1% 25.7% 10.6% (0.1)% 45.4% 21.0% 40.0% 9.6% 2011E $55,391 $18,499 6,044 1,487 $10,968 (2,474) 270 52 (130) $8,686 (3,431) $5,255 (1,137) $4,117 $1.50 1.48 2,745 2,776 $0.45 46.0% 7.9% 37.4% 13.3% 33.6% 19.8% 39.5% 7.4% 2012E $59,634 $19,765 6,571 1,428 $11,767 (2,476) 250 63 --$9,604 (3,841) $5,762 (1,180) $4,582 $1.74 1.72 2,634 2,665 $0.53 7.7% 6.3% 7.3% 11.3% 33.1% 19.7% 40.0% 7.7% 2013E $62,522 $21,002 6,585 1,244 $13,174 (2,360) 250 66 --$11,129 (4,452) $6,678 (1,490) $5,188 $2.05 2.02 2,532 2,563 $0.61 4.8% 6.3% 12.0% 13.2% 33.6% 21.1% 40.0% 8.3% 2014E $64,499 $21,742 6,534 1,073 $14,136 (2,163) 250 68 --$12,291 (4,916) $7,375 (1,108) $6,266 $2.57 2.54 2,438 2,469 $0.68 3.2% 3.5% 7.3% 20.8% 33.7% 21.9% 40.0% 9.7% 2015E $66,277 $22,109 6,410 1,053 $14,646 (2,159) 250 70 --$12,807 (5,123) $7,684 (1,116) $6,568 $2.79 2.76 2,353 2,383 $0.75 2.8% 1.7% 3.6% 4.8% 34.2% 15.0% 40.0% 9.9% 14.8% 10A-'15E CAGR 11.8% 8.7% 3.0% (0.5)% 12.9%
Revenues Operating Cash Flow (OCF) Depreciation Amortization Operating Income (EBIT) Interest Expense, net Investment Income Equity in Net Income of Affiliates Other Income/Expenses Pre-Tax Income Provision for income taxes Net Income Less: Net income attributable to noncontrolling interest Net Income attributable to Comcast Earnings per Share (EPS) Basic EPS Diluted EPS Average common shares outstanding Basic Diluted Dividends per Share YoY Growth Revenues Total Consolidated OCF Operating Income (EBIT) Net Income attributable to Comcast Margins OCF Margins EBIT Margins Tax Rate Net Income attributable to Comcast
16.0% 15.9% 12.6% 16.6% 16.4%

Exhibit 127: Comcast Consolidated Cash Flow Statement (in millions)

2010A Cash Flow From Operating Activities Net Income Adjustments for noncash and nonoperating items Depreciation & Amortization Amortization of film & television costs Sharebased compensation Non-cash Interest Expense Equity in Net Income of Affiliates Gains/Losses on Investments and Other Deferred Income Taxes Changes in operating assets and liabilities Receivables Change in film and television costs Accounts payable and other liabilities Change in other operating assets and liabilities Net Cash Provided by Operating Activities Cash Flow from Investing Activities Capital Expenditures Cash paid for Software and Intangibles Acquisitions, net of Cash Purchases/Sale of Investments Other Net Cash Provided by Investing Activities Cash Flow from Financing Activities Debt Net Borrowings/(Repayments) Stock Repurchases Dividends paid Other Net Cash Provided by Financing Activities Beginning Cash Net Increase (Decrease) in Cash Ending Cash Free Cash Flow Net Cash Provided by Operating Activities Capital Expenditures Cash paid for Software and Intangibles Adjustments for Payment of Tax on Nonoperating Items Free Cash Flow, incl Stimulus Packages Economic Stimulus Packages Reported Free Cash Flow Less: Impact of Other Deferred Taxes Fully Taxed Free Cash Flow Add: Interest expense, net Less: Adjusted Taxes Unlevered Fully Taxed Free Cash Flow Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance Cable TTM EBITDA Cable Gross Leverage to TTM EBITDA $3,668 6,616 25 300 141 141 (254) 549 (131) (38) 37 125 $11,179 2011E $5,255 7,531 2,749 395 155 (52) 63 845 254 (3,278) 101 11 $14,030 2012E $5,762 7,998 2,886 433 156 (63) --(27) (228) (3,360) 97 (37) $13,618 $(5,617) (550) ------$(6,167) $106 (3,000) (1,393) --$(4,287) $2,175 3,163 $5,338 $13,618 (5,617) (550) --$7,451 227 $7,678 (200) $7,478 2,476 (990) $8,964 $3,000 $26.91 111.5 --$16,115 1.9x 2013E $6,678 7,828 3,031 502 158 (66) --(494) (213) (3,444) 53 (26) $14,006 2014E $7,375 7,606 3,182 554 156 (68) --(226) (146) (3,410) (6) (66) $14,952 2015E $7,684 7,463 3,341 578 153 (70) --(116) (131) (3,375) 11 (89) $15,448 $(6,206) (550) ------$(6,756) $(702) (3,000) (1,770) --$(5,472) $4,103 3,219 $7,323 $15,448 (6,206) (550) --$8,692 262 $8,954 (146) $8,808 2,159 (864) $10,103 $3,000 $34.99 85.7 --$17,494 1.8x 10A-'15E CAGR 15.9%
6.7% 4.6%
$(4,961) $(5,383) (536) (583) (183) (6,685) (161) 70 130 (23) $(5,711) $(12,604) $2,267 (1,200) (1,064) (158) $(155) $671 5,313 $5,984 $11,179 (4,961) (536) 7 5,689 (301) $5,388 (248) $5,140 2,156 (861) $6,435 $1,200 $17.16 69.9 $2,141 $14,302 2.2x $(1,897) (2,141) (1,185) (12) $(5,235) $5,984 (3,809) $2,175 $14,030 (5,383) (583) (256) 7,808 (638) $7,170 (207) $6,963 2,474 (972) $8,465 $2,141 $23.36 91.6 --$15,272 1.9x
$(5,847) $(6,040) (550) (550) --(7,930) --------$(6,397) $(14,520) $465 (3,000) (1,540) --$(4,074) $5,338 3,535 $8,873 $14,006 (5,847) (550) --$7,609 674 $8,282 (180) $8,102 2,360 (944) $9,519 $3,000 $29.37 102.1 --$16,705 1.8x $(534) (3,000) (1,668) --$(5,201) $8,873 (4,770) $4,103 $14,952 (6,040) (550) --$8,361 388 $8,749 (162) $8,587 2,163 (865) $9,885 $3,000 $32.06 93.6 --$17,186 1.8x
3.4%
104.0%
4.1%
10.7% 11.4%
9.4%

Exhibit 128: Comcast Consolidated Balance Sheet (in millions)

2010A ASSETS Current Assets Cash & Equivalents Investments Receivables Programming Rights Other Current Assets Total Current Assets Film and television costs Investments Property, Plant & Equipment, net Franchise Rights Goodwill Other Intangible assets Other Non-current Assets Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts Payable Accrued participations and residuals Accrued Expenses and Other Current Portion of Long Term Debt Total Current Liabilities Long-Term Debt, Net of Current Portion Deferred Income Taxes Other Non-current Liabilities Redeemable non-controlling interests Total Liabilities Equity Class A Common Class A Special Class B Common Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated other comprehensive loss, net Total Comcast Shareholders' Equity Noncontrolling interests Total equity Total liabilities and equity 2011E 2012E 2013E 2014E 2015E 10A-'15E CAGR
$5,984 $2,175 $5,338 $8,873 $4,103 $7,323 81 64 64 64 64 64 1,855 4,179 4,406 4,620 4,766 4,897 122 955 955 955 955 955 844 1,178 1,178 1,178 1,178 1,178 $8,886 $8,551 $11,942 $15,690 $11,066 $14,417 460 5,256 5,730 6,143 6,370 6,404 6,670 10,032 10,032 10,032 10,032 10,032 23,515 27,116 26,163 25,425 24,932 24,728 59,442 59,442 59,442 59,442 59,442 59,442 14,958 27,569 27,569 27,569 27,569 27,569 3,431 16,932 16,055 15,361 14,838 14,336 1,172 2,126 2,126 2,126 2,126 2,126 $118,534 $157,024 $159,058 $161,788 $156,375 $159,053
4.1%
10.2%
6.1%
$3,291 --3,143 1,800 $8,234 29,615 28,246 7,862 143 $74,100 $24 8 --39,424 13,395 (8,417) (80) $44,354 80 $44,434
$5,093 1,235 5,269 1,350 $12,948 38,735 29,629 11,985 15,509 $108,806 $25 7 --40,909 15,033 (8,608) (105) $47,260 958 $48,219
$5,190 1,235 5,388 1,350 $13,163 38,841 29,602 11,985 15,509 $109,099 $25 7 --39,949 19,552 (11,608) (105) $47,820 2,138 $49,958
$5,243 1,235 5,519 1,350 $13,347 39,306 29,108 11,985 15,509 $109,255 $25 7 --38,912 24,674 (14,608) (105) $48,905 3,628 $52,533
$5,237 1,235 5,608 1,350 $13,430 38,772 28,882 11,985 15,509 $108,579 $25 7 --29,868 30,872 (17,608) (105) $43,060 4,736 $47,796
$5,248 1,235 5,672 1,350 $13,505 38,070 28,766 11,985 15,509 $107,835 $25 7 --28,676 37,370 (20,608) (105) $45,365 5,853 $51,218
10.4%
7.8%
2.9% 6.1%
$118,534 $157,024 $159,058 $161,788 $156,375 $159,053

DIRECTV (DTV), BUY | 2012YE TARGET $61

Best in Class Growth, Best in Class Capital Returns Combined With Some Latin Spice
We are initiating coverage of DIRECTV (DTV) with a Buy rating and a YE 2012 $61 price target. It is our top pick in the group. Over the past five years, DIRECTV has arguably been the single strongest executor in the Pay-TV sector, growing its core U.S. subscriber base from 15.5MM subscribers at the end of 2Q06 to 19.4MM at the end of 2Q11 (25% growth). This has come at a time when the Multichannel video market in the U.S. has seen growth slow or even contract among many other providers. DIRECTV is the second largest traditional Pay-TV provider in the U.S after Comcast. However, on a global basis, DIRECTVs subscriber base of more than 30MM cannot be touched, thanks to the continued booming business in its Latin America (DLA) division, which accounts for approximately ~11 million subscribers (approximately 7MM of which are consolidated by the company). DIRECTVS gravity-defying growth in Latin America & the incredible brand equity that it has built in the region make us even more bullish on the stock. DIRECTV has the highest ROIC, ROA, ROE and even RONTA (return on net tangible assets that excludes goodwill from prior acquisitions) out of any of the Cable & Satellite companies that we cover. On our 2012 estimates, DTV shares trade at 5.1x EBITDA and 11x EPS and support an 11% levered FCF yield and 8% unlevered FCF yield. We estimate the 3-year (2011E-2014E) growth rates for EBITDA, EPS and FCF (levered) at 8%, 27% and 17%, respectively, when compounded annually. The Bull Thesis: The fastest grower with shareholder friendly stock buy-back action Early HD advantage was differentiator; Now many smaller innovations. We believe that one of the reasons that DIRECTV has been the top performing Cable & Satellite stock over the past few years has been its continued focus on the product, whether it be exclusive content arrangements (i.e. NFL Sunday Ticket) or new technologies (i.e. the most robust HD channel lineup). We believe that for DTV to continue its outperformance, it be imperative for the company to continue its culture of innovation & industry-leading customer care, & to continue to put forth a brand image second-tonone (at least to the extent that Multichannel video companies have brands that are viewed favorably).
Ticker ISI Group Rating Price as of 10/21/2011 Target Price Consensus Average Target Upside/Downside to Target YTD Relative Return1 TTM Relative Return1 52 Week High 52 Week Low M arket Data M arket Cap ($M M ) Enterprise Value ($M M ) Net Debt ($M M ) Shares Outstanding (M M ) Short Interest (as % of Float) Average Daily Volume (3 M o., M M ) Dividend Yield Financial M etrics (ISI Group Estimates)
DTV Buy $46.42 $61.00 $54.34 31.4% 16.9% 0.8% $53.40 $39.12
34,271 45,429 11,158 738 2.4% 7.3 nm
2011E 2012E 2013E

27,036 29,178 31,078
2011E 2012E 2013E

7,084 7,768 8,366
2011E 2012E 2013E
2,278 2,850 3,041
Stock Chart

We see many incremental efforts disclosed by the company that could, in aggregate, help maintain DTVs leading position as the premium service provider. In fact, in 4Q11 the company will be deploying five new initiatives: 1) an Internet-connected Home Media Center, 2) HD user-interface/programming guide, 3) streaming content (pay-per-view and premium) inside the home for which it has already secured rights to movies, 4) streaming content outside the home and the 5) the Nomad product that allows DVR customers with an Internet-connected box to get a digital copy of a copyright on a another device. While no single advancement seems like a killer-app to us, we believe that the sheer volume of enhancements is representative of DIRECTVS continued commitment to improving its service. On the customer service side, DIRECTV continues to impress. Every year JD Power & Associates releases its rankings of Pay-TV providers on a regional basis. And every year DIRECTV scores higher than its peer group in all regions, once again improving in 2011 despite intensifying competition (see Exhibit 129).
Exhibit 129: DIRECTV JD Power Rankings vs. Other Pay-TV Providers (2008-2011)
677 675 679 639
2010 Average ex. DTV 2011 700
657
680 660
643
JD Power Ranking
620 600 580 560 540 520 500 DTV 2008 2009
621
640
634
Source: JD Power; ISI Group analysis Note: Possible Scale is 0-1000
Demographically, as a national provider, DIRECTVs customers are spread out fairly broadly among almost all 210 Designated Market Areas (DMAs). In its top-10 markets, the company counts slightly more than a quarter of its subscriber base (5.3MM as of 2Q11). It has been able to retain share on a weighted basis in these markets over the past 10 quarters (from 3Q09 2Q11), losing just 6bps of market share, despite a much more robust Telco offering (see Exhibit 130).

Exhibit 130: DIRECTV Top-Ten Markets and Share Gain (Loss) 3Q09 2Q11
Subs 2Q11 3Q09 (000s) (000s) 1,234.9 1,177.4 663.3 656.9 563.5 553.6 505.5 503.6 460.7 474.5 448.4 431.1 418.3 386.2 361.6 341.4 349.2 320.5 324.8 308.2 % Market Share 2Q11 25% 10% 21% 23% 24% 20% 20% 31% 20% 42% % Market Share 3Q09 25% 10% 20% 24% 23% 19% 19% 27% 21% 47% Total Market Total Market Size (2Q11) Size (3Q09) (000s) (000s) 4,931.2 4,624.2 6,885.2 6,905.7 2,653.2 2,748.8 2,224.2 2,102.7 1,948.0 2,029.1 2,270.3 2,250.9 2,143.0 1,983.2 1,159.7 1,272.1 1,725.6 1,512.7 1,318.9 1,343.8
DIRECTV Market Los Angeles, CA New York, NY Chicago, IL Dallas-Ft. Worth, TX Atlanta, GA San Francisco-Oakland-San Jose, CA Washington, DC Miami-Ft. Lauderdale, FL Houston, TX Minneapolis-St. Paul, MN
Delta (000s) 57.5 6.4 9.8 1.9 (13.8) 17.3 32.1 20.2 28.7 16.6
Market Share Delta (42)bp 12 bp 110 bp (122)bp 27 bp 60 bp 5 bp 434 bp (95)bp (466)bp
New NFL Sunday-Ticket offer driving market share gains. Content remains a key in enhancing the DIRECTV brand. One way the company achieves such differentiation is through its coveted NFL Sunday Ticket. From an economic perspective, although DIRECTV has never come out much better than break even from selling the $300 Sunday Ticket to subscribers, the marketing power that it has given the brand has been immeasurable. This year, DIRECTV decided to leverage the Sunday Ticket to the max, and give the package away for free (for one year) to new customers that take the Total Choice Plus or higher tier and sign a twoyear contract. Though this might sound like financial insanity, its really a case of taking money out of one pocket and putting it into the other; in prior years, when customers paid $250-300 for the Sunday Ticket, they would get 5 months of free service. This year with the free NFL Sunday Ticket DIRECTV has done away with the former promotion. We believe that the relative subscriber economics of the two promotions are similar with respect to SAC and ARPU; the potentially differing impact would be on gross additions, longer-term churn and retention spending. Historically, about 25% of DTVs 1MM gross subscriber additions took the NFL promotion; given the mainstream aspect of the current offer, it is feasible that more than 80% of the gross subscriber additions will take the free offer, driving net additions in the short term. The key question is what might happen in the second year of the contract when these same customers will be forced to pay or lose the NFL service. Retention spending could increase as existing subscribers demand the same offer if they agree to sign up for a new two year agreement. Those caveats aside, we think the short term impact of the new offer will be positive and expect subscriber net additions in 3Q 2011 to be over 200k. What is striking is that it is the first time that the company has materially changed the NFL offer, making it a mass market proposition (hopefully maximizing revenues) even though its annual payments are fixed to the NFL. A leveraged equity shrink model. DIRECTV is using a more targeted approach to subscriber acquisition costs (SAC) and retention spending to surgically add and retain only high quality customers, even if it means lower gross additions and marginally higher churn in a given period. This strategy can be appreciated by looking at DIRECTVs subscriber economics: the investment payback period (the number of months of preSAC cash flows per sub it takes to recoup cash SAC) is estimated at about 21 months while the lifetime of an average subscriber is about 64 months (subscriber lifetime is simply the reciprocal of the monthly churn rate). DIRECTV U.S. has been generating between $2.2-2.5B in FCF per year since 1999. According to company disclosures, they are targeting a leverage ratio of 2.5x on DIRECTV U.S. trailing twelve months EBITDA by 2011 year-end to aggressively return cash to shareholders via a share repurchase. Beginning in 2012, the company could conceivably add $5B of borrowing capacity thanks to its DLA assets. As such, similar to 2011 we think DIRECTV can undertake a $5-6B buyback in 2012.

DLA is the growth engine that keeps on giving & also diversifies the asset base. With low Pay-TV penetration, a rapidly growing middle-class, & a younger demographic, Latin America holds significant growth potential. In Brazil, Pay-TV penetration was 18% by the end of 2Q11, with estimated DLA market share at 29%. In the Pan Americana markets, Pay-TV penetration was 38% at 2Q11, with DLAs share estimated at 20%. DIRECTV Latin America has a distinct technological advantage over competitors as it leverages DIRECTV U.S.s experience, & scale economics in programming, set-top-boxes and advanced services (HD, DVR and interactive). DLA has also been aggressive in tailoring pre-paid and post-paid packages to meet diverse customer needs (no two markets are exactly the same), and has even partnered with Telco providers in Colombia and Argentina to offer bundled packages. Given the lack of a uniform broadband service and pokey broadband speeds, the company is testing wireless broadband technologies (using LTE technology) in Argentina and Brazil and could participate in spectrum auctions in the region. While some might view a broadband build as a capital allocation risk, we believe that should DIRECTV choose to enter the wireless broadband market it will do so only if the ROIs are very high. Also, given its brand recognition, we believe DLA could very well start a Netflix type over-the-top video service.
Exhibit 131: DIRECTV Latin America Subscribers and Pay-TV Market
Country Ownership% Revenue ($M) 2011E 93% 100% 100% 100% 100% 100% 41% $3,248 $1,807 Subscribers 2Q11E % YoY TV Households 3,100 3,607 1,228 1,162 447 770 6,707 3,586 48% 15% 59,072 48,599 11,048 7,128 10,350 20,072 107,670 26,679 Pay-TV Market (000s) Pay-TV Pay-TV Households Penetration 10,598 18% 18,467 38% 6,734 61% 2,529 35% 3,539 34% 5,665 28% 29,066 27% 11,369 43% DIRECTV Market Share 29% 20% 18% 46% 13% 14% 23% 32% Real GDP growth 2011E 3.7% 7.5% 3.5% 5.0%
Brazil PanAmericana Argentina Venezuela Colombia Other Consolidated Mexico
$5,055 $1,004
28% 46%
4.0%
Source: ISI Group estimates, SNL Kagan, Bloomberg, L.P., company documents
We are projecting 14% CAGR in subscribers over the 2010-2015 period and project 18% revenue and 19% EBITDA CAGR over the same period, as we dont forecast any real margin improvement from current levels during this rapid growth phase. Brazil which will represent about 65% of DLA revenues in 2011 is expected to grow faster, have higher ARPU but lower EBITDA margins than Pan Americana. Capital expenditures, which are predominantly comprised of STB costs, are closely tied to subscriber gross additions and exclude the capitalized leases that DLA has for procuring satellite transponder capacity which we estimate to vary between $100-150MM annually. 41%-owned Innova/Sky Mexico, which is accounted for on an equity- method basis, has 4MM subscribers (2011E) and should grow EBITDA 8% when compounded annually over the 2010A-2015E period. The Bear Thesis: One Trick Pony and the Terminal Value (or lack thereof) The bear thesis on DIRECTV and the DBS industry in general is an old and familiar tale: that satellite is a one-trick pony and will struggle mightily when competing with well capitalized, multi-faceted Cable and Telco providers that can cross promote (ahem, subsidize) their various services. These Bears have also long argued that the terrestrial providers can also provide more robust Video-on-demand (VOD) offerings, given the two-way capability of the network. While subscriber economics provide a high rate of return on the investment, marginal returns have weakened as competition has increased. Longer-term, there is the question of terminal value if subscriber losses begin
and then accelerate, a scenario many project for the U.S. business. Finally, some would argue that instead of undertaking such a substantial equity shrink strategy, management should look to use its substantial free cash flow as a tool of reinvestment (and by definition, reinvention) of the company for next generation opportunities like what DISH Network is attempting to do. What We Think: Now as Good a Time as Any to Get in With all due respect to the Bear argument, which does have some merit, we believe the risk/reward of owning DTV shares in this environment overly skews toward the reward side of the pendulum. We believe that relative to peers, DIRECTV has superior brand recognition, faster cash flow growth, better financial engineering of its balance sheet and an attractive valuation. Theres no doubt that as we forecast modest growth for DIRECTV U.S.s subscriber base through 2015E (1.1% CAGR from 2010A through 2015E), this will pale in comparison to what investors might have grown accustomed to. Yet as growth has slowed at DIRECTVs U.S. business, the company has nary missed a beat, as the promise of the mass scale advantage of satellite technology is now paying off in spades. The companys U.S. business is generating a significant and accelerating amount of FCF, as growth has moderated (in 2008, levered FCF was $1.5B; this year we project $2.3B; by 2013E, we project $2.5B of FCF). To the extent that one believes the DBS companies are at a disadvantage to the Cable MSOs given their lack of a triple-play bundle, DTV still cross-markets a synthetic triple-play bundle in nearly 90% of the country through its partnerships with Telco companies. The story at DLA a business unit which we believe does not receive enough investor attention & an area where we have attempted to perform detailed work is decidedly different. DLA, which was once an afterthought to many investors, is a business that might have its best days ahead of it. DLA is the high-octane growth engine for the company, knocking the cover off the ball in all subscriber related metrics, quarter-afterquarter. Although the amount of disclosure surrounding DLAs smorgasbord of operating units has been a bit more limited than we would have liked, during the companys Analyst Day last December, some clarity was offered on the strength of the business. With DLA expected to generate $2B of EBITDA in 2012 and accelerating FCF we expect that the business unit will become a source of future debt leverage to enable the consolidated entity to continue to shrink its equity base. Similar to Time Warner Cable, DTV shares warrant a premium to the broader group, in our opinion, given our expectation of a relatively faster growth and return of capital strategy, a historical track-record of execution, no super-voting share class that is often a source of investor agita, and generally better corporate governance than peers. We rate the stock a Buy with a DCF-derived price target of $61.
Exhibit 132: DIRECTV Net Subscriber Additions by Segment
Exhibit 133: DIRECTV Subscribers by Segment
*Mexico is not consolidated Source: ISI Group estimates, company documents
*Mexico is not consolidated Source: ISI Group estimates, company documents
Exhibit 134: DIRECTV ARPU by Segment
Exhibit 135: DIRECTV Subscriber Acquisition Cost per Gross Addition by Segment
Exhibit 136: DIRECTV Consolidated Revenues and Profitability
Exhibit 137: DIRECTV Consolidated Free Cash flow, Debt Maturities, and Return of Capital
Exhibit 138: DIRECTV Estimates vs. Consensus (in millions except per share values)
Annual 2012E $29,178 $29,299 -0.4% $7,768 $7,745 15 0.3% 26.6% 26.4% 0.2% $5,118 $5,313 13 -3.7% $4.06 $4.21 -3.4% $2,780 $2,778 0.1% Quarterly 3Q11E 4Q11E $6,821 $6,740 1.2% $1,702 $1,655 13 2.8% 25.0% 24.6% 0.4% $1,003 $1,069 10 -6.2% $0.68 $0.73 -6.1% $743 $689 7.8% $7,295 $7,312 -0.2% $1,770 $1,807 12 -2.0% 24.3% 24.7% -0.4% $1,077 $1,193 10 -9.7% $0.77 $0.87 -10.5% $680 $694 -2.0%
2011E ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) #Est Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income #Est Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. Consensus Delta $27,036 $26,958 0.3% $7,084 $7,048 16 0.5% 26.2% 26.1% 0.1% $4,465 $4,612 15 -3.2% $3.21 $3.35 -3.9% $2,719 $2,705 0.5%
2013E $31,078 $31,122 -0.1% $8,366 $8,268 10 1.2% 26.9% 26.6% 0.4% $5,674 $5,911 7 -4.0% $5.30 $5.28 0.4% $2,786 $2,805 -0.7%
CAPEX
Exhibit 139: DIRECTV Discounted Cash Flow Valuation (in millions)

FY 2012E DIRECTV US DCF Valuation PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity DIRECTV US Enterprise Value Add: Cash & Equivalents Less: Debt DIRECTV US Equity Value DIRECTV Latin America DIRECTV Sports Networks Game Show Network Corporate G&A Add: Corporate Cash Less: Corporate Debt DIRECTV Equity Value Diluted Shares Fair Value per Share Current Share Price Potential Upside $10,887 23,987 $34,874 250 (13,462) $21,662 14,500 $709 $536 (448) 1,266 (2,990) $35,235 573.5 $61 $46.42 32.3% Valuation Asssumptions - DIRECTV US Risk Free Rate 3.2% Equity Risk Premium 6.0% Stock Beta 1.0 Cost of Equity 9.3% Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
5.0% 38.0% 3.1% 30.0% 7.4% (0.5)% 12.5x
Exhibit 140: DIRECTV Consolidated Valuation Multiples

2011E Valuation Multiples Per Share Metrics Diluted EPS Fully Taxed FCF per Share Per Share Multiples Price Earnings (P/E) Ratio Fully Taxed FCF Yield Unlevered Fully Taxed FCF Yield Consolidated EV/OPBDA Multiples (In Millions) DIRECTV Enterprise Value Fully Diluted Shares Current Share Price Market Cap Add: Debt Less: Cash & Equivalents DIRECTV Enterprise Value Adjustments Sky Brasil Minority Stake Sky Mexico Equity Stake Game Show Network Less: Total Adjustments Adjusted Enterprise Value Consolidated OPBDA Consolidated EV/OPBDA U.S. EV/OPBDA Multiple DIRECTV Enterprise Value Less: DIRECTV Latin America Less: Game Show Network Less: DIRECTV Sports Networks & Other DTV US Enterprise Value DTV US OPBDA incl Corp Overhead Implied DTV U.S. EV/OPBDA Ending U.S. Subscribers ('000s) Value per U.S. Subscriber Capital Returned to Shareholders Dividends Share Repurchases Cash Returned to Shareholders Free Cash Flow Shareholders' Returns as % of FCF Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Leverage & Coverage Ratios Net Debt/EBITDA EBITDA/Interest Expense (EBITDA-Capex)/Interest Expense 2012E 2013E 2014E 2015E
$3.21 2.94 14.4x 6.7% 5.8%
$4.06 4.64 11.4x 10.7% 8.0%
$5.30 6.30 8.8x 14.9% 9.4%
$6.57 8.08 7.1x 19.8% 10.6%
$7.58 9.12 6.1x 23.3% 11.1%
670.4 $46.42 $31,119 13,462 (796) $43,785 $610 (1,853) (491) $(1,734) $42,052 $7,084 5.9x
573.5 $46.42 $26,624 16,452 (1,516) $41,560 $635 (1,917) (536) $(1,819) $39,741 $7,768 5.1x
468.9 $46.42 $21,765 19,433 (1,500) $39,697 $682 (2,104) (576) $(1,998) $37,699 $8,366 4.5x
386.5 $46.42 $17,943 21,506 (1,500) $37,949 $749 (2,310) (619) $(2,180) $35,769 $8,845 4.0x
331.5 $46.42 $15,388 22,330 (1,500) $36,218 $822 (2,535) (665) $(2,378) $33,840 $9,054 3.7x
$43,785 (13,951) (491) (275) $29,069 $5,341 5.4x 19,810 $1,467 --$5,801 $5,801 1,968 294.8% 15.5% 27.5% 20.2% (126.3)% 1.8x 9.2x 5.6x
$41,560 (14,500) (536) (261) $26,263 $5,744 4.6x 20,173 $1,302 --$5,000 $5,000 2,660 188.0% 17.5% 31.7% 22.7% (53.8)% 1.9x 9.3x 5.9x
$39,697 (15,576) (576) (274) $23,271 $6,038 3.9x 20,353 $1,143 --$5,908 $5,908 2,953 200.1% 19.0% 35.0% 24.5% (37.0)% 2.1x 8.5x 5.6x
$37,949 (16,732) (619) (288) $20,310 $6,289 3.2x 20,405 $995 --$5,078 $5,078 3,122 162.7% 20.3% 38.3% 26.3% (28.8)% 2.3x 7.9x 5.4x
$36,218 (17,974) (665) (302) $17,277
20,353 $849 --$3,711 $3,711 3,025 122.7% 20.9% 40.0% 27.0% (25.5)% 2.3x 7.5x 5.0x
$6,280 2.8x
Exhibit 141: DIRECTV U.S. Income Statement (in millions)

2010A Key Subscriber Data Ending Subscribers ('000s) Gross Additions ('000s) Net Additions ('000s) Monthly Churn Average Revenue Per Subscriber (ARPU) Cash SAC per Gross Add Upgrade & retention expenses/Ave Sub/Month Income Statement (In Millions) Revenues Operating costs and expenses Costs of revenues Broadcast programming & other Subscriber service expenses Broadcast operations expenses Selling, general & administrative Subscriber acquisition costs Upgrade & retention expenses General & administrative expenses Total operating expenses excl D&A Operating Profit Before D&A (OPBDA) Depreciation & Amortization Operating Profit (EBIT) Interest Income Interest Expense Other, net Income Before Income Taxes Income tax expense Net Income/(Loss) Growth Rates Ending Subscribers Gross Additions Average Revenue Per Subscriber (ARPU) Cash SAC per Gross Add Upgrade & retention expenses/Ave Sub/Month Revenues Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Net Income/(Loss) Margins Adjusted Pre-SAC (Including G&A and capitalized STB) Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Net Income Tax Rate 19,223 4,124 663 1.53% $89.79 $796 $4.90 $20,268 2011E 19,810 4,226 587 1.56% $92.79 $817 $5.10 $21,712 2012E 20,173 4,141 363 1.58% $95.89 $823 $5.13 $23,004 2013E 20,353 4,059 180 1.60% $98.83 $815 $5.15 $24,031 2014E 20,405 3,977 52 1.61% $101.83 $809 $5.17 $24,901 2015E 20,353 3,898 (52) 1.62% $104.14 $803 $5.19 $25,468 '10A-'15E CAGR 1.1% (1.1)% 1.0% 3.0% 0.2% 1.2% 4.7%
$8,699 1,340 273 $2,631 1,106 1,003 $15,052 $5,216 1,926 $3,290 5 (488) (5) $2,802 (1,051) $1,751 3.6% (3.5)% 5.2% 11.8% 2.6% 8.6% 11.3% 36.5% 39.5% 37.2% 25.7% 16.2% 8.6% 37.5%
$9,600 1,460 296 $2,757 1,194 1,024 $16,329 $5,382 1,783 $3,600 2 (704) 23 $2,921 (1,106) $1,815 3.1% 2.5% 3.3% 2.7% 4.1% 7.1% 3.2% 9.4% 3.7% 36.0% 24.8% 16.6% 8.4% 37.9%
$10,338 1,565 308 $2,704 1,230 1,061 $17,207 $5,798 1,727 $4,071 1 (696) --$3,375 (1,282) $2,092 1.8% (2.0)% 3.3% 0.7% 0.5% 6.0% 7.7% 13.1% 15.3% 35.5% 25.2% 17.7% 9.1% 38.0%
$10,976 1,652 320 $2,654 1,252 1,085 $17,939 $6,092 1,639 $4,452 1 (702) --$3,750 (1,425) $2,325 0.9% (2.0)% 3.1% (0.9)% 0.4% 4.5% 5.1% 9.4% 11.1% 35.0% 25.3% 18.5% 9.7% 38.0%
$11,531 1,724 333 $2,607 1,264 1,099 $18,558 $6,343 1,584 $4,759 1 (748) --$4,011 (1,524) $2,487 0.3% (2.0)% 3.0% (0.8)% 0.4% 3.6% 4.1% 6.9% 7.0% 34.6% 25.5% 19.1% 10.0% 38.0%
$12,076 1,781 346 $2,563 1,269 1,099 $19,134 $6,334 1,519 $4,815 1 (803) --$4,012 (1,525) $2,488 (0.3)% (2.0)% 2.3% (0.7)% 0.4% 2.3% (0.1)% 1.2% 0.0% 33.6% 24.9% 18.9% 9.8% 38.0%
6.8% 5.9% 4.9% (0.5)% 2.8% 1.8% 4.9% 4.0% 7.9%
7.4% 7.3%
Exhibit 142: DIRECTV U.S. Cash Flow Statement (in millions)

2010A CASH FLOWS FROM OPERATING ACTIVITIES Net Income/(Loss) Adjustments to reconcile net income to cash Depreciation & Amortization Amortization of def revenues & credits Stock-based compensation expense Deferred Income Taxes Other Change in Working Capital Accounts Receivable Inventories Prepaid Expenses & Other Accounts Payable & Accrued Liabilities Unearned Subscriber Income Other, net Total Cash Flows From Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for property & equipment Cash paid for leased boxes -- sub adds Cash paid for leased boxes -- upsell Cash paid for satellites Investment in companies, net of cash Other Total Cash Flows From Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Debt Debt issuance costs Repayment of Long-Term Obligations Cash dividend to Parent Other, net Total Cash Flows From Financing Activities Beginning Cash Change in Cash Balance Ending Cash Free Cash Flow Total Cash Flows From Operating Activities Less: Capital Expenditures Levered Free Cash Flow Net Interest Expense Tax shield associated with Net Debt Leverage Unlevered Free Cash Flow $1,751 1,926 (36) 67 278 20 (329) (27) (26) 245 25 11 $3,905 $(477) (651) (316) (113) (1) 3 $(1,555) $3,655 (44) (99) (6,900) 9 $(3,379) $1,716 (1,029) $687 $3,905 (1,557) $2,348 483 (180) $2,651 2011E $1,815 1,783 (18) 103 223 (31) (279) (15) (13) 316 25 (12) $3,898 $(531) (696) (320) (78) (11) 55 $(1,581) $3,990 (30) (1,090) (5,645) 21 $(2,754) $687 (437) $250 $3,898 (1,625) $2,273 702 (266) $2,709 2012E $2,092 1,727 --119 65 --(229) (14) (11) 173 24 --$3,946 $(531) (704) (330) (50) ----$(1,615) ----(213) (2,119) --$(2,332) $250 --$250 $3,946 (1,615) $2,332 696 (264) $2,763 2013E $2,325 1,639 --132 (12) --(219) (11) (9) 145 19 --$4,008 $(531) (655) (336) (17) ----$(1,539) $245 ----(2,714) --$(2,470) $250 --$250 $4,008 (1,539) $2,470 702 (267) $2,905 2014E $2,487 1,584 --141 18 --(218) (10) (8) 122 16 --$4,133 $(531) (610) (339) (50) ----$(1,530) $1,517 ----(4,120) --$(2,603) $250 --$250 $4,133 (1,530) $2,603 747 (284) $3,066 2015E $2,488 1,519 --141 44 --(200) (6) (7) 114 11 --$4,103 $(531) (568) (340) (250) ----$(1,689) $294 ----(2,708) --$(2,414) $250 --$250 $4,103 (1,689) $2,414 802 (305) $2,911 '10A-'15E CAGR
1.0% 2.2% (2.7)% 1.5% 17.2%
(18.3)% 1.0% 1.6% 0.6%
1.9%
Exhibit 143: DIRECTV Latin America Segment Financials (in millions)

2010A Subscribers ('000s) Gross Additions Net Additions Ending Subscribers Monthly Churn Average Revenue per Subscriber (ARPU) YoY Change Expensed SAC per Gross Add YoY Change Upgrade & retention expenses/Ave Sub/Month YoY Change Abridged Income Statement (In Millions) Revenue Operating costs and expenses Costs of revenues Broadcast programming & other Subscriber service expenses Broadcast operations expenses Selling, general & administrative Subscriber acquisition costs Upgrade & retention expenses General & administrative expenses Total operating expenses excl D&A Operating Profit Before D&A (OPBDA) Depreciation & Amortization Operating Profit (EBIT) Growth Rates Ending Subscribers Average Revenue per Subscriber (ARPU) Expensed SAC per Gross Add Upgrade & retention expenses/Ave Sub/Month Revenue Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Margins Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Free Cash Flow (In Millions) Total Cash Flows From Operating Activities Cash paid for property & equipment Free Cash Flow YoY Change 2,317 1,220 5,808 1.76% $57.67 1.0% $161 (13.8)% $1.01 9.2% $3,597 2011E 2,997 1,580 7,388 1.79% $63.85 10.7% $161 (0.4)% $1.30 28.2% $5,055 2012E 2,960 1,254 8,642 1.77% $61.16 (4.2)% $165 2.7% $1.85 43.1% $5,882 2013E 2,941 1,006 9,648 1.76% $61.35 0.3% $170 2.8% $2.33 25.6% $6,732 2014E 3,060 1,082 10,730 1.62% $61.55 0.3% $177 4.0% $2.81 20.6% $7,526 2015E 2,961 610 11,340 1.78% $61.56 0.0% $180 2.1% $3.24 15.4% $8,152 '10A-'15E CAGR 5.0% (12.9)% 14.3% 1.3% 2.2% 26.3%
17.8%
$1,175 341 77 374 63 403 $2,433 $1,164 541 $623 26.6% 1.0% (13.8)% 9.2% 25.0% 67.0% 88.2% 32.4% 17.3% $1,075 (857) $218 107.6%
$1,690 446 88 482 103 527 $3,336 $1,719 802 $917 27.2% 10.7% (0.4)% 28.2% 40.5% 47.7% 47.2% 34.0% 18.1% $1,406 (1,122) $284 30.2%
$2,014 517 91 489 178 601 $3,889 $1,993 913 $1,081 17.0% (4.2)% 2.7% 43.1% 16.4% 15.9% 17.9% 33.9% 18.4% $1,600 (1,166) $434 53.0%
$2,348 578 87 499 255 674 $4,441 $2,290 1,030 $1,261 11.6% 0.3% 2.8% 25.6% 14.4% 14.9% 16.7% 34.0% 18.7% $1,781 (1,214) $567 30.5%
$2,672 630 90 540 343 738 $5,013 $2,513 1,179 $1,334 11.2% 0.3% 4.0% 20.6% 11.8% 9.7% 5.8% 33.4% 17.7% $1,870 (1,296) $574 1.2%
$2,924 665 91 534 429 783 $5,427 $2,725 1,281 $1,444 5.7% 0.0% 2.1% 15.4% 8.3% 8.4% 8.3% 33.4% 17.7% $1,971 (1,318) $653 13.7%
20.0% 14.3% 3.5% 7.4% 46.8% 14.2% 17.4% 18.5% 18.8% 18.3%
12.9% 9.0% 24.5%
Exhibit 144: DIRECTV Consolidated Key Segment Financials (in millions)

2010A Revenues DIRECTV US DIRECTV Latin America DIRECTV Sports Networks, Eliminations & Other Total Revenue Revenue Growth DIRECTV US DIRECTV Latin America Revenue Growth Operating Profit Before D&A (OPBDA) DIRECTV US DIRECTV Latin America DIRECTV Sports Networks, Eliminations & Other Total OPBDA OPBDA Margins DIRECTV US DIRECTV Latin America Total OPBDA Margin OPBDA Growth DIRECTV US DIRECTV Latin America OPBDA Growth Operating Profit DIRECTV US DIRECTV Latin America DIRECTV Sports Networks, Eliminations & Other Total Operating Profit Operating Margin DIRECTV US DIRECTV Latin America Total Operating Margin Operating Profit Growth DIRECTV US DIRECTV Latin America Total Operating Profit Growth $20,268 3,597 237 $24,102 8.6% 25.0% 11.8% $5,216 1,164 (2) $6,378 25.7% 32.4% 26.5% 11.3% 67.0% 20.0% $3,290 623 (17) $3,896 16.2% 17.3% 16.2% 36.5% 88.2% 45.8% 2011E $21,712 5,055 269 $27,036 7.1% 40.5% 12.2% $5,382 1,719 (18) $7,084 24.8% 34.0% 26.2% 3.2% 47.7% 11.1% $3,600 917 (51) $4,465 16.6% 18.1% 16.5% 9.4% 47.2% 14.6% 2012E $23,004 5,882 291 $29,178 6.0% 16.4% 7.9% $5,798 1,993 (23) $7,768 25.2% 33.9% 26.6% 7.7% 15.9% 9.7% $4,071 1,081 (34) $5,118 17.7% 18.4% 17.5% 13.1% 17.9% 14.6% 2013E $24,031 6,732 315 $31,078 4.5% 14.4% 6.5% $6,092 2,290 (16) $8,366 25.3% 34.0% 26.9% 5.1% 14.9% 7.7% $4,452 1,261 (39) $5,674 18.5% 18.7% 18.3% 9.4% 16.7% 10.9% 2014E $24,901 7,526 332 $32,760 3.6% 11.8% 5.4% $6,343 2,513 (11) $8,845 25.5% 33.4% 27.0% 4.1% 9.7% 5.7% $4,759 1,334 (32) $6,060 19.1% 17.7% 18.5% 6.9% 5.8% 6.8% 2015E $25,468 8,152 354 $33,974 2.3% 8.3% 3.7% $6,334 2,725 (5) $9,054 24.9% 33.4% 26.6% (0.1)% 8.4% 2.4% $4,815 1,444 (27) $6,232 18.9% 17.7% 18.3% 1.2% 8.3% 2.8% 7.9% 18.3% 9.8% 4.0% 18.5% 7.3% '10A-'15E CAGR 4.7% 17.8% 8.4% 7.1%
Exhibit 145: DIRECTV Consolidated Income Statement (in millions)

2010A $24,102 2011E $27,036 2012E $29,178 2013E $31,078 2014E $32,760 2015E $33,974 '10A-'15E CAGR 7.1%
Revenues Operating costs and expenses Costs of revenues Broadcast programming & other Subscriber service expenses Broadcast operations expenses Selling, general & administrative Subscriber acquisition costs Upgrade & retention expenses General & administrative expenses Total operating expenses excl D&A Operating Profit Before D&A (OPBDA) Depreciation & Amortization Operating Profit (EBIT) Interest Income Interest Expense Liberty transaction & other gains Other, net Income Before Income Taxes Income tax expense Net Income from continuing operations Net income from discontinued operations Net Income Less: Income attributable to noncontrolling stake Net Income attributable to DIRECTV Earnings Per Share Basic EPS Average Basic Shares Diluted EPS Average Diluted Shares YoY Change Revenues Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Margins Operating Profit Before D&A (OPBDA) Operating Profit (EBIT) Effective Tax Rate
$10,074 1,681 350 3,005 1,169 1,445 $17,724 $6,378 2,482 $3,896 39 (557) 67 69 $3,514 (1,202) $2,312 --$2,312 (114) $2,198 $2.31 870 $2.30 876 11.8% 20.0% 45.8% 26.5% 16.2% 34.2%
$11,502 1,906 384 3,238 1,296 1,625 $19,952 $7,084 2,598 $4,465 25 (771) --128 $3,847 (1,396) $2,452 --$2,452 (29) $2,423 $3.24 748 $3.21 752 12.2% 11.1% 14.6% 26.2% 16.5% 36.3%
$12,576 2,083 398 3,192 1,408 1,752 $21,409 $7,768 2,649 $5,118 24 (837) --38 $4,342 (1,650) $2,692 --$2,692 (31) $2,661 $4.09 651 $4.06 655 7.9% 9.7% 14.6% 26.6% 17.5% 38.0%
$13,564 2,230 408 3,153 1,508 1,850 $22,712 $8,366 2,679 $5,674 31 (988) --43 $4,760 (1,809) $2,951 --$2,951 (37) $2,914 $5.34 546 $5.30 550 6.5% 7.7% 10.9% 26.9% 18.3% 38.0%
$14,455 2,353 423 3,148 1,608 1,929 $23,915 $8,845 2,773 $6,060 30 (1,115) --49 $5,024 (1,909) $3,115 --$3,115 (41) $3,074 $6.63 464 $6.57 468 5.4% 5.7% 6.8% 27.0% 18.5% 38.0%
$15,266 2,447 438 3,097 1,698 1,974 $24,921 $9,054 2,810 $6,232 30 (1,199) --55 $5,117 (1,945) $3,173 --$3,173 (45) $3,128 $7.65 409 $7.58 413 3.7% 2.4% 2.8% 26.6% 18.3% 38.0%
8.7% 7.8% 4.6% 0.6% 7.8% 6.4% 7.1% 7.3% 9.8%
7.8%
7.3% 27.1% 26.9%
Exhibit 146: DIRECTV Consolidated Cash Flow Statement (in millions)

2010A CASH FLOWS FROM OPERATIONS Net Income/(Loss) Adjustments to reconcile net income to cash Depreciation & Amortization Amortization of def revenues & credits Stock-based compensation expense Dividends received Net foreign currency translation loss Liberty transaction & related gains Deferred Income Taxes Other Change in operating assets/liabilities Accounts Receivable Inventories Prepaid Expenses and Other Accounts Payable & Accrued Liabilities Unearned sub revenue and def credits Other, net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING Cash paid for property & equipment Cash paid for satellites Net Capital Expenditures, Including Sale of PP&E Investment in companies, net of cash Purchase/Sale of Short-Term Investments Other, net Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING Net Increase/(Decrease) in Borrowings Debt Issuance Costs Repayment of Collar Loan Increase/Repayment of Long-Term Obligations Net, Sale of Equity & Option Proceeds Other Net Cash from Financing Activities Beginning Cash Net Increase/(Decrease) in Cash & Equivalents Ending Cash Free Cash Flow Fully Taxed Free Cash Flow Cash Flow from Operations Less: Capital Expenditure Free Cash Flow Less: Impact of Deferred Taxes Fully Taxed Free Cash Flow Net Interest Expense Tax shield associated with Net Debt Leverage Unlevered Fully Taxed Free Cash Flow Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance Gross Leverage - Consolidated $2,312 2,482 (36) 82 78 (11) (67) 375 (30) (391) (35) (4) 437 52 (38) $5,206 $(2,303) (113) --(617) --(66) $(3,099) $3,693 (44) (1,537) (127) (5,073) (122) $(3,210) $2,605 (1,103) $1,502 2011E $2,452 2,598 (18) 101 77 (26) --310 (58) (380) (25) (90) 189 23 (79) $5,075 $(2,719) (78) ------144 $(2,653) $2,951 (30) --(206) (5,813) (30) $(3,128) $1,502 (706) $796 2012E $2,692 2,649 --111 19 ----190 64 (320) (22) (37) 291 --42 $5,681 $(2,780) (50) --------$(2,830) $2,990 ----(120) (5,000) --$(2,130) $796 721 $1,516 2013E $2,951 2,679 --120 22 ----88 60 (322) (19) (33) 260 --38 $5,844 $(2,786) (17) --------$(2,803) $2,981 ----(130) (5,908) --$(3,057) $1,516 (16) $1,500 2014E $3,115 2,773 --127 24 ----33 57 (325) (17) (30) 240 --33 $6,031 $(2,826) (50) --------$(2,876) $2,073 ----(150) (5,078) --$(3,155) $1,500 --$1,500 2015E $3,173 2,810 --130 27 ----(8) 55 (299) (12) (25) 201 --24 $6,074 $(2,807) (250) --------$(3,057) $825 ----(130) (3,711) --$(3,017) $1,500 --$1,500 '10A-'15E CAGR
3.1% 4.0% 17.2%
(0.0)%
$5,206 (2,416) $2,790 (375) $2,415 518 (175) $2,758 $5,179 $38.20 136 $6,000 1.6x
$5,075 (2,797) $2,278 (310) $1,968 746 (273) $2,442 $5,801 $46.68 124 $520 1.9x
$5,681 (2,830) $2,850 (190) $2,660 814 (309) $3,165 $5,000 $51.63 97 2.1x
$5,844 (2,803) $3,041 (88) $2,953 958 (364) $3,547 $5,908 $56.44 105 2.3x
$6,031 (2,876) $3,155 (33) $3,122 1,085 (412) $3,795 $5,078 $61.69 82 2.4x
$6,074 (3,057) $3,017 8 $3,025 1,169 (444) $3,750 $3,711 $67.42 55 2.5x
3.1% 4.8% 1.6% 4.6%
6.3% (6.4)%
Exhibit 147: DIRECTV Consolidated Balance Sheet (in millions)

2010A ASSETS Current Assets Cash & Equivalents Accounts receivable Inventories Deferred income taxes Prepaid Expenses and Other Total Current Assets Satellites, net Property & equipment, net Goodwill Intangible Assets, net Investments and Other Assets Total Assets LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable & Accrued Liabilites Deferred Revenue Current Portion Of Long-Term Debt Other, net Total Current Liabilities Long-Term Debt Deferred income taxes Other liabilities & deferred credits Redeemable noncontrolling interest Shareholders' Equity Common Stock & Paid-in Capital Accumulated earnings/deficit Accumulated other comprehensive loss Total Stockholders' Equity Total Liabilities and Shareholders' Equity 2011E 2012E 2013E 2014E 2015E '10A-'15E CAGR
$1,502 2,001 247 53 450 $4,253 2,235 4,444 4,148 1,074 1,755 $17,909
$796 2,400 272 111 504 $4,083 2,084 4,814 4,181 946 1,668 $17,776
$1,516 2,720 294 76 540 $5,146 1,895 4,893 4,181 856 1,586 $18,556
$1,500 3,042 313 --573 $5,428 1,673 4,896 4,181 810 1,503 $18,491
$1,500 3,366 330 --604 $5,800 1,455 4,816 4,181 772 1,422 $18,446
$1,500 3,666 342 --629 $6,137 1,481 4,653 4,181 737 1,340 $18,528
(0.0)%
7.6%
0.7%
$3,926 486 38 --$4,450 10,472 1,670 1,287 224 6,691 (6,805) (80) $(194) $17,909
$3,987 535 ----$4,522 13,462 1,964 1,232 236 7,036 (10,597) (80) $(3,641) $17,776
$4,278 578 ----$4,856 16,452 2,119 1,112 267 7,147 (13,317) (80) $(6,250) $18,556
$4,538 616 ----$5,154 19,433 2,131 982 305 7,267 (16,700) (80) $(9,513) $18,491
$4,779 649 ----$5,428 21,506 2,164 832 346 7,393 (19,142) (80) $(11,829) $18,446
$4,980 673 ----$5,653 22,330 2,156 702 391 7,523 (20,146) (80) $(12,703) $18,528
4.9%
0.7%
DISH NETWORK CORP. (DISH), BUY | 2012YE TARGET $34

In the Midst of a Protracted Transformation (What will Charlie Do?)
We are initiating coverage of DISH Network with a Buy rating and a 2012 YE price target of $34. With 14.1MM subscribers as of 2Q11, DISH is the third largest U.S. Multichannel video provider (after Comcast and DIRECTV). The stock trades at a 15-40% discount on the various valuation multiples relative to the peer group. On our 2012 estimates, the shares trade at 9.1x P/E, 3.2x EV/EBITDA, support a 14% levered FCF yield and 13% unlevered FCF yield. We estimate the 3-year (2011E-2014E) growth rates for EBITDA, EPS and FCF (levered) at -1.5%, -1.3% and 2.7%, respectively, when compounded annually. Generally, DISHs proposition for the consumer has first-andforemost been about value. As such, DISHs subscriber base overindexes towards a more suburban and rural demographic. For example, in DISHs top-50 most penetrated markets (out of the 210 DMAs in the U.S.), it averages 32% market share; population density is just 42 people per square mile, on average, in these markets, compared with 158 people/sq-mile in the country as a whole (unweighted average of all DMAs). A simple scatter plot of Dishs subscriber density by market is included in Exhibit 148. Over the course of its history, DISH has striven not to sacrifice product quality just because it offered lower prices. To the contrary, DISH has learned to often make less into more and innovate in ways that were both original and that pushed the envelope further than other Multichannel operators (first to launch the DVR and integrate Sling functionality into set-to-boxes are some examples that come to mind). Unlike DIRECTV, which has a single publicly traded class of shares, DISH is by no means a Democracy. The company is tightly controlled by a small inner circle, led by long-time founder & Chairman, Charles Charlie Ergen. Ergen has a 54% economic stake and 92% voting stake in the company through his ownership of the 238.4MM Class-B Super-voting shares, which carry 10 votes per share (versus 1 vote per Class A share). It should be pointed out that some view Mr. Ergens iron fist leadership of DISH as a positive for the stock, as he is widely regarded by investors (and us) as one of the smartest media luminaries in the businesses.
DISH Buy $25.91 $34.00 $33.85 31.2% 31.4% 25.5% $32.57 $17.95
11,523 15,434 3,910 208 1.8% 3.2 nm
2011E 2012E 2013E

14,049 14,467 14,686
2011E* 2012E 2013E

3,654 3,581 3,561
2011E 2012E 2013E *Excludes reversal of TiVO litigation accrual Stock Chart
1,611 1,174 1,611
Exhibit 148: Dish Network Subscriber Share & Population Density by DMA
40.0%
DISH Market Share in DMA
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 100.00 200.00 300.00 400.00 Subscriber Density (Pop/Sq-Mile) 500.00 R = 0.2497
Source: SNL Kagan, ISI Group analysis
The Bull Thesis: A Successful Metamorphosis of the One Trick Pony Housing mostly, not just competition to blame. Many Bulls believe that recent subscriber weakness at Dish has primarily been the result of the housing slowdown rather than just being a casualty of increased competition. As the argument goes, DISH over-indexes to lower income households, which the data confirm are feeling the squeeze much more than any other cohort of the population. When the recovery does come (some day), DISH should feel a snap-back in regaining those lost subscribers. Acquisitions of Blockbuster, Spectrum etc. According to the company, the Blockbuster acquisition (purchased in bankruptcy in April of this year for $120MM net of cash) will not be a drag on profitability. Blockbuster Movie Pass, the on-demand/premium streaming service offered exclusively to DISH subscribers (our initial attempt to triangulate its economics is in Exhibit 150 and Exhibit 151) could have some success in reducing DISH churn and improve market share. In 4Q11, new DISH Network customers will be offered Movie Pass with their DBS subscription for one year when they subscribe to Americas Top 200 programming or greater. New subscribers to Americas Top 120 programming will be offered Movie Pass for free for three months, and after that they will have to pay $10 per month to continue the service.
Exhibit 149: Blockbuster Movie Pass Competitive Comparison

Dish + Blockbuster Movie Pass 130,000+ DVDs & Blu-ray Comcast 32,600 X X X 32,600 --NA DIRECTV 4,500 X X X 4,500 --NA Netflix 130,000+ Up to 4 week delay: DVDs, fee for Blu-ray TBD X 31,700 31,700 Amazon Prime Instant Video 100,000+ X X X 100,000+ 12,000
Total number of movies and TV shows New releases included Games In-store exchanges On-demand streaming to TV and computers Subscription VOD titles Price per month

34,000 4,000 to PC 3,000 to TV $10
$16 $6.58 ($8 streaming, $8 DVDs) ($79 per year)
Exhibit 150: Blockbuster Movie Pass Subscribers
Exhibit 151: Blockbuster Movie Pass Revenues and Profitability
*Assumes 40% promotional conversion rate to paid subscribers Source: ISI Group estimates, company documents
What DISH might do with its Spectrum assets is thus far unclear, although the possibilities are broad. The company owns 6 MHz of spectrum in the 700 MHz band and 40 MHz in the S-band via its ownership of DBSD & Terrestar (announced February 2011, closing of transaction expected in 2012). This spectrum could be used for the formation of (yet another) nationwide broadband network, but given the costs involved in doing so and the lessons learned from the likes of LightSquared and Clearwire we believe it unlikely that DISH would choose to go it alone. We are confident that DISH will be able to get a reprieve on the satellite component requirement of its S-band spectrum, similar to the one granted to LightSquared. Refocusing the message. Historically, DISH has usually been savvy in offering competitive, distinctive offers that grab the attention of the market place (free DISH service for your town for 10 years if you rename it DISH is one of the more memorable ones). The company has conceded that it has taken its eye off the ball in getting the proper message out, but with the launch of the Blockbuster Movie Pass on October 1st,4Q11 results could see a lift in gross additions and a reduction in churn.
M&A is always possible. Lastly, a discussion of DISH would be incomplete without at least mentioning the hot-cold expectation of a DISH-DTV merger (their prior attempt in 2001 was unsuccessful) or of course a combination between a satellite company and a Telco. The outcome of the pending merger between AT&T and T-Mobile could set a precedent. The Bear Thesis: A Company that Cant Compete, and Doesnt Care about Shareholders The triple-play bundle is getting to be too much. A prevalent Bear theme is that the Cable & Telco tripleplay bundles, with higher-margin data and voice services will continue to erode DISHs single-play value proposition. While the company has been able reasonably control costs thus far, the key question is whether it can drive growth without eroding marginal economics. Wheres my capital? While its fun to prognosticate on what Ergen & Co. might be cooking up with their various portfolio of assets, the bottom line is that even if theyre literally (ok, figuratively) reinventing themselves, their time horizon might be 5-10 years. Many investors dont have the time or patience to wait that long. And then of course there is the worst case: that DISH management has made a miscalculation, and whatever it has planned is destined to fail. To be clear, were not suggesting this be the case, only that it be a possibility that one considers. Many Bears would rather have the considerable amount of Free Cash Flow that DISH is generating returned to them, especially given the stocks currently historically low relative valuation. What We Think: A Lot of Unknowns, But Valuation too Attractive to Pass Up To invest or not to invest in Dishcan be a tough call. As discussed above, this isnt a low-risk story; good value stocks in this space rarely are. But any real operational improvements or clarity on broad strategy could close the relative valuation gap of Dish vs. its peer group. Our Buy rating is a stock rating, and a measure of the reward/risk ratio on value, not necessarily a proxy for our comfort with the many unknowns facing the company. We are of the belief that in the near/medium terms, fundamentals will remain challenged and growing subscribers will be a heroic achievement. To be sure, Dish Network is not without its headwinds, as alluded to above. The company has posted uninspiring fundamentals for some time now, has shown lack of operational and strategic transparency, provides essentially no management access to either buy-side or sell-side analysts, has instituted no consistent return of capital to equity owners and has recently gone on an acquiring binge of seemingly disparate assets (spectrum, Blockbuster, and a CLEC thrown in for good measure). Dish has effectively gone about its business without defining what, exactly its business is. Whats interesting is that historically the stock actually carried a premium valuation to the group, although to be fair, that was during the glory days of satellite television (think back to the late 1990s-early 2000s). Whether or not Dish Network deserves or will once again reach the lofty multiples of days yore remains to be seen; however, given todays anemic valuation (15-40% discount to peer group), one could argue that investors might be discounting a worst-case scenario to materialize in essentially all facets of the business. We dont believe such a scenario is likely nor a multiple discounting of such a scenario should be warranted. We therefore rate DISH shares Buy with a DCF-derived Target Price of $34.
Exhibit 152: Dish Network Video Net Subscriber Additions and Churn
Exhibit 153: Dish Network Subscribers and Video ARPU
Exhibit 154: Dish Network Video Gross Additions and Subscriber Acquisition Cost per Gross Addition
Exhibit 155: Dish Network Revenues and Profitability
Exhibit 156: Dish Network Free Cash Flow, Debt Maturities, and Return of Capital
Exhibit 157: Dish Network Estimates vs. Consensus (in millions except per share values)
Annual 2012E $14,467 $14,569 -0.7% $3,581 $3,538 1.2% 24.8% 24.3% 0.5% $2,629 $2,600 1.1% $2.85 $2.86 -0.2% $1,049 $1,030 1.8% Quarterly 3Q11E 4Q11E $3,594 $3,611 -0.5% $934 $906 3.0% 26.0% 25.1% 0.9% $694 $676 2.6% $0.76 $0.73 4.0% $200 $278 -28.1% $3,641 $3,603 1.0% $893 $867 3.0% 24.5% 24.1% 0.5% $649 $650 -0.2% $0.71 $0.69 3.1% $277 $279 -0.8%
2011E ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. CAPEX Consensus Delta $14,049 $14,026 0.2% $3,654 $3,776 -3.2% 26.0% 26.9% -0.9% $2,703 $2,883 -6.2% $2.98 $3.17 -6.0% $879 $976 -9.9%
2013E $14,686 $15,031 -2.3% $3,561 $3,547 0.4% 24.2% 23.6% 0.6% $2,634 $2,609 1.0% $2.89 $2.88 0.1% $1,118 $1,062 5.2%
*Excludes reversal of TiVO litigation accrual Source: ISI Group estimates, Bloomberg, L.P., company documents
Exhibit 158: Dish Network Discounted Cash Flow Valuation (in millions)
FV 2012E DCF Valuation PV of Interim Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Add: Option Proceeds Add: DBSD at Book Value Add: Terrestar at Transaction Value Add: 700 MHz Spectrum at Book Value Less: Debt Equity Value Diluted Shares Fair Value per Share Current Share Price Potential Upside $5,839 9,400 $15,239 4,094 103 1,274 1,375 712 (7,470) $15,326 452.5 $34 $25.91 30.7% Valuation Asssumptions Risk Free Rate 3.2% Equity Risk Premium 6.0% Stock Beta 1.2 Cost of Equity 10.4% Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
7.2% 39.0% 4.4% 10.0% 9.8% (0.5)% 9.7x
Exhibit 159: Dish Network Valuation Multiples

2011E Per Share Valuation Multiples Per Share Metrics Adj. Diluted EPS Fully Taxed FCF per Share Per Share Multiples Price Earnings (P/E) Ratio Fully Taxed FCF Yield Unlevered Fully Taxed FCF Yield Enterprise Value Multiples (In Millions) Enterprise Value Fully Diluted Shares Current Share Price Market Cap Add: Debt Less: Cash & Equivalents Less: Option Proceeds Enterprise Value Less: DBSD/TerreStar at Transaction Value Less: 700 MHz Spectrum at Book Value Adjusted Enterprise Value Adj. EBITDA EV/Adj. EBITDA Ending Subscribers ('000s) Value per Subscriber Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Leverage & Coverage Ratios Net Debt/EBITDA EBITDA/Interest Expense (EBITDA-Capex)/Interest Expense
2012E
2013E
2014E
2015E
$2.98 2.64 8.7x 14.3% 11.7%
$2.85 2.65 9.1x 14.3% 13.1%
$2.89 2.71 9.0x 14.8% 14.6%
$2.87 2.86 9.0x 15.9% 17.0%
$2.96 3.15 8.8x 17.7% 21.2%
452.5 $25.91 $11,724 7,491 (2,941) (103) $16,171 (2,649) (712) $12,810 $3,654 3.5x 13,959 $918 16.9% 27.8% 16.9% NM 0.8x 7.5x 5.9x
452.5 $25.91 $11,724 7,470 (4,094) (103) $14,998 (2,649) (712) $11,637 $3,581 3.2x 13,740 $847 12.5% 18.9% 12.5% 128.4% 0.9x 6.4x 4.5x
452.5 $25.91 $11,724 6,948 (4,586) (103) $13,983 (2,649) (812) $10,522 $3,561 3.0x 13,500 $779 11.9% 17.3% 11.9% 61.8% 0.7x 6.6x 4.5x
452.5 $25.91 $11,724 5,922 (4,725) (103) $12,818 (2,649) (912) $9,257 $3,488 2.7x 13,244 $699 11.3% 16.1% 11.3% 39.0% 0.3x 7.1x 5.1x
452.5 $25.91 $11,724 5,143 (5,253) (103) $11,511 (2,649) (1,012) $7,850 $3,441 2.3x 12,976 $605
(0.0)x 8.0x 6.0x
11.1% 15.7% 11.1% 29.9%
Exhibit 160: Dish Network Income Statement (in millions)

2010A Subscribers ('000s) Ending Subscribers Gross Additions Net Additions Monthly Churn Average Revenue Per Subscriber (ARPU) Cash SAC Per Gross Add Income Statement (in millions) Revenue: Subscriber Related Equipment Sales and Other Equipment Sales -- EchoStar Services and Other -- EchoStar Blockbuster Revenues Total Revenue Costs and Expenses: Subscriber Related Satellite & Transmission EchoStar Other Cost of Sales Subscriber Acquisition Costs (SAC) Cost of Sales Subscriber Promotion Subsidies Advertising & Other Total Subscriber acquisition costs General and administrative expenses -- EchoStar General and administrative expenses -- Other Other Litigation expense TiVo Litigation expense Total Costs and Expenses Operating Cashflow (EBITDA) Depreciation and Amortization Operating Income (EBIT) Other Income/(Expense) Interest income Interest expense, net of amounts capitalized Other, net Total Other Income/(Expense) Income (loss) before income taxes Income Taxes Net Income/(Loss) Income attributable to noncontrolling interest Net Income/(Loss) For Shareholders Weighted Average Diluted Shares Diluted Earnings Per Share Adjusted Earnings Per Share Margins Adjusted Operating Cashflow (EBITDA) Operating Income (EBIT) Net Income Tax Rate 14,133 3,052 33 1.76% $73.28 $776 2011E 13,959 2,654 (174) 1.68% $78.56 $790 2012E 13,740 2,601 (218) 1.70% $81.17 $784 2013E 13,500 2,549 (240) 1.71% $83.56 $780 2014E 13,244 2,498 (256) 1.72% $85.78 $780 2015E 12,976 2,448 (268) 1.73% $87.95 $782 '10A-'15E CAGR (1.7)% (4.3)% (252.0)% (0.4)% 3.7% 0.1%
$12,544 60 3 34 --$12,641 $6,676 418 40 76 $176 1,105 373 $1,653 47 578 --225 $9,716 $2,925 984 $1,941 $25 (455) 31 $(399) $1,542 (557) $985 0 $985 447 $2.20 $2.20 24.9% 17.1% 7.8% 36.1%
$13,259 58 1 35 695 $14,049 $6,960 438 41 284 $226 944 355 $1,525 51 1,072 24 (341) $10,054 $3,995 951 $3,044 $32 (530) (8) $(507) $2,537 (997) $1,540 0 $1,540 448 $3.44 $2.98 28.4% 21.7% 11.0% 39.3%
$13,491 51 1 35 889 $14,467 $7,218 497 42 429 $199 939 369 $1,507 53 1,140 ----$10,886 $3,581 952 $2,629 $35 (561) (8) $(534) $2,095 (817) $1,278 0 $1,278 448 $2.85 $2.85 24.8% 18.2% 8.8% 39.0%
$13,658 46 1 34 948 $14,686 $7,439 492 43 489 $176 934 383 $1,493 54 1,116 ----$11,125 $3,561 927 $2,634 $36 (544) (8) $(516) $2,119 (826) $1,292 0 $1,292 448 $2.89 $2.89 24.2% 17.9% 8.8% 39.0%
$13,764 40 1 33 952 $14,791 $7,622 499 45 483 $164 929 397 $1,489 56 1,109 ----$11,302 $3,488 923 $2,565 $39 (493) (8) $(462) $2,103 (820) $1,283 0 $1,283 448 $2.87 $2.87 23.6% 17.3% 8.7% 39.0%
$13,835 36 1 33 932 $14,837 $7,770 507 46 468 $152 924 409 $1,486 57 1,062 ----$11,396 $3,441 874 $2,567 $42 (431) (8) $(397) $2,170 (846) $1,324 0 $1,324 448 $2.96 $2.96 23.2% 17.3% 8.9% 39.0%
2.0% (9.9)% (21.4)% (0.8)% 3.3% 3.1% 3.9% 2.7% 43.7% (2.8)% (3.5)% 1.9% (2.1)% 3.9% 12.9%
3.2% 3.3% (2.4)% 5.8%
(0.1)% 7.1% 6.1% 6.1% 6.0%
Exhibit 161: Dish Network Cash Flow Statement (in millions)

Cash Flow Statement (In Millions) 2010A Cash Flows From Operating Activities Net Income/(Loss) Depreciation & Amortization Equity in Net Loss of Affiliates Stock Based Compensation Deferred Tax Expense Other, Net Change in Non-Current Assets Change in Long-Term Liabilities Change in Working Capital Requirements Net Cash From Operating Activities Cash Flows From Investing Activities Net Purchase of Marketable Investment Securities Purchase of Property, Plant & Equipment Change in Restricted Cash Other Net Cash From Investing Activities Cash Flows From Financing Activities Addl Borrowings/Repayments Equity Issue/Repurchase/Dividends Other Net Cash From Financing Activities Effect of Exchange Rates Beginning Cash Net Increase/(Decrease) in Cash Ending Cash Free Cash Flow Cash Flow from Operations Add: Accumulated TiVo Royalties Add: Capex Related to 700MHz Spectrum Less: Purchase of Property, Plant & Equipment Adjusted Free Cash Flow Less: Impact of Deferred Income Taxes Fully Taxed Free Cash Flow Add: Interest expense, net Less: Adjusted Taxes Unlevered Fully Taxed Free Cash Flow % of Revenues Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance Net Debt to EBITDA $106 535 $641 $2,140 (225) --(1,113) $801 (201) $600 430 (155) $874 6.9% $107 $17.79 6 $1,000 1.1x $985 984 --15 201 18 0 (125) 61 $2,140 $(269) (1,113) (3) (93) $(1,478) $(27) (101) 0 $(127) 2011E $1,540 951 --26 418 (271) (93) (0) (420) $2,149 $211 (879) 20 (1,304) $(1,952) $972 24 (23) $973 (1) $641 1,169 $1,809 $2,149 341 --(879) $1,611 (418) $1,193 499 (198) $1,495 10.6% ------$1,000 0.8x 2012E $1,278 952 --22 (26) 15 --(26) 8 $2,222 --(1,049) --(1,306) $(2,355) $(21) ----$(21) --$1,809 (153) $1,657 $2,222 ----(1,049) $1,174 26 $1,200 526 (205) $1,521 10.5% ------$1,000 0.9x 2013E $1,292 927 --22 (44) 15 --(44) (35) $2,133 --(1,118) ----$(1,118) $(523) ----$(523) --$1,657 492 $2,149 $2,133 66 100 (1,118) $1,181 44 $1,225 507 (198) $1,534 10.4% ------$1,000 0.7x 2014E $1,283 923 --22 (29) 15 --(29) (31) $2,153 --(988) ----$(988) $(1,026) ----$(1,026) --$2,149 139 $2,288 $2,153 --100 (988) $1,265 29 $1,294 454 (177) $1,571 10.6% ------$1,000 0.3x 2015E $1,324 874 --23 (17) 15 --(17) (33) $2,167 --(860) ----$(860) $(779) ----$(779) --$2,288 528 $2,816 $2,167 --100 (860) $1,407 17 $1,424 389 (152) $1,662 11.2% ------$1,000 (0.0)x '10A-'15E CAGR 6.1%
0.3%
(5.0)%
(10.3)%
34.5% 0.3%
18.9%
13.7%
(5.0)% 11.9%
Exhibit 162: Dish Network Balance Sheet (in millions)

2010A Assets Current Assets Cash and Equivalents Marketable Securities Trade Accounts Receivable Trade Accounts Receivable -- EchoStar Inventory - DISH Inventory - Blockbuster Deferred Tax Assets Prepaid Income Taxes Other Total Current Assets Noncurrent Assets Restricted Cash and Marketable Securities TiVo Prepayment Property & Equipment, net FCC Authorizations Marketable Securities Other Noncurrent Assets Total Noncurrent Assets Total Assets Liabilities & Stockholders' Equity Current Liabilities Trade Accounts Payable Trade Accounts Payable -- EchoStar Deferred Revenue Accrued Programming Litigation Accrual Other Accrued Expenses Current Portion of Long-Term Debt Total Current Liabilities Long-Term Obligations, Net of Current Portion Long-Term Debt, Capital Leases Deferred Tax Liabilities Long-Term Deferred Revenue and Other Total Long-Term Liabilities Total Liabilities Stockholders Equity/(Deficit) Class A Common Stock Class B Common Stock Additional Paid in Capital Accumulated Other Comp Income/(Loss) Accumulated Deficit Treasury Stock at Cost Total DISH Network Stockholders' Equity Non-controlling Interest Total Stockholders Equity/(Deficit) Total Liabilities & Stockholders' Equity 2011E 2012E 2013E 2014E 2015E '10A-'15E CAGR
$641 2,300 772 14 488 --217 --142 $4,573 144 --3,232 1,391 225 66 $5,059 $9,632
$1,809 2,188 764 14 431 87 231 --189 $5,714 125 387 3,130 1,391 124 1,447 $6,604 $12,318
$1,657 2,188 752 14 446 61 231 --189 $5,537 125 372 2,953 1,391 124 2,750 $7,716 $13,253
$2,149 2,188 740 13 460 59 231 --189 $6,029 125 357 3,071 1,391 124 2,747 $7,816 $13,845
$2,288 2,188 726 13 475 54 231 --189 $6,164 125 342 3,063 1,391 124 2,745 $7,791 $13,955
$2,816 2,188 712 13 488 50 231 --189 $6,688 125 327 2,800 1,391 124 2,742 $7,510 $14,198
34.5%
7.9%
8.2% 8.1%
$162 239 804 1,090 618 555 1,031 $4,498 $5,484 568 215 $6,266 $10,765 $3 2 2,172 93 (1,834) (1,569) $(1,133) 0 $(1,132) $9,632
$159 192 822 1,071 66 807 1,030 $4,148 $6,461 1,002 211 $7,674 $11,821 $3 2 2,250 178 (368) (1,569) $495 2 $497 $12,318
$172 192 810 1,055 66 807 523 $3,624 $6,948 976 211 $8,135 $11,759 $3 2 2,272 178 607 (1,569) $1,492 2 $1,494 $13,253
$176 184 796 1,037 66 807 1,026 $4,092 $5,922 932 211 $7,065 $11,157 $3 2 2,294 178 1,779 (1,569) $2,686 2 $2,688 $13,845
$179 180 782 1,018 66 807 779 $3,810 $5,143 903 211 $6,257 $10,067 $3 2 2,315 178 2,957 (1,569) $3,886 2 $3,888 $13,955
$180 176 767 998 66 807 1,531 $4,525 $3,612 885 211 $4,708 $9,233 $3 2 2,338 178 4,011 (1,569) $4,962 2 $4,965 $14,198
0.1%
(5.6)% (3.0)%
8.1%
TIME WARNER CABLE (TWC), BUY | 2012YE TARGET $88

Cables (Former) Industry Darling Needs the Love Again
We are initiating coverage of Time Warner Cable (TWC) shares with a Buy rating and an $88 price target at year-end 2012. Pro forma for the recently announced acquisitions, TWC serves 12.5MM basic subscribers within a 30MM household footprint and is the secondlargest cable provider in the country. In August, 2011, it announced its intention to acquire Insight Communications for $3B. Along with a $260MM acquisition of New Wave Communications, this adds 1.5MM homes and over 700k basic subscribers to its footprint in Kentucky, Indiana, Tennessee and Ohio. Time Warner Cable stands in stark contrast to its larger peer, Comcast, in that it was historically been part of a vertically integrated enterprise under the Time Warner (TWX) umbrella. At the end of 2006, Time Warners Cable properties were separated via a distribution to TWX shareholders. On our 2012 estimates and pro forma for the NaviSite, NewWave and Insight acquisitions, the shares trade at 13x P/E, 5.5x EV/EBITDA and supports a levered FCF yield of 11% and an unlevered FCF yield of 7.5%. Again pro forma for these acquisitions, we estimate the 3year (2011E-2014E) growth rates for EBITDA, EPS and FCF (levered) at 3.9%, 22% and 4.5%, respectively, when compounded annually. The Bull Thesis A Blip in the Radar but Not a Change in Strategy The clear choice for cable investors: a Cable company owned by the PEOPLE. Once TWC completed its separation from Time Warner, Inc. (TWX, not covered) in March 2009, TWC became the go-to choice for large institutional investors wanting to invest in Cable, as it offered (and continues to offer) several unique attributes in the media investment space: no controlling Class B (super-voting) shareholder whose goals may not be aligned with those of public shareholders; the best disclosure standard in the industry, in our view; and senior leadership whose focus is on maximizing shareholder returns rather than empire building. The companys simple message of returning excess FCF to equity owners via a share buyback as long as leverage (measured as net debt/EBITDA) is in the 3.25x vicinity, has resulted in $2.2 billion in shares repurchased (through 2Q11) along with a recurring annual dividend of $1.92 per share. Business acquisitions not likely to be habitual. The business acquisition risk for Time Warner Cable, while modest, does exist, but
TWC Buy $70.87 $88.00 $84.05 24.2% 9.6% 19.4% $80.86 $56.84
23,046 44,027 20,981 325 2.3% 2.4 2.5%
2011E 2012E 2013E

