How Comcast Benefits From Joint Marketing With Verizon

Last year Verizon (NYSE:VZ) signed a spectrum deal with Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC) and Bright House Networks for $3.6 billion, and it simultaneously entered into some joint-marketing deals with these cable companies. Now it has kick-started a promotional offer with Comcast in certain markets where if subscribers buy both Comcast’s Xfinity TