Comcast Slows Video Subscriber Losses

New Broadband Customers Make Up for Video (and Could Soon Stream HBO Without Cable)

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Comcast, the No. 1 U.S. cable company awaiting regulatory approval to buy No. 2 Time Warner Cable, reported profit that beat estimates as new high-speed internet customers more than made up for for declining video subscribers.

Third-quarter earnings were 73 cents a share, excluding tax adjustments and acquisition-related expenses, Comcast said today in a statement. That topped the 71 cents that analysts projected on average, according to estimates compiled by Bloomberg. Revenue rose 4% to $16.79 billion, just shy of the $16.81 billion estimated by analysts.

Cable operators like Comcast are relying more on broadband users for revenue growth as new TV subscribers are harder to come by. More content is being offered via online services like Netflix and HBO's upcoming online subscription, encouraging cable customers to cut the cord. The increasing reliance on broadband sign-ups is helping boost profit margins, according to David Heger, an analyst at Edward Jones & Co.

"From the point of view of a cable company, you really want to see broadband growth more so than cable-TV growth because it's much more profitable," Mr. Heger, who has a buy rating on the stock, said in an interview before the earnings release. "For a Comcast, it's really broadband and a bigger push into the business market" that are fueling growth, he said.

Steve Burke, CEO of Comcast's NBC Universal division, said on an earnings call that he doesn't think CBS and HBO's new and planned cable-free streaming services are really "over-the-top" products -- industry jargon for platforms that deliver programming over the web without traditional cable or satellite distribution.

"If you define over-the-top sort of coming over-the-top of the existing distributors and going direct and bypassing existing distributors, I think both HBO and CBS are trying to add to their existing ecosystem," he said. "And if you think about it, HBO probably has the most elegant economically attractive sort of business model of anybody who has ever been in the television business, and it's going to be very interesting and I think challenging to them to go and attract new customers into that ecosystem without cannibalizing the existing customers, if existing customers that are sold through cable and satellite are extremely high margin. So even if they sell at 15 dollars per sub when they go direct to consumers through the internet … I don't think they're saying we're going over the top of the existing ecosystem."

"CBS is not I don't think trying to get their existing ecosystem to move over to a new model," Mr. Burke added. "They're trying to reach millennials or new customers, and I think that's what we're all trying to do."

Upfront optimism

Mr. Burke said he doesn't believe the softness in TV's recent upfront marketplace for ad time in the new season was a result of a massive shift of TV dollars into digital. "I'm in the camp that says it was more tentativeness and keeping flexibility," he said. "The fact of the matter is digital can't deliver the same kind of emotional attitude adjusting advertising that a 30-second television spot can, and I think a lot of advertisers intellectually want to get the targetability and data driven side of digital. But they also realize when they have a big product to get out into the market, that they need television. So I think clearly there is a shift to digital, but I think the market is likely to be quite strong."

Internet customers
The Philadelphia-based company signed up 315,000 new broadband customers in the quarter. That was better than the 288,000 and 300,000 additions estimated by Matthew Harrigan, an analyst at Wunderlich Securities, and Todd Mitchell, an analyst at Brean Capital, respectively.

TV subscribers fell by 81,000, better than the drop of 127,000 a year ago.

"It was a very good quarter, particular strength in improving video numbers, broadband and NBC broadcast network," Mr. Harrigan said in a phone interview.

A customer's average monthly bill rose to $137.24 a month. More than a third of Comcast's customers subscribe to all three services: internet, voice and video.

Revenue at NBC Universal rose 1.2% to $5.92 billion, driven by higher revenue from the theme parks, as well as broadcast and cable networks.

Cable posted a 4.6% declined in ad revenue, as increases in price and volume were offset by a decline in ratings.

On the broadcast side, ad revenue grew 4.4%.

Deal timing
The film division, which includes the Universal Pictures studio, generated $1.19 billion in sales, a 15% drop from a year ago when the studio released the sequel in the lucrative "Despicable Me" franchise.

Comcast's proposed $45.2 billion takeover of Time Warner Cable, the second-largest U.S. cable-TV company, is at risk of taking longer to complete as regulators resolve disputes over programming contracts. The Federal Communications Commission yesterday stopped the clock in its review and suspended deadlines for comments in this deal, as well as AT&T's agreement to purchase DirecTV.

"Since the deal was announced, it's been a cloud of uncertainty," Mr. Heger said. "It's been a big factor on why the shares have been underperformers this year."

Through yesterday, Comcast shares had fallen 6.8% since the Time Warner Cable deal was announced in February. The Standard & Poor's 500 Index has increased 5.9% during the same period.

For Comcast, the merger is, in part, being motivated by the falling number of Americans paying for TV. That's left companies focused on retaining customers instead of chasing new ones.

Comcast is also facing skeptical consumers who routinely rate it among the worst for customer service in the U.S. Earlier this month, a former employee of PricewaterhouseCoopers sued Comcast and claimed the company ruined his professional career. The cable operator had previously apologized publicly, while denying that any of its employees asked that he be fired.

~ Bloomberg News with Jeanine Poggi ~

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