US financial analysts are already starting to imagine that they see an improvement in video subscriptions for US cable operators, in particular Comcast. They continue to ignore the facts in front of them, which are that all US cable operators are now including OTT video services in their numbers, and that these services are not only less profitable, but also, in many cases, they are no longer on long term 2 year contracts.
This trend only became noticeable when each and every US cable service moved from only offering a TV Everywhere service, where customers had to also be a customer for the main cable video service, to a situation where anyone from outside their footprint can buy into an OTT service.
If this move was taken to its extreme, and every one of the cable company’s customers were to switch to an OTT service, it would mean a considerable shrinkage in revenue, and lead to an increase in broadband pricing, which would make cable less attractive as a broadband offering.
So by these analysts letting Comcast, Time Warner Cable and Charter off the hook, it creates a rose tinted glow around their stock, at a time when in real terms they are at greater risk. A shift to consuming more video on short term or non-existent contracts make US cable revenues less stable and less profitable and yet their stock price goes up.
Comcast has a new paid service called simply Stream TV, but you might think it doesn’t qualify for the criticism we have levied above, because it is limited to existing broadband customers, and when new customers join it for the double play of broadband and video, it involves a broadband contract for at least 2 years, although the TV element has no such commitment, and only comes out at an additional $15. Interestingly Comcast has said that broadband data used on Stream TV will not count towards the total data cap, and says this is not a breach in net neutrality, because the video is delivered over its managed network, not over the internet.
This position means that Comcast cannot change its mind and open it up to the larger broadband world because then it would deliver it over the open internet, and use it, as many other pay TV providers have, to capture customers from outside its footprint. And if it did that, it could not offer it within the existing data cap.
It can hardly say to an AT&T customer, that its Stream TV video data will not count towards an AT&T data cap. But what it CAN do is create an irresistible data video double play bundle which is based around $15 for the video element, and take a broadband customer away from AT&T and that appears to be what’s happening here.
We believe that the video element is intrinsically less profitable than a genuine cable contract, but Comcast has a 24-month minimum broadband contract every time someone decides to become a new broadband customer with additional OTT video.
This is not the case for Sling TV or Sony’s Vue service, which are genuinely over the top services, with no 24 month contracts and eventually Comcast Stream TV must come under pressure from such services. Then what will happen to its video count?
US Financial analysts this week, specifically Amy Yong at Macquarie Research, have suggested that Comcast will end the quarter with 32,000 video additions.
Given that Comcast last quarter added around 460,000 broadband lines and that a year earlier it only grew broadband lines by 375,000, then as many as 85,000 of these customers may well have been attracted to a double play including a $15 OTT deal. If that was the case, then the way to read the figures that Comcast reported last quarter, is that it gained 89,000 total video customers, but that virtually ALL of these were on the new, less profitable, Stream TV contract. Many others may have also taken up that product, and there is every chance that QAM based cable video fell once again, by some considerable number. Video ARPU for Comcast is roughly $135, OTT is just $15, so if this is going on, it will only be a matter of time before both profit and revenues are adversely affected.
Initially the Stream service was launched in July in a few territories, and it was extended to a wider ambit during November. We can expect it to go to a wider audience still during the coming quarter. And this is without noting that simultaneously it has an OTT offering for students, which it sells by attaching campuses to its OTT service. Last quarter it added 26 campuses to this service and added who knows how many students on the equivalent of Stream TV, no doubt counting each one as a new video addition.
We have to applaud the way Comcast has managed to create a TV service and put it into a package that drives broadband growth and has partially solved the problem of how you introduce students into the Comcast brand, but we wouldn’t applaud it to the point where it looks like all of its cord cutting problems have evaporated. This is an artificial fix and cord cutting will eventually take its toll.
When stream TV was introduced Comcast said it was intended for Comcast’s Internet only customers, offering live TV on computers, tablets, and phones, but if you took that to mean that it only had a universe of about 1 million homes which take its broadband and not its TV, to sell this to. Of course it can use the double play package, to actually increase the broadband only base, but it counts them as video customers too, and by effectively bundling video with broadband, it has taken a page out of the book of the French market, where a full IPTV video service comes free with every broadband line sold, whether you want it or not. Doing it that way is merely a PR exercise and the US finance analysts are falling for it.
Some programming isn’t available outside the home, and users can’t stream to more than two devices at once and Comcast doesn’t offer its Xfinity video app on streaming boxes like Roku and Apple TV so the service cannot be watched on a TV. All of these are disadvantages compared to its TV Everywhere version and against services like Sling TV.
Comcast has in fact been doing something like this for years under the Internet Plus Plan, which offered a handful of TV channels bundled with a broadband line since 2013.
Comcast CEO Brian Roberts alluded to the TV gains while speaking at a Morgan Stanley conference during March, which is what has led to analyst firms increasing their Q1 video net add assumptions.
There is a case that Comcast above all over US cable operators, is doing a fine job of keeping OTT cord cutting from its door with such moves, but the question remains whether or not it can sustain this type of performance long term. Last year it changed how it counted video customers adding about 1 million new customers overnight and talked up the idea of gaining video customers, but a year later it dropped all pretense of this. We suspect that the same will happen in Comcast’s numbers once an analyst is brave enough to force the real OTT Stream TV numbers into the open.