Friday, November 7, 2008, 9:34 AM ET|Posted by Will Richmond
Three numbers in last week's third quarter Comcast earnings release underscored something I've believed for a while: Comcast is a company transformed, now reliant on business drivers that barely existed just ten short years ago. Comcast's transformation from a traditional, plain vanilla cable TV operator to a digital TV and broadband Internet access powerhouse is profound proof of how consumer behaviors' are changing and value is going to be created in the future.
The three numbers that caught my attention were the net additions of 382,000 broadband Internet subscribers and 417,000 digital subscribers, with the simultaneous net loss of 147,000 basic subscribers. The latter number is the largest basic sub loss the company has sustained and, based on the company's own earnings releases, the sixth straight quarter of basic sub contraction. In the pre-digital, pre-broadband days, when a key measure of cable operators' health was ever-expanding basic subscribers, this trend would have caused a DEFCON 1 situation at the company. (see graph below for 2 year performance of these three services)
That it doesn't any longer owes to the company's ability to bolster video services revenue and cash flow through ever-higher penetration of digital services into its remaining sub base (at the end of Q3 it stood at 69% or 16.8 million subs). Years after Comcast and other cable operators introduced "digital tiers," stocked with ever-more specialized channels that consumers resisted adopting, the industry has hit upon a winning formula for driving digital boxes into Americans' homes: layering on advanced services like HD, VOD and DVR that are only accessible with digital set top boxes and then bundling them with voice and broadband Internet service into "triple play" packages. Comcast has in effect gone "up-market," targeting consumers willing and able to afford a $100-$200/month bundle in order to enjoy the modern digital lifestyle.
Still, in a sense the new advanced video services represent just the latest in a continuum of improved video services. Far more impressive to me is the broadband growth that both Comcast and other cable operators have experienced. Comcast's approximately 15 million YE '08 broadband subscribers will generate almost $8 billion in annual revenue for Comcast, up dramatically from its modest days as part of @Home 10 years ago. (It's also worth noting the company now also provides phone service to over 6 million homes today vs. zero 10 years ago)
The cable industry as a whole will end 2008 with approximately 37 million broadband subs, again up from single digit millions 10 years ago. And note that the 387,000 net new broadband subs Comcast added in Q3 '08 compares with just 277,000 net broadband subs that the two largest telcos, AT&T and Verizon added in quarter, combined. As someone who was involved in the initial trials of broadband service at Continental Cablevision less than 15 years ago, observing this growth is nothing short of astounding.
While broadband's financial contribution to Comcast is unmistakable, its real impact on the company is more keenly felt in its newfound importance in its customers' lives. Broadband Internet access has become a true utility for many, as essential in many homes as heat, water and electricity. A senior cable equipment executive told me recently that research done by cable companies themselves has shown that in broadband households, broadband service would be considered the last service to get cut back in these tough economic times. In these homes cable TV itself - long thought to be recession-resistant - would get cut ahead of broadband.
But Comcast and other cable operators must not rest on their laurels. Their next big challenge is to figure out how to take this massive base of broadband subs and start delivering profitable video services to it. If Comcast allows its broadband service to be turned into a dumb pipe, with "over the top," on demand video offerings from the likes of Hulu, YouTube, Neflix, Apple and others to ascend to dominance, that would be criminal. Not only would it devalue the broadband business, it would dampen interest in the company's advanced video services (VOD in particular) while making the company as a whole vulnerable in the coming era of alternative, high-quality wireless delivery.
Comcast is indeed a company transformed from what it was just 10 years ago. Technology, changing consumer behaviors and a little bit of "being in the right place at the right time" dumb luck have combined to allow Comcast to remake itself. Comcast itself must fully recognize these changes and aggressively build out Fancast and other initiatives to fully capitalize on its newfound opportunities.
What do you think? Post a comment now.