19,721 21,101 22,116
2011E 2012E 2013E

7,163 7,767 8,265
2011E 2012E 2013E
3,294 2,558 2,363
Stock Chart
requires a high financial hurdle for management and board approval, and would likely be in horizontal operations or for technologies supporting the cable operations the company has steadfastly asserted that it is a Cable company. The recent acquisitions have taken some luster away from the leveraged equity shrink story. The $3B Insight acquisition at face value looks like a 8.5x 2011 EBITDA transaction but net of operating synergies and deferred tax assets, is closer to a 6.3x multiple (similar to where TWC traded at the time of the announcement). Moreover, Insights network is upgraded and the opportunity is really in improving EBITDA margins (about 400 bps lower than TWC) and up-selling multiple subscriptions. Capitalizing on the network advantage while Telco rollout moderates. Recent overhangs notwithstanding, TWC still remains a solid operational story, and a good defensive play in a still uncertain market. By the end of 2012, Time Warner Cables transition to switched-digital and DOCSIS 3.0 should be largely completed, giving the cable MSO a sustainable competitive advantage. At 2Q11, TWC had deployed DOCSIS 3.0 in about 60% of homes passed. Time Warner Cables Wideband rollout has been slower and a bit more surgical than Comcasts, as the company believes it already has a speed advantage relative to the competition. Only about 15% of the plant is all-digital, primarily in the New York DMA. With these investments, TWC should benefit from more capacity (that can be used for HD/3D, international channels, faster HSI speeds) as well as from operating efficiencies in the form of fewer truck rolls and the prevention of signal theft. Continued focus on the bundle. TWCs strategy has been primarily to push the triple-play bundle offerings, which are among the most attractively priced relative to the competition, in contrast to the pricing of standalone video, voice, and data products. While primary service unit growth should slow on a secular basis, we expect bundled subscriber penetration together to approach 85% of basic subscribers by 2015, from 69% in 2010. The Bear Thesis Wheres My Cash? Does TWCs new acquisitive posture suggest a new normal for the company? As mentioned earlier, TWC has been a top performer in terms of share price appreciation since it became a public entity. Recently, the only true negative that weve heard (besides the usual ones like competition, the Macro environment, etc), has been that TWCs days of being a shareholder friendly returner of capital might be coming to a close. What happened to my buyback? Over the last year, the company announced $3.7B of acquisitions which has taken pro forma leverage close to the magical 3.25x threshold. This has resulted in the company materially slowing buyback activity. This suggests that the buybacks are likely to be curbed until EBITDA growth and FCF generation affords enough liquidity to return to the previous intensity levels ($800M+ per quarter) which we only anticipate restarting in the second half of 2012. TWCs PSU and EBITDA growth lags the peer group Is it a cause for worry? As Exhibit 163 and Exhibit 164 illustrate, TWCs fundamentals have been less inspiring than the peer group. In 2Q 2011, not only were single and double play customers down, so were DVR subscribers for the first time. Moreover, EBITDA growth rates lag Comcast, the key comparable. Whether it is the economy or competition, TWCs philosophy is to only drive profitable growth and not react to short term promotions that can sway short term net addition market share.
Exhibit 163: Cable Primary Subscriber Unit Net Additions YoY Growth (1Q10A-2Q11A)
Exhibit 164: Cable EBITDA YOY Growth (1Q10A-2Q11A)
*Cablevision is New York metropolitan market only Source: ISI Group estimates, company documents
* Cablevision is New York metropolitan market only Source: ISI Group estimates, company documents
What We Think: Still a Good Way to Play the Cable Theme Over the 2011-2013 period, and pro forma for the NaviSite, New Wave and Insight acquisition, we estimate about 3% revenue and 4.5% EBITDA CAGR. In our model, we assume the company stays near its target leverage ratio over our 2011-2015 forecast period, which suggests that the company could repurchase almost $7.8B worth of equity during the three years (2011-2013, in addition to paying out $2.1B in dividends. A stock that once use to trade at a premium to the group has lost some of its luster due to a squishy 2Q11 (as noted in the Bear case, weak subscriber and EBITDA trends), the aforementioned acquisitions (Cable investors are not fans of acquisitions, probably justifiably) and the diminished buyback intensity till the Insight transaction is closed. However, we think the shares should trade at a premium to the group due to strong corporate governance, what we believe will be improving subscriber trends in 3Q11, steady cash flow growth with substantial FCF generation and our belief that the buyback intensity will return to the norm by mid-2012. At the time of its spin-off, TWC was a novelty for Cable equities. For the first time, there was a Cable company owned and controlled by the public, with no super-voting shares to worry about. Moreover, it was a pure-play operator with scale, with some of the best properties in the country (Manhattan, Dallasetc). While Time Warner Cable certainly deserves accolades for executing well since it has become a stand-alone entity, we believe its strong equity performance (at least in part) owes to the fact that investors who previously liked cable as businesses but didnt or couldnt invest in them because of the baggage that came with them, now had an option. While were not against the M&A activity per se, we wonder if this represents a blip in the radar or a more permanent shift in strategy (Charter has a few clusters that would be ideal targets for TWC). Regarding Insight, et al, we believe that the acquisitions were done at attractive levels pro forma for the expected synergies and the associated tax shields. Had they not met higher risk-adjusted returns over the share buyback option, we dont believe that TWC management who are excellent stewards of investor capital would have initiated them. We rate TWC a Buy with a YE 2012 Price Target of $88.
Exhibit 165: Time Warner Cable Subscriber Net Additions
Exhibit 166: Time Warner Cable Subscribers and Total ARPU
Exhibit 167: Time Warner Cable Revenues and Profitability
Exhibit 168: Time Warner Cable Capital Expenditures
Exhibit 169: Time Warner Cable Free Cash Flow, Debt Maturities, and Return of Capital
Exhibit 170: Time Warner Cable Revenue Mix (2011E)
Exhibit 171: Insight Communications Adjusted Acquisitions Multiples (in millions)

Deal value 2011E EBITDA EBITDA Multiple 2011E Unlevered FCF Unlevered FCF Yield Deal value NPV of NOLs Cost synergies Adjusted value Adjusted EBITDA Multiple Adjusted Unlevered FCF Yield $3,000 $351 8.5x $163 5.4% $3,000 -300 -500 $2,200 6.3x 7.4%
Exhibit 172: Time Warner Cable Estimates vs. Consensus (in millions except per share values)
Annual 2012E $21,101 $20,610 2.4% $7,767 $7,572 2.6% 36.8% 36.7% 0.1% $4,633 $4,529 2.3% $5.54 $5.68 -2.5% $2,900 $3,002 -3.4% Quarterly 3Q11E 4Q11E $4,948 $4,942 0.1% $1,771 $1,794 -1.3% 35.8% 36.3% -0.5% $1,018 $1,041 -2.2% $1.08 $1.14 -4.6% $671 $756 -11.2% $5,002 $4,995 0.1% $1,837 $1,830 0.4% 36.7% 36.6% 0.1% $1,081 $1,081 0.0% $1.18 $1.26 -5.9% $774 $804 -3.7%
2011E ISI Group Inc. Revenues Consensus Delta ISI Group Inc. EBITDA Consensus (Adj) Delta ISI Group Inc. EBITDA Consensus Margins Delta ISI Group Inc. Operating Consensus Income Delta ISI Group Inc. EPS (Diluted) Consensus Delta ISI Group Inc. CAPEX Consensus Delta $19,721 $19,687 0.2% $7,163 $7,169 -0.1% 36.3% 36.4% -0.1% $4,137 $4,152 -0.4% $4.43 $4.55 -2.6% $2,808 $2,920 -3.8%
2013E $22,116 $21,505 2.8% $8,265 $7,949 4.0% 37.4% 37.0% 0.4% $5,162 $4,950 4.3% $7.09 $6.91 2.7% $3,004 $3,068 -2.1%
Exhibit 173: Time Warner Discounted Cash Flow Valuation (in millions)
FV 2012E DCF Valuation PV of Projected Unlevered FCF PV of Cash Flows in Perpetuity Enterprise Value Add: Cash & Equivalents Add: Option Proceeds Less: Debt Add: Clearwire Investment Add: SpectrumCo Investment Add: NPV of Insight NOL Tax Shield Add: PV of Terminal Value of Adelphia Tax Asset Equity Value Diluted Shares Fair Value per Share Current Share Price Potential Upside $13,678 35,302 $48,981 4,883 276 (29,600) 144 692 300 857 $26,532 300.7 $88 $70.87 24.5% Valuation Asssumptions Risk Free Rate 3.2% Equity Risk Premium 6.0% Stock Beta 1.00 Cost of Equity 9.2% Weighted Average Cost of Capital (WACC) Perpetual Growth Rate (g) Terminal Multiple = (1+g)/(WACC-g)
4.530% 40.0% 2.7% 37.5% 6.7% --14.8x
Exhibit 174: Time Warner Valuation Multiples

2011PF Per Share Valuation Multiples Per Share Metrics Diluted EPS Fully Taxed FCF per Share Dividend per Share Per Share Multiples Price Earnings (P/E) Ratio Fully Taxed FCF Yield Unlevered Fully Taxed FCF Yield Dividend Yield Enterprise Value Multiples (In Millions) Enterprise Value Fully Diluted Shares Current Share Price Market Cap Add: Debt Less: Cash & Equivalents Less: Option Proceeds Enterprise Value Less: Clearwire Investment Less: SpectrumCo Investment Less: NPV of NOLs/Deferred Tax Assets Adjusted Enterprise Value Adjusted EBITDA EV/EBITDA Value per Basic Subscriber Value per PSU Capital Returned to Shareholders Dividends Share Repurchases Cash Returned to Shareholders Free Cash Flow Shareholders' Returns as % of FCF Returns Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Net Tangible Assets (RONTA) Return on Equity (ROE) Leverage & Coverage Ratios Net Debt/EBITDA (pro forma) EBITDA/Interest Expense (EBITDA-Capex)/Interest Expense 2012PF 2013E 2014E 2015E
$4.69 6.44 1.92 15.1x 9.4% 7.5% 2.7%
$5.59 7.47 2.26 12.7x 11.0% 7.5% 3.2%
$7.09 8.63 2.59 10.0x 12.7% 7.9% 3.7%
$8.47 9.81 2.92 8.4x 14.5% 8.1% 4.1%
$8.87 10.59 3.21 8.0x 15.8% 8.2% 4.5%
333.3 $70.87 $23,622 27,233 (6,466) (276) $44,113 (144) (692) (1,621) $41,657 $7,544 5.5x $3,276 $1,459 $641 2,493 $3,134 2,081 150.6% 5.2% 7.4% 5.5% 17.5% 3.2x 4.7x 2.9x
300.7 $70.87 $21,311 29,600 (4,883) (276) $45,752 (144) (692) (1,390) $43,526 $7,946 5.5x $3,542 $1,518 $708 2,800 $3,508 2,219 158.1% 5.6% 7.8% 5.9% 24.4% 3.1x 4.8x 3.0x
274.0 $70.87 $19,421 29,950 (4,350) (276) $44,744 (144) (692) (1,486) $42,422 $8,265 5.1x $3,560 $1,478 $745 2,500 $3,245 2,365 137.2% 6.2% 8.6% 6.6% 33.2% 3.1x 5.1x 3.2x
249.6 $70.87 $17,689 29,478 (3,173) (276) $43,718 (144) (692) (1,473) $41,409 $8,454 4.9x $3,576 $1,443 $767 2,500 $3,267 2,449 133.4% 6.6% 9.2% 7.0% 40.3% 3.1x 5.5x 3.5x
227.2 $70.87 $16,102 28,728 (1,725) (276) $42,829 (144) (692) (1,404) $40,589 $8,519 4.8x $3,599 $1,417 $772 2,500 $3,272 2,406 136.0% 6.9% 9.7% 7.4% 46.1% 3.2x 5.6x 3.5x
*Valuation multiples are pro forma for Insight and NewWave acquisitions Source: ISI Group estimates, Bloomberg, L.P., company documents
Exhibit 175: Time Warner Cable Subscriber Statistics (000s)

2010A Passings Video HSI Homes Passed Digital Phone Homes Passed Subscribers Basic Video Residential HSI Commercial HSI Residential Digital Phone Commercial Digital Phone Primary Service Units (PSUs) Digital Video Revenue Generating Units (RGUs) PSU/Basic Sub Double Play Triple Play Bundled Subscribers Bundled Subs as % of Basic Non-Video Subscribers Customer Relationships PSU/Customer Relationship Digital Video Recorders (DVRs) Penetration Basic Subs as % of Homes Passed Digital Subs as % of Basic DVR as % of Digital HDTV as % of Digital HSI as % of Homes Passed Voice as % of Homes Passed Subscriber Net Adds Basic Video Residential HSI Commercial HSI Residential Digital Phone Commercial Digital Phone Primary Service Units (PSUs) Digital Video Revenue Generating Units (RGUs) 27,471 27,375 26,943 12,422 9,469 334 4,385 111 26,721 9,013 35,734 2.2x 4,866 3,680 8,546 68.8% 2,074 14,495 1.8x 4,630 45.2% 72.6% 51.4% 71.6% 35.8% 16.7% (449) 475 40 232 46 344 147 491 2011E 27,939 27,876 27,472 12,060 9,910 383 4,555 161 27,069 9,065 36,134 2.2x 4,948 3,857 8,804 73.0% 2,348 14,408 1.9x 4,733 43.2% 75.2% 52.2% 83.3% 36.9% 17.2% (434) 396 49 146 50 207 15 222 $80.36 $43.13 $39.45 $105.42 $56.62 $134.41 4.3% 4.9% 1.9% 4.3% 2.8% 8.4% 2012E 29,766 29,737 29,314 12,290 10,771 428 4,947 236 28,672 9,721 38,393 2.3x 5,172 4,239 9,411 76.6% 2,732 15,022 1.9x 5,201 41.3% 79.1% 53.5% 80.7% 37.7% 17.7% (415) 305 45 107 75 116 11 127 $83.88 $44.85 $39.75 $108.92 $57.65 $144.17 4.4% 4.0% 0.7% 3.3% 1.8% 7.3% 2013E 31,713 31,713 31,258 11,916 11,000 468 5,027 296 28,707 9,731 38,438 2.4x 5,133 4,353 9,487 79.6% 2,951 14,867 1.9x 5,410 37.6% 81.7% 55.6% 83.1% 36.2% 17.0% (374) 229 40 80 60 35 10 45 $86.63 $46.37 $40.02 $113.75 $59.25 $152.27 3.3% 3.4% 0.7% 4.4% 2.8% 5.6% 2014E 33,787 33,787 33,316 11,580 11,171 508 5,087 346 28,692 9,740 38,432 2.5x 5,075 4,443 9,518 82.2% 3,151 14,731 1.9x 5,550 34.3% 84.1% 57.0% 84.6% 34.6% 16.3% (336) 171 40 60 50 (15) 9 (6) $89.53 $47.84 $40.05 $117.11 $60.39 $160.36 3.3% 3.2% 0.1% 3.0% 1.9% 5.3% 2015E 35,996 35,996 35,502 11,277 11,300 548 5,132 383 28,640 9,748 38,388 2.5x 5,006 4,510 9,516 84.4% 3,336 14,613 2.0x 5,636 31.3% 86.4% 57.8% 85.6% 32.9% 15.5% (303) 129 40 45 38 (52) 8 (44) $91.98 $49.18 $39.91 $119.92 $61.38 $167.54 2.7% 2.8% (0.4)% 2.4% 1.6% 4.5% (7.6)% --(4.0)% '10A-'15E CAGR 5.6% 5.6% 5.7% (1.9)% 3.6% 10.4% 3.2% 28.1% 1.4% 1.6% 1.4% 3.4% 0.6% 4.2% 2.2% 10.0% 0.2% 1.2% 4.0%
Average Revenue Per Subscriber (ARPU) Video ARPU per Basic Sub (Incl. Advertising & Oth $77.06 High-Speed Internet $41.13 Voice $38.72 Subscription ARPU per Customer $101.06 Subscription ARPU per Primary Service Unit $55.08 Total ARPU per Basic Subscriber $124.01 YoY Growth Video ARPU per Basic Sub (Incl. Advertising 5.0% High-Speed Internet (1.2)% Voice (0.5)% Subscription ARPU per Customer 3.4% Subscription ARPU per Primary Service Unit 0.5% Total ARPU per Basic Subscriber 8.4%
3.6% 3.6% 0.6% 3.5% 2.2% 6.2%
*Assumes NewWave acquisition completed by 4Q11 and Insight Communications acquisition completed by 2Q12 Source: ISI Group estimates, company documents
Exhibit 176: Time Warner Cable Income Statement (in millions)

