Are we missing something at Comcast? A Google News search showed 234 stories after its results came out, all of them positive and, it appears, none of them written by people that are familiar with the dangers surrounding the company.
Let’s see if we’ve got this right? Comcast lost 2.6% of its TV customer base last year and that’s the customer base that it gets all of its other sources of revenue from. That amounts to 199,999 customers falling off the map in the quarter and 623,000 in the entire year, a quarterly average of 156,000. So in the December quarter that process of losing customers accelerated. Grim news.
Meanwhile it continued to gain high speed internet customers at a rate of 247,000 in the quarter and around 1 million during the year. Fixed voice customers were being acquired at virtually the same rate, in fact slightly faster.
Throughout its conference call Comcast talked about increases in customers as if it were a reality, but what’s actually going up is that more homes are using more services ‘ the old trick of reporting revenue generating units ‘ the number of customer relationships, so TV in one home counts as one, voice in that home counts as another and broadband as a third relationship. But the number of homes that are wired up at all is going down, albeit slightly.
If you look at the AT&T numbers for the quarter we see the opposite. Broadband is going up, but only in the areas where it has U-Verse (Project Lightspeed fiber). Where it is only DSL it is falling. But TV is going up at about the same speed that Comcast numbers for broadband are going up.
What appears to be happening is that AT&T is turning into a cable company, while Comcast is turning into a Telco. Right now the sweet spot for Comcast is the 85% of territory in its footprint – and it keeps using this number – which fiber does not reach. Does it mean 85% of homes? We don’t think so, because with AT&T reaching 23 million and Verizon around 12 million homes, with their high speed broadband systems, that’s 35 million of the richest homes, some 30% of America’s 111 million homes. Perhaps Brian Robert, CEO of Comcast, simply doesn’t count U-Verse, that would give about the right number, because the last 5,000 feet is actually copper. Although it can deliver nearly as fast a broadband line as fiber at 24 to 32 Mbps per line and these can be twinned to go even faster.
The image Comcast is trying to paint is one where it will continue to sweep up broadband in all but a handful of markets, forever, while it only suffers a few minor TV losses. That doesn’t seem the way of it at all to us. Already it is on the ropes, and once the Telcos continue their aggressive capex program, it will be faced with a war of attrition.
If there continues to be acceleration in the TV gains of the telcos and if the telcos can begin to fight back in broadband, then why would anyone want to take Voice only from the largest cable operator? To us this seems to be all one big fight and the tide has almost, but not quite, turned.
At the same time DTH suppliers in EchoStar and DirecTV, have been the biggest reason for Comcast to spend money this year. The company has been going all digital wherever it can. The cablecos already have the plant at the head of each loop to send all the existing TV programming only as digital, but it has millions of set top boxes set up to take some channels, mostly local channels, as analog. This uses up a huge amount of cable bandwidth and by handing out new set tops, Comcast is able to use the bandwidth that it recaptures by being all digital, to send around 100 HD channels to customers.
It is these HD channels that will keep its customer base loyal, but at present is resulting in losses to DirecTV and the Telcos in TV. Comcast can also add more VoD options in these areas. The other major capex investment which Roberts says will be over in the first quarter of 2010, is the upgrade of DOCSIS 3.0 termination system and DOCSIS 3.0 modems, which will realistically give 50 Mbps (not 160 Mbps) broadband in each home (though there is a theoretical maximum of 160 Mbps).
‘We already have 35 million homes capable of getting 50 Mbps, more than all the other cable operators and the two major phone companies combined,’ he said. Well that’s conveniently forgetting the entire AT&T network once again. It’s about a draw in reality.
The truth is that Roberts has wowed Wall Street, because he plans to cut back on major new capex initiatives, because Comcast has done almost all that it can for now. It still has to get Canoe and its EBIF interactive advertising initiative off the ground, and it still has to get its XFINITY, TV Everywhere service off the ground, but these are not major capex outlays, more marketing outlays. Eventually it will have to create all data IPTV networks to offer the kinds of additional applications that Telcos can offer, with the same ease. But that’s way off into the distance and may be delayed indefinitely.
What made Comcast its marginal revenue increase this year (up 2.9% in the quarter to $9 billion) and its increased profitability (doubled to $955 million, but all of that down to a single $580 million extraordinary item) was by putting through yet more price increases in services (in a recession) in the first half of the year and then offering bundles to sell more revenue generating units in triple play formats in the second half.
The feeling you get is that Comcast customers would not put up with any more price increases so the company changed tack mid-year and began offering more services in bundles. Today the average TV customer pays Comcast $118 a month for all the services they take, in our view way too much since there are $99 quad plays out there.
But from five years ago when the Telcos where on the ropes, with revenue shrinking, today is a very different picture. Despite cable’s best efforts to take fixed line and broadband customers, the RBOCs are no longer up against it, and the Comcast results are a more downbeat, less enthusiastic affair, without any ‘Yeehaas’ compared to those of AT&T and Verizon. Now the Telcos have continued capex spend (in fixed lines at least though not enough in wireless) ahead of them to cut down the oxygen that cablecos are living on, with the DTH TV suppliers conducting guerilla warfare from the trenches to keep both of them honest.
Our view is that this scenario will look healthy for the next two years for cablecos. But when the fiber laying activities of the RBOCs nears completion, the cablecos will get hit at every turn, as Telcos continue to take TV customers, and begin reclaiming the broadband high ground with aggressive pricing and quad play bundles and as fixed voice perishes in value. The only hope for companies like Comcast is that it too has its wireless broadband offerings ready for consumers by then and can match bundle for bundle in quad play warfare. So back to the capex spending then.