Dodge & Cox: Strong Signals Out of Cable Companies

Dan Culloton: You guys also have a very large weighting in media stocks, which, like technology stocks, are subject to very fierce competition, technological upgrades that could be really disruptive to their business models. What gives you the confidence in the media, and particularly the cable companies that you own, that they can continue to earn reasonable profits and cash flows over your time horizon?

Charles Pohl: We've spent a lot of time with the cable companies, looking at potential competitive threats. And originally each of these, in most markets, the cable companies had a monopoly position. One potential threat is satellite. Now we're invested in both DISH and DirecTV. So we have a pretty good understanding of what those guys are trying to do and what they're capable of doing, relative to the cable companies.

We also spend time trying to look at new technologies that might be able to impact that franchise. So far we don't see anything that's really plausibly going to come to fruition in any kind of reasonable time horizon.

There are incursions being made into the cable bases by both Verizon, with its FiOS product, which is fiber direct to the home, and also from AT&T, with the U-verse. We think there are some technological issues that AT&T has struggled with, with U-verse. Verizon, the fiber to the home is a very expensive solution, so there's some question as to how many markets they'll be able to roll that out in and how quickly.

At the same time that the phone companies are trying to attack the cable bases of subscribers--and there are some issues with the attacks, both in terms of Verizon with the cost of its solution, in terms of AT&T with the actual technology of the solution--the cable companies are going after the phone customers of those companies and the Internet access customers, and they are making considerably greater headway in terms of attracting those customers than the phone companies are in terms of taking away cable customers.

So net there, we think that that competition is working out to the advantage of the cable companies. And if you look at the valuations that those command in the marketplace today and you compare it to the cash flow, they certainly appear to be very attractive investments to us, provided that somebody doesn't figure out a way to damage those franchises. We spend a lot of time researching them. We don't really see how that's going to happen right now, but it's a continuing, ongoing research effort for us.