2010A Revenues Subscription Video High-Speed Internet Voice Total Subscription Revenues Other Advertising Total Revenues Costs and Expenses Costs of Revenues Selling, General & Administrative Depreciation Amortization Restructuring & Other Total Costs and Expenses Operating Income (EBIT) Interest Expense, net Other, net Pre-Tax Income Provision for income taxes Net Income Less: Net income attributable to noncontrolling inte Net Income attributable to TWC Earnings per Share (EPS) Basic EPS Diluted EPS Dividends per Share Cash dividend Special cash dividend YoY Growth Revenues Subscription Video High-Speed Internet Voice Total Subscription Revenues Advertising Total Revenues Costs of Revenues Selling, General & Administrative Operating Cash Flow (OIBDA) Operating Income (EBIT) Net Income attributable to TWC Margins Gross Margins OIBDA Margins Operating Margins Tax Rate Net Income attributable to TWC 2011E 2012E 2013E 2014E 2015E '10A-'15E CAGR
$10,843 4,735 2,032 $17,610 377 881 $18,868 $8,873 3,125 2,961 168 52 $15,179 $3,689 (1,394) (99) $2,196 (883) $1,313 (5) $1,308 $3.67 3.64 $1.60 ---
$10,897 5,207 2,185 $18,289 538 894 $19,721 $9,220 3,338 2,988 22 15 $15,583 $4,137 (1,513) (126) $2,498 (1,001) $1,498 (4) $1,494 $4.51 4.43 $1.92 ---
$11,274 5,796 2,385 $19,455 642 1,003 $21,101 $9,788 3,546 3,115 19 --$16,468 $4,633 (1,619) (50) $2,964 (1,186) $1,779 (4) $1,774 $5.65 5.54 $2.26 ---
$11,570 6,306 2,522 $20,399 706 1,012 $22,116 $10,191 3,661 3,089 14 --$16,954 $5,162 (1,634) (50) $3,478 (1,391) $2,087 (5) $2,082 $7.24 7.09 $2.59 ---
$11,570 6,644 2,585 $20,798 757 1,052 $22,607 $10,413 3,740 3,041 11 --$17,205 $5,402 (1,543) (50) $3,809 (1,524) $2,286 (6) $2,280 $8.67 8.47 $2.92 ---
$11,550 6,943 2,621 $21,113 798 1,065 $22,977 $10,631 3,827 2,950 11 --$17,419 $5,558 (1,518) (50) $3,990 (1,596) $2,394 (6) $2,388 $9.93 8.87 $3.21 ---
1.3% 8.0% 5.2% 3.7% 3.9% 4.0% 3.7% 4.1% (0.1)% (42.0)% 2.8% 8.5%
12.7% 12.8% 12.8% 22.0% 19.5%
0.8% 4.8% 7.7% 2.6% 25.5% 5.6% 3.7% 10.4% 5.9% 11.2% 22.2% 53.0% 36.4% 19.6% 40.0% 6.9%
0.5% 10.0% 7.5% 3.9% 1.5% 4.5% 3.9% 6.8% 4.2% 12.2% 14.2% 53.2% 36.3% 21.0% 40.0% 7.6%
3.5% 11.3% 9.1% 6.4% 12.2% 7.0% 6.2% 6.2% 8.4% 12.0% 18.7% 53.6% 36.8% 22.0% 40.0% 8.4%
2.6% 8.8% 5.8% 4.9% 0.8% 4.8% 4.1% 3.2% 6.4% 11.4% 17.3% 53.9% 37.4% 23.3% 40.0% 9.4%
(0.0)% 5.4% 2.5% 2.0% 4.0% 2.2% 2.2% 2.2% 2.3% 4.7% 9.5% 53.9% 37.4% 23.9% 40.0% 10.1%
(0.2)% 4.5% 1.4% 1.5% 1.3% 1.6% 2.1% 2.3% 0.8% 2.9% 4.7% 53.7% 37.1% 24.2% 40.0% 10.4%
Exhibit 177: Time Warner Cable Cash Flow Statement (in millions)
2010A Cash Flow From Operating Activities Net Income Adjustments for noncash and nonoperating items Depreciation Amortization (Income From)/Losses Due to Equity Investme Deferred Income Taxes Equitybased compensation Impairment of cable franchise rights Changes in operating assets and liabilities Receivables Accounts payable and other liabilities Other changes Net Cash Provided by Operating Activities Cash Flow from Investing Activities Acquisitions and investments Capital Expenditures Other investing activities Net Cash Provided by Investing Activities Cash Flow from Financing Activities CP Borrowings/(Repayments) Debt Net Borrowings/(Repayments) Debt Issuance Costs Proceeds from exercise of stock options Dividends paid Share Repurchases Other financing activities Net Cash Provided by Financing Activities Beginning Cash Net Increase (Decrease) in Cash Ending Cash Free Cash Flow Net Cash Provided by Operating Activities Capital Expenditures Free Cash Flow Less: Impact of Deferred Taxes Less: Economic Stimulus Impacts Adjusted Fully Taxed Free Cash Flow Add: Interest expense, net Less: Adjusted Taxes Unlevered Fully Taxed Free Cash Flow % of Revenues OIBDA-Capex Operating Cash Flow (OIBDA) Capital Expenditures OIBDA-Capex % of Revenues YoY Growth Share Repurchases Cost of repurchased shares Average Price per Share Shares Repurchased Repurchase authorization remaining balance $1,313 2,961 168 132 687 109 --(50) (177) 75 $5,218 $48 (2,930) 10 $(2,872) $(1,261) 1,864 (25) 113 (576) (472) 10 $(347) $1,048 1,999 $3,047 $5,218 (2,930) $2,288 (715) 28 $1,601 1,394 (568) $2,427 12.9% $6,875 (2,930) $3,945 20.9% 21.0% $472 $58.81 8 $3,485 2011E $1,498 2,988 22 110 1,213 115 --(5) 110 51 $6,103 $(563) (2,808) 18 $(3,353) $500 3,215 (8) 98 (641) (2,491) (3) $670 $3,047 3,419 $6,466 $6,103 (2,808) $3,294 (602) (611) $2,081 1,513 (608) $2,986 15.1% $7,163 (2,808) $4,354 22.1% 10.4% $2,493 $74.21 34 $993 2012E $1,779 3,115 19 35 339 123 --(73) 121 --$5,458 $(1,245) (2,900) --$(4,145) $2,750 (2,138) ----(708) (2,800) --$(2,896) $6,466 (1,583) $4,883 $5,458 (2,900) $2,558 (464) 125 $2,219 1,619 (647) $3,190 15.1% $7,767 (2,900) $4,867 23.1% 11.8% $2,800 $85.87 33 --2013E $2,087 3,089 14 35 (2) 129 --(39) 55 --$5,367 --(3,004) --$(3,004) $1,900 (1,550) ----(745) (2,500) --$(2,895) $4,883 (532) $4,350 $5,367 (3,004) $2,363 (395) 397 $2,365 1,634 (654) $3,345 15.1% $8,265 (3,004) $5,261 23.8% 8.1% $2,500 $93.73 27 --2014E $2,286 3,041 11 35 113 132 --(19) 28 --$5,627 --(3,065) --$(3,065) $1,350 (1,822) ----(767) (2,500) --$(3,739) $4,350 (1,178) $3,173 $5,627 (3,065) $2,562 (361) 248 $2,449 1,543 (617) $3,374 14.9% $8,454 (3,065) $5,390 23.8% 2.4% $2,500 $102.30 24 --2015E $2,394 2,950 11 35 169 134 --(14) 27 --$5,705 --(3,130) --$(3,130) $(750) ------(772) (2,500) --$(4,022) $3,173 (1,447) $1,725 $5,705 (3,130) $2,575 (344) 175 $2,406 1,518 (607) $3,317 (1.7)% $8,519 (3,130) $5,389 23.5% (0.0)% $2,500 $111.66 22 --'10A-'15E CAGR
1.8%
1.3% 1.7%
63.2%
(10.8)%
2.4%
8.5%
6.4%
6.4%
Exhibit 178: Time Warner Cable Balance Sheet (in millions)

