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1 November 2018

Comcast plots Sky expansion to offset US cable hemorrhage

Comcast’s first quarterly results after sealing the Sky acquisition for $39 billion in September, continued the recent theme of heavy churn from cable to OTT, offset by healthy growth in high speed broadband.

The cable TV exodus shows no sign of slowing down with 342,000 net subs lost for the first nine months of 2018 after taking account of gains registered by the Xfinity Instant TV OTT service.

Unlike Sky’s Now TV in Europe, Xfinity Instant TV is only available to Comcast broadband subscribers, but that is likely to change soon as the operator starts to align its global strategy more with Sky. This partly reflects failure of Comcast’s defense of multi-play bundles in the US as consumers continue to swing more towards cherry picking as part of the trend away from monolithic services that have proved so lucrative for US pay TV operators.

Comcast’s Q3 results reflect that trend as its customer base continued its shift towards single-play subscriptions, which grew by 284,000 to over 8.9 million. Double, triple and quad-play numbers all declined compared to Q2, although Comcast reminded us that 68% of residential customers still take at least two services.

This touches on the controversy surrounding Comcast’s attitude to net neutrality, which has been a source of unpopularity within the industry, even if its subscribers have been more concerned with inconsistent customer service in recent years.

Earlier Comcast had been accused by Netflix among others of capping access broadband speeds for its traffic, but then the debate moved on to favoring customers of multiplay bundles. Comcast has made much of how it has consistently increased bit rates automatically for its broadband customers free of charge, without seeking to raise subscription costs on the back of that, but in April 2018 it added the string that only customers who also took cable TV would benefit.

Initially focused on two US regions around Houston and Oregon/SW Washington, those cable TV subscribers with 60Mbps download speeds were bumped up to 150Mbps, 150Mbps subscribers went to 250Mbps, while 250Mbps subscribers were raised to 400Mbps or even 1Gbps in some cases where the infrastructure allowed.

This did not violate the letter of net neutrality law, even without President Trump’s relaxation, because it was not favoring or prejudicing any particular service. But it did contravene the spirit of the open Internet by associating general performance with a specific service, leading some web freedom advocates to question Comcast’s commitment to preserving open internet ideals in the absence of net neutrality protections from the FCC. In any case Comcast’s measures to defend multiplay bundles do not look to be working.

Comcast can quite easily paint some gloss on its overall results since the rate of gain of broadband customers is more than offsetting losses on the video front, up by 363,000 to 26.87 million from Q2. This translated into a net subscriber gain of 288,000 taking Comcast past the milestone of 30 million cable customers. It was also good for revenues which were up 5% year-on-year to $22.1 billion for the quarter, helped by the content arm NBCUniversal increasing 8.1% to $8.6 billion. Net profit was up by 9.3% to $2.9 billion.

Comcast as a whole can be seen increasingly as a microcosm of the whole media industry now that it is an international player, with cable, satellite and OTT pay TV arms, as well as broadband and in NBC Universal a strong presence both in feature films for theatrical exhibition and shows for wider TV distribution, as well as its own pay TV channels. It is also now strong in live sports rights both through Sky in Europe led by football and NBC Sports in the US. Comcast is therefore suffering from pay TV churn and at the same time gaining from the swing to broadband and OTT video. Comcast and Sky have had to cope with sports rights inflation but also gained or retained subscribers on the back of that, as well as holding up prices for subscription packages.

Sky has been more successful at managing the disruption of churn from legacy pay TV to OTT and has been more bullish in encouraging it, partly reflecting its position as a satellite provider with little direct investment in broadband infrastructure. Sky’s CEO Jeremy Darroch, who has retained his post under the new regime, stressed during Comcast’s Q3 results call that the recent launch of the first full Sky service without a satellite dish was “potentially a major development” that could open up additional customer segments in existing markets, as well as helping expand into new territories. Darroch suggested there were six million households within Sky’s existing footprint who either cannot for planning reasons or will not tolerate having a dish and yet might be receptive to the operator’s services.

There was speculation that Darroch would depart in the event of Comcast taking over Sky, rather than Twenty-First Century Fox with which he had closer connections as the 39% shareholder in Sky ever since he became CEO in 2007. But after Comcast outbid Fox by $3.6 billion it quickly became clear Darroch would play a key role steering the whole group through this transition phase when although it had succeeded in becoming the most powerful of the world’s traditional pay TV groups it still faced even greater foes in Amazon, Netflix, Google, Facebook and possibly Apple. Of these Amazon is likely to pose the greatest existential threat by covering a similar turf with ambitions to become the leading player in global media. Amazon has already signaled its intent by placing a toe, or even a whole foot, in the water of live sports streaming, for example with its acquisition of the mid-week package of English Premier League football matches for the UK.

Comcast and Sky are already well aligned in their strategies for dealing with the SVoD competition coming from Netflix and also Amazon Prime as well as Hulu. It is to embrace them as “frenemies” by distributing their content, while simultaneously investing as much as possible in original content. Comcast in April 2018 announced it was expanding its relationship with Netflix by bundling its catalog into both new and existing Xfinity packages.

The hope was that if Netflix and Amazon were provoking churn then at least some of that could be stemmed by bundling them in. Sky was making similar calculations and as we reported around the same time it was uncharacteristically behind the curve when it finally integrated Netflix onto its pay TV set tops late in 2017. But then it quickly changes tack completely by bringing Netflix to its Now TV streaming service as well. As we pointed out, with the added possibility of throwing in NBC Universal titles and sports content following Sky’s takeover by Comcast, Now TV is rapidly emerging as Europe’s most comprehensive go-to source for OTT video content of various flavors, live, linear and on-demand.

This in turn is placing Sky perfectly for the transition from legacy pay TV to OTT, having of course announced its famous broadband-only TV plans early in 2017. As we put it, Sky was exploiting the unstoppable success of Netflix to hasten the cannibalization of its own satellite TV business. Comcast was coming from a different position with extensive broadband coverage through its modernized DOCSIS infrastructure. Comcast after all was the architect of RDK which is still the preferred migration route for most super tier 1 MSOs.

After the Sky acquisition Comcast may focus still harder on broadband while oiling the wheels of migration away from the legacy cable offering to OTT. There is likely to be more merger activity, especially if Amazon dramatically raises the stakes by bidding some serious money on sports rights. That could propel more former adversaries into alliances. Disney is now well placed after gaining shareholder approval for its $71 billion acquisition of many Twenty First Century Fox assets in July 2018, while it is preparing a major push into OTT next year. Disney will start out with three separate OTT services, ESPN+ for sports, Hulu which it holds 60% of and the planned offering for family content, but there is likely to be the option of bundling these together.

However Comcast owns 30% of Hulu itself and also struck a deal with Amazon in August 2018 to add Prime video to its Xfinity X1 alongside Netflix, YouTube, and Pandora. These deals are not just tactical and can be seen as each way bets that will leave Comcast as well placed as possible,  however the industry winds blow. One certainty is that the current wave of consolidation is not over. Meanwhile Comcast will be following Sky’s line with Now TV, noting also the success already enjoyed by Sling TV and DirecTV Now in the US. Both have gained more subscribers than were lost from the parent legacy DTH service.