Quick Thoughts: Comcast Gaining Speed but Runway is Short

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–          Comcast’s 4Q11 results were strong, driven by rising pricing and increasing penetration of high speed internet service, and economic recovery, election year ad spending and the summer Olympics could fuel further momentum in 2012.

–          However, deceleration in video subscriber losses is NOT evidence of long term resilience to over-the-top and eventually, cord cutting.

–          Relentless cable price hikes and shifting ad dollars could hasten a transition to on-line video.  TV Everywhere is a short term defensive play that will not stop churn once competitive solutions gain traction.

Comcast’s 5% jump on its 4Q11 numbers capped a three month run that has added more than a third to company’s market value.  Analysts viewing the results cheered the slowing of subscriber losses, which seems akin to wordsmithing a deceleration of the growth in the government budget deficit as a deficit cut.  Some of the slowing in disconnects is seasonal, some of it is a sign of better economic conditions, and some of it may be fewer customers “cutting the cord”.  I agree with Comcast management in so far as I believe that most of the video customer losses since 2008 were driven by economic choice, but question whether or not we can expect to see most of these erstwhile customers back for more $73 per month and rising video service once the household larder is a bit more full.

Moreover, as I have written (most recently HERE), I think that the wave of cord cutting has yet to really begin.  Tablets and connected TVs may seem like old news, but the iPad was only introduced 22 months ago and the penetration of connected TVs is only now starting to get interesting.  The growth of the audience on-line, combined with increased internet video advertising spending and the availability of new on-line content are the more relevant indicators of future viewership, and all are moving rapidly to the detriment of the traditional cable model.  Ultimately, the cable orthodoxy of paying up for content and jamming the costs down on consumers – Comcast monthly video bills were up nearly $3 YoY to $73 – will only exacerbate the problem and hasten the day when cord-cutting really becomes a problem.

Comcast is also taking price in its high speed internet business, hiking its average rate 3% to $41/month.  Given that 70% of Americans have no viable alternative for broadband, the increase was absorbed by consumers, with Comcast’s total cable modem customer base rising 7% YoY in the face of the economic headwinds that are the fallback excuse for the subscriber losses on the multichannel video side.  I note that the ratio of broadband customers to video customers has risen from 74.5% to 81.2%, a reflection of the amount of runway left for penetration growth in the high speed internet business.  I am on record with a prediction that meaningful competition from wireless broadband will emerge within the next 5 years, and that a continued strategy of banging through price raises ahead of inflation without corresponding investment for performance improvement will bring regulatory scrutiny that the industry has been, thus far, able to lobby away.

A few comments on TV Everywhere.  Comcast’s Xfinity service offers internet access to a broad library of previously aired television content from many of the most popular channels on its flagship cable service.  With a recent agreement with Disney, Comcast now has full access to ABC and cable networks like ESPN and the Disney channel, with rights to stream the content live to its Xfinity subscribers through 2022.  This service is meant to beat the cord cutters to the punch by integrating on-line access with the traditional cable experience, undercutting alternatives by giving it away free (provided you maintain that $73 a month subscription).  While this may rob on-line video streamers of potential customers just looking for a way to get cable content on their portable devices, it does little to slow the migration of users dissatisfied with the relative utility of the cable bundle, particularly as rising content costs force adherence to a pricing trajectory well ahead of inflation.  The average cable video bill is already almost 2% of average household income in the US and the public reputation of cable companies for customer service is comically low.

I also note that not all network operators have been as enthusiastic as Disney/ABC in passing the keys to the kingdom, nor are the on-line content deals exclusive to Comcast.  Moreover, the networks themselves are content buyers, and will pay higher fees themselves to producers and talent for the control of programming, even as these creators test the waters of going directly to on-line aggregators for distribution.  Advertisers will also have their say, accounting, as they do, for two thirds of the money flowing to content networks and facing their own enticements to shift priorities to on-line with its superior targeting and interactivity.

Of course, most of the issues that concern us about cable MSOs in general and Comcast in particular are relatively long lead time items.  As such, the good results of 4Q11 could persist for a few more quarters.  In the near term, the on-line audience and advertising flow is still very small relative to TV, the economy is showing some signs of life, and the combined impact of a presidential campaign year and the summer Olympics should juice advertising.  Assuming subscriber losses remain manageable, a rising tide of revenue could carry the day for 2012.  However, longer term, I believe cable becomes an undifferentiated dumb pipe in a price competitive, asset intensive business.  The question is: how long will it take to get there?

For our full research notes, please visit our published research site.

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