2010A ASSETS Current Assets Cash & Equivalents Receivables Deferred income tax assets Other Current Assets Total Current Assets Investments Property, Plant & Equipment, net Intangible assets subject to amortization, net Intangible assets not subject to amortization Goodwill Other Assets Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts Payable Deferred Revenue Accrued Programming Expense Short-term/Current Long-Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt, Net of Current Portion Mandatorily redeemable preferred issued by subsid Deferred Income Taxes Other Liabilities Total Liabilities TWC Shareholders' Equity Common Stock Additional Paid-In Capital Accumulated other comprehensive loss, net Accumulated deficit Total TWC Shareholders' Equity Noncontrolling interests Total equity Total liabilities and equity 2011E 2012E 2013E 2014E 2015E '10A-'15E CAGR
$3,047 718 150 425 $4,340 866 13,873 132 24,091 2,091 429 $45,822
$6,466 748 147 170 $7,531 764 13,685 180 24,143 2,293 650 $49,246
$4,883 821 147 170 $6,020 729 15,107 161 24,911 2,888 650 $50,466
$4,350 860 147 170 $5,528 694 15,022 147 24,911 2,888 650 $49,840
$3,173 879 147 170 $4,369 659 15,045 136 24,911 2,888 650 $48,659
$1,725 894 147 170 $2,936 624 15,226 125 24,911 2,888 650 $47,360
(10.8)%
(7.5)%
0.7%
$529 163 765 --1,629 $3,086 23,121 300 9,637 461 $36,605
$490 177 718 2,638 1,576 $5,598 24,295 300 10,640 511 $41,344
$534 177 794 4,800 1,576 $7,881 24,500 300 10,653 511 $43,845
$550 177 834 6,972 1,576 $10,109 22,678 300 10,325 511 $43,922
$558 177 854 7,017 1,576 $10,182 22,161 300 10,111 511 $43,265
$565 177 874 6,267 1,576 $9,459 22,161 300 9,954 511 $42,385
25.1%
3.0%
(11.6)% 0.7%
$45,822
$49,246
$50,466
$49,840
$48,659
$47,360
$3 9,444 (291) 54 $9,210 7 9,217
$3 7,567 (110) 432 $7,892 10 7,902
$3 4,181 217 2,206 $6,607 14 6,621
$3 1,064 543 4,288 $5,898 20 $5,918
$3 (2,072) 869 6,568 $5,368 25 $5,394
$3 (5,210) 1,196 8,956 $4,944 31 $4,976
Table of Exhibits
Exhibit 1: Cable & Satellite Coverage, Stock Ratings, and 2012E Price Target.................................. 4 Exhibit 2: S&P500 Consumer Staples Trailing EBITDA Valuation Multiple ..................................... 9 Exhibit 3: S&P500 Consumer Discretionary Trailing EBITDA Valuation Multiple ........................... 9 Exhibit 4: Fully Taxed Levered FCF Yield (2012E) vs. 3-year Levered FCF CAGR (2012E-2014E) 9 Exhibit 5: Fully Taxed Unlevered FCF Yield (2012E) vs. 3-year Unlevered FCF CAGR (2012E2014E) ................................................................................................................................................... 9 Exhibit 6: EV/EBITDA (2012E) vs. 3-year EBITDA CAGR (2012E-2014E) .................................. 10 Exhibit 7: P/E (2012E) vs. 3-year Diluted EPS CAGR (2012E-2014E) ............................................ 10 Exhibit 8: Discounted Cash Flow Assumptions ................................................................................. 10 Exhibit 9: Cable & Satellite Comparative Valuations ........................................................................ 11 Exhibit 10: Cable & Satellite Key Operational Comparisons ............................................................ 12 Exhibit 11: Pay-TV Penetration of Households.................................................................................. 16 Exhibit 12: U.S. Pay-TV Subscribers by Industry (Cable, DBS & Telco) ......................................... 16 Exhibit 13: Basic Video Subscriber Mix Circa 2011E ....................................................................... 17 Exhibit 14: Basic Video Subscriber Mix Circa 2015E ....................................................................... 17 Exhibit 15: Cable MSO Overlap with Telco Footprints ..................................................................... 18 Exhibit 16: Cable MSO Overlap with Telco Fiber Networks............................................................. 18 Exhibit 17: Heat Map of AT&Ts Television Footprint by State (Darker Shading Indicates More Homes Passed) .................................................................................................................................... 18 Exhibit 18: Heat Map of Verizons Television Footprint by State (Darker Shading Indicates More Homes Passed) .................................................................................................................................... 18 Exhibit 19: U.S. Television Ad Spending (National, $Bs) ................................................................ 19 Exhibit 20: Basic Tier Affiliate Fees (2006-2010); Top-15 and All Other 1 ...................................... 20 Exhibit 21: Cable & Satellite Industry-Video Subscribers & Net Additions (2009A 2015E) ........ 21 Exhibit 22: Cable & Satellite Industry-Video Revenues vs. Programming Costs .............................. 21 Exhibit 23: Cable Industry HD Penetration of Basic and Digital Subscribers (Annual) .................... 22 Exhibit 24: Cable Industry DVR Penetration of Basic Subscribers (Annual) .................................... 22 Exhibit 25: Triple Play Penetration (Cablevision, Charter, Comcast and TWC as a % of Basic Subs) ............................................................................................................................................................. 22 Exhibit 26: ISI Multichannel Subscriber Forecast .............................................................................. 23 Exhibit 27: ISI Multichannel Subscriber Forecast (including OTT Forecast) .................................... 23 Exhibit 28: U.S. Monthly Unique Online Video Viewers .................................................................. 24 Exhibit 29: Average Realized Broadband Speed in the U.S. Over Time ........................................... 24 Exhibit 30: U.S. Aggregate Distribution of Broadband Usage vs. Percentiles................................... 25 Exhibit 31: ISI Group Teen Video Usage Survey Summary .............................................................. 26 Exhibit 32: Actual Download Speeds Required by Online Activity .................................................. 28 Exhibit 33: Industry HSI Subscribers and Net Additions ................................................................... 28 Exhibit 34: Cable HSI Weighted ARPU ............................................................................................. 28 Exhibit 35: U.S. Percentage of Households That Have Substituted Wireless for Wireline Over Time ............................................................................................................................................................. 29 Exhibit 36: Historical Cable VoIP Subscribers .................................................................................. 30 Exhibit 37: Cable/Telco Residential Voice Forecasts ........................................................................ 30 Exhibit 38: Wireless Substitution Forecast of Primary Access Lines ................................................ 30 Exhibit 39: Cable Industry Revenues, CAPEX and Capital Intensity ................................................ 31 Exhibit 40: Cable & DBS: Consolidated EBITDA and FCF (2011E 2013E) ................................. 32 Exhibit 41: Cable & DBS: Debt Maturities, FCF & Leverage Ratios (2012E-2016E) ...................... 32 _________________________________________________________________________________ PLEASE do not forward Page 133 of 139 October 24, 2011
Exhibit 42: Cable & DBS: Return of Capital and Payout (2011E 2013E) ...................................... 32 Exhibit 43: Illustrative Cable Plant Pre All Digital Conversion ......................................................... 34 Exhibit 44: Illustrative Cable Plant All Digital................................................................................ 35 Exhibit 45: Illustrative Switched-Digital Video Cable Plant Bandwidth Use .................................... 35 Exhibit 46: U.S. Cable Industry SMB Subscribers by Product .......................................................... 37 Exhibit 47: Commercial Revenue Forecast ........................................................................................ 37 Exhibit 48: Cable Industry SMB Footprint Opportunity (2010A 2015E) ....................................... 37 Exhibit 49: Cable Industry Business Services Market Opportunity by Segment ............................... 38 Exhibit 50: Cable Industry Business Services Revenue Growth Forecast ......................................... 38 Exhibit 51: Cable Industry Business Services Revenue % of Total Cable Revenue ......................... 38 Exhibit 52: Personal Expenditures for Consumption of Food Items (excludes alcohol) .................... 39 Exhibit 53: Personal Expenditures for Consumption of Transportation Services .............................. 39 Exhibit 54: U.S. Cable & Satellite Index vs. S&P Discretionary Index ............................................. 40 Exhibit 55: U.S. Cable & Satellite Television Consumer Personal Expenditures (Chained to 2005 $s) ...................................................................................................................................................... 41 Exhibit 56: U.S. Cable & Satellite Internet Access Consumer Personal Expenditures (Chained to 2005 $s) ............................................................................................................................................. 41 Exhibit 57: Hours per Day Spent on Leisure Activities per Adult American (Television and Other) 41 Exhibit 58: Flat Screen Television Unit Volume Versus Average Selling Price ............................... 42 Exhibit 59: Abraham Maslow Pyramid of Needs ............................................................................... 43 Exhibit 60: Consumer Annualized Recreational Spending Over Time ($Bs, Chained to 2005) ...... 43 Exhibit 61: Consumer Annualized Recreational Spending ex. Cable & Satellite Over Time ($Bs, Chained to 2005) ................................................................................................................................. 43 Exhibit 62: Share of Recreational Spending by Category (3Q11) .................................................. 44 Exhibit 63: Cable & Satellite Share of Recreational Spending Trend (Quarterly) ............................. 44 Exhibit 64: U.S. Real Disposable Personal Income ............................................................................ 45 Exhibit 65: U.S. Consumer Net Worth ............................................................................................... 45 Exhibit 66: Bankrate.com Average 30-Year Fixed Mortgage Interest Rate (2001-present) .............. 45 Exhibit 67: Consumer Bank Loans (2001-present) ............................................................................ 45 Exhibit 68: University of Michigan Consumer Sentiment Survey ..................................................... 46 Exhibit 69: Blended Average Retail Gasoline Prices (Weekly) ......................................................... 46 Exhibit 70: Single-Family Housing Starts (Seasonally Adjusted Annual Rate, 000s) ....................... 47 Exhibit 71: Multi-Family Housing Starts (Seasonally Adjusted Annual Rate, 000s) ........................ 47 Exhibit 72: U.S. Housing Starts vs. TTM Industry Video Net Adds (Quarterly)............................... 48 Exhibit 73: U.S. Cable & Satellite Industry Subscribers .................................................................... 48 Exhibit 74: U.S. Breakout of HHs Below $15K per/yr and $15k-25k/yr Over Time ........................ 49 Exhibit 75: Telco Cable & Satellite Share in top-5 Markets (all Subscriber Values in 000s) ............ 51 Exhibit 76: Market share statistics of top-25 DMAs as of 2Q11 ....................................................... 51 Exhibit 77: A Tale of Two Cities: Miami & Washington DC Single Family Home Resale Prices (S&P Case-Shiller Price Index) .......................................................................................................... 52 Exhibit 78: Median Income Quintiles for Cable, DBS & Telco Pay-TV Subscribers ....................... 53 Exhibit 79: Timeline of Net Neutrality Evolution .............................................................................. 55 Exhibit 80: Average Historical ACSI Score by Industry Group......................................................... 57 Exhibit 81: American Customer Satisfaction Survey Results for Bottom 5 Industries (2005-2011) . 58 Exhibit 82: Exhibit 83: JD Power and Associates Customer Satisfaction Score for Video Providers (2010, Average for All Regions) ........................................................................................................ 58 Exhibit 84: JD Power Video Customer Satisfaction Scores by Operator ........................................... 59 _________________________________________________________________________________ PLEASE do not forward Page 134 of 139 October 24, 2011
Exhibit 85: Regression of 2007-2011 ACSI Scores vs. YE 2007 Through 2Q11 Video Subscriber Share ................................................................................................................................................... 59 Exhibit 86: Cablevision Subscriber Net Additions ............................................................................. 64 Exhibit 87: Cablevision Subscribers and Total ARPU ....................................................................... 64 Exhibit 88: Cablevision Revenues and Profitability ........................................................................... 64 Exhibit 89: Cablevision Capital Expenditures .................................................................................... 64 Exhibit 90: Cablevision Free Cash Flow, Debt Maturities, and Return of Capital ............................ 64 Exhibit 91: Cablevision Revenue Mix (2011E) .................................................................................. 64 Exhibit 92: Cablevision Estimates vs. Consensus (in millions except per share values) ................... 65 Exhibit 93: Cablevision Discounted Cash Flow Valuation (in millions) ........................................... 66 Exhibit 94: Cablevision Valuation Multiples ..................................................................................... 67 Exhibit 95: Cablevision Subscriber Statistics ..................................................................................... 68 Exhibit 96: Cablevision Business Segment Results (in millions) ....................................................... 69 Exhibit 97: Cablevision Income Statement (in millions) .................................................................... 70 Exhibit 98: Cablevision Cash Flow Statement (in millions) .............................................................. 71 Exhibit 99: Cablevision Balance Sheet (in millions) .......................................................................... 72 Exhibit 100: Charter Subscriber Net Additions .................................................................................. 76 Exhibit 101: Charter Subscribers and Total ARPU ............................................................................ 76 Exhibit 102: Charter Revenues and Profitability ................................................................................ 76 Exhibit 103: Charter Capital Expenditures ......................................................................................... 76 Exhibit 104: Charter Free Cash Flow, Debt Maturities, and Return of Capital.................................. 76 Exhibit 105: Charter Revenue Mix (2011E) ....................................................................................... 76 Exhibit 106: Charter Estimates vs. Consensus (in millions except per share values) ........................ 77 Exhibit 107: Charter Discounted Cash Flow Valuation (in millions)................................................. 77 Exhibit 108: Charter Valuation Multiples........................................................................................... 78 Exhibit 109: Charter Subscriber Statistics (000s).............................................................................. 79 Exhibit 110: Charter Income Statement (in millions) ......................................................................... 80 Exhibit 111: Charter Cash Flow Statement (in millions).................................................................... 81 Exhibit 112: Charter Balance Sheet (in millions) ............................................................................... 82 Exhibit 113: CMCSA/CMCSK Historical Spread (2005-Present) ..................................................... 84 Exhibit 114: Comcast-NBU Assets .................................................................................................... 87 Exhibit 115: Comcast Subscriber Net Additions ................................................................................ 88 Exhibit 116: Comcast Subscribers and Total ARPU .......................................................................... 88 Exhibit 117: Comcast Consolidated Revenues and Profitability ........................................................ 88 Exhibit 118: Comcast Cable Capital Expenditures ............................................................................. 88 Exhibit 119: Comcast Free Cash Flow, Debt Maturities, and Return of Capital................................ 88 Exhibit 120: Comcast Cable Revenue Mix (2011E)........................................................................... 88 Exhibit 121: Comcast Estimates vs. Consensus (in millions except per share values) ...................... 89 Exhibit 122: Comcast Discounted Cash Flow Valuation (in millions)............................................... 90 Exhibit 123: Comcast Valuation Multiples......................................................................................... 91 Exhibit 124: Comcast Cable Subscriber Statistics and Financials...................................................... 92 Exhibit 125: NBC Universal Operating Segments (in millions) ........................................................ 93 Exhibit 126: Comcast Consolidated Income Statement (in millions except per share values) .......... 94 Exhibit 127: Comcast Consolidated Cash Flow Statement (in millions) ........................................... 95 Exhibit 128: Comcast Consolidated Balance Sheet (in millions) ....................................................... 96 Exhibit 129: DIRECTV JD Power Rankings vs. Other Pay-TV Providers (2008-2011) ................... 98 Exhibit 130: DIRECTV Top-Ten Markets and Share Gain (Loss) 3Q09 2Q11.............................. 99 _________________________________________________________________________________ PLEASE do not forward Page 135 of 139 October 24, 2011
Exhibit 131: DIRECTV Latin America Subscribers and Pay-TV Market ....................................... 100 Exhibit 132: DIRECTV Net Subscriber Additions by Segment ....................................................... 102 Exhibit 133: DIRECTV Subscribers by Segment ............................................................................. 102 Exhibit 134: DIRECTV ARPU by Segment ..................................................................................... 102 Exhibit 135: DIRECTV Subscriber Acquisition Cost per Gross Addition by Segment................... 102 Exhibit 136: DIRECTV Consolidated Revenues and Profitability................................................... 102 Exhibit 137: DIRECTV Consolidated Free Cash flow, Debt Maturities, and Return of Capital ..... 102 Exhibit 138: DIRECTV Estimates vs. Consensus (in millions except per share values) ................. 103 Exhibit 139: DIRECTV Discounted Cash Flow Valuation (in millions) ......................................... 103 Exhibit 140: DIRECTV Consolidated Valuation Multiples ............................................................. 104 Exhibit 141: DIRECTV U.S. Income Statement (in millions) ......................................................... 105 Exhibit 142: DIRECTV U.S. Cash Flow Statement (in millions) .................................................... 106 Exhibit 143: DIRECTV Latin America Segment Financials (in millions) ....................................... 107 Exhibit 144: DIRECTV Consolidated Key Segment Financials (in millions) ................................ 108 Exhibit 145: DIRECTV Consolidated Income Statement (in millions) .......................................... 109 Exhibit 146: DIRECTV Consolidated Cash Flow Statement (in millions) ..................................... 110 Exhibit 147: DIRECTV Consolidated Balance Sheet (in millions)................................................. 111 Exhibit 148: Dish Network Subscriber Share & Population Density by DMA ................................ 113 Exhibit 149: Blockbuster Movie Pass Competitive Comparison ..................................................... 114 Exhibit 150: Blockbuster Movie Pass Subscribers ........................................................................... 114 Exhibit 151: Blockbuster Movie Pass Revenues and Profitability ................................................... 114 Exhibit 152: Dish Network Video Net Subscriber Additions and Churn ......................................... 116 Exhibit 153: Dish Network Subscribers and Video ARPU .............................................................. 116 Exhibit 154: Dish Network Video Gross Additions and Subscriber Acquisition Cost per Gross Addition ............................................................................................................................................ 116 Exhibit 155: Dish Network Revenues and Profitability ................................................................... 116 Exhibit 156: Dish Network Free Cash Flow, Debt Maturities, and Return of Capital ..................... 116 Exhibit 157: Dish Network Estimates vs. Consensus (in millions except per share values) ............ 117 Exhibit 158: Dish Network Discounted Cash Flow Valuation (in millions) .................................... 117 Exhibit 159: Dish Network Valuation Multiples .............................................................................. 118 Exhibit 160: Dish Network Income Statement (in millions) ............................................................ 119 Exhibit 161: Dish Network Cash Flow Statement (in millions) ....................................................... 120 Exhibit 162: Dish Network Balance Sheet (in millions) .................................................................. 121 Exhibit 163: Cable Primary Subscriber Unit Net Additions YoY Growth (1Q10A-2Q11A) .......... 124 Exhibit 164: Cable EBITDA YOY Growth (1Q10A-2Q11A) ......................................................... 124 Exhibit 165: Time Warner Cable Subscriber Net Additions ............................................................ 125 Exhibit 166: Time Warner Cable Subscribers and Total ARPU ...................................................... 125 Exhibit 167: Time Warner Cable Revenues and Profitability .......................................................... 125 Exhibit 168: Time Warner Cable Capital Expenditures ................................................................... 125 Exhibit 169: Time Warner Cable Free Cash Flow, Debt Maturities, and Return of Capital ............ 125 Exhibit 170: Time Warner Cable Revenue Mix (2011E) ................................................................. 125 Exhibit 171: Insight Communications Adjusted Acquisitions Multiples (in millions) .................... 126 Exhibit 172: Time Warner Cable Estimates vs. Consensus (in millions except per share values)... 126 Exhibit 173: Time Warner Discounted Cash Flow Valuation (in millions) ..................................... 127 Exhibit 174: Time Warner Valuation Multiples ............................................................................... 128 Exhibit 175: Time Warner Cable Subscriber Statistics (000s) ........................................................ 129 Exhibit 176: Time Warner Cable Income Statement (in millions) ................................................... 130 _________________________________________________________________________________ PLEASE do not forward Page 136 of 139 October 24, 2011
Exhibit 177: Time Warner Cable Cash Flow Statement (in millions) .............................................. 131 Exhibit 178: Time Warner Cable Balance Sheet (in millions) ......................................................... 132
ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in the Report. No person(s) responsible for preparing this Report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies. No person(s) preparing this report or a member of his/her household have a financial interest in the subject companies of this Report. At various times, the employees and owners of ISI, other than those preparing this Report, may transact in the securities discussed in this Report. Neither ISI nor its affiliates have any investment banking or market making operations. No person(s) preparing this research Report has received non-investment banking compensation form the subject company in the past 12 months. ISI does and seeks to do business with companies covered in this research Report and has received noninvestment banking compensation in the past 12 months. DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security. ISI RATING SYSTEM: Based on stock's 12-month risk adjusted total return; ETR = total expected return (stock price appreciation/depreciation + dividend yield) Buy Low Risk ETR >+10% Hold Low Risk ETR 0% to +10% Sell Low Risk ETR <0% Buy Medium Risk ETR >+15% Hold Medium Risk ETR -5% to +15% Sell Medium Risk ETR <-5% Buy High Risk ETR >+20% Hold High Risk ETR -10% to +20% Sell High Risk ETR <-10%
ISI has assigned a rating of BUY to 41% of the securities rated as of 9/30/11. ISI has assigned a rating of HOLD to 55% of the securities rated as of 9/30/11. ISI has assigned a rating of SELL to 4% of the securities rated as of 9/30/11. Due to rounding the above numbers may add up to more/less than 100%. RISK RATING: 30% based on stock price volatility, 30% on EPS volatility, 30% on debt rating & 10% on mkt cap.
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ISI - Cable &amp; Satellite Initiations - Oct 2011

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Media: Cable & Satellite

Initiating Coverage with a Constructive View | Playing Offense in a Defensive Market

vjayant@isigrp.com jrifkin@isigrp.com mlanzana@isigrp.com

Mon Oct 24 2011

Playing Offense in a Defensive Market

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*Prices are as of 10/21/2011 Source: ISI Group, Bloomberg, L.P.

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Exhibit 2: S&P500 Consumer Staples Trailing EBITDA Valuation Multiple

Exhibit 3: S&P500 Consumer Discretionary Trailing EBITDA Valuation Multiple

9.5x 9.0x 8.5x 8.0x 7.5x

9.5x 9.0x 8.5x 8.0x 7.5x

Source: Bloomberg L.P., ISI Group

Source: Bloomberg L.P., ISI Group

Exhibit 5: Fully Taxed Unlevered FCF Yield

Source: ISI Group estimates, Bloomberg, L.P., company documents

Source: ISI Group estimates, Bloomberg, L.P., company documents

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Exhibit 6: EV/EBITDA (2012E) vs. 3-year EBITDA CAGR (2012E-2014E)

Exhibit 7: P/E (2012E) vs. 3-year Diluted EPS

Source: ISI Group estimates, Bloomberg, L.P., company documents

Source: ISI Group estimates, Bloomberg, L.P., company documents

Exhibit 8: Discounted Cash Flow Assumptions

Source: ISI Group estimates, Bloomberg, L.P., company documents

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Exhibit 9: Cable & Satellite Comparative Valuations

13.5x 12.7x 11.2x 19.7x 11.4x 9.1x 12.0x 12.9x

2012E $3,548 $3,542 $4,266 $3,733 $1,302 $847 $3,545 $2,873

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Exhibit 10: Cable & Satellite Key Operational Comparisons

Source: ISI Group estimates, company documents

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PART I: THE EVOLUTION OF THE CABLE & SATELLITE INDUSTRY

Source: SNL Kagan, ISI Group estimates, company documents

Source: SNL Kagan, ISI Group estimates, company documents

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Source: Company reports, ISI Group estimates

Source: Company reports, ISI Group estimates

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ISI - Cable & Satellite Initiations - Oct 2011

ISI - Cable & Satellite Initiations - Oct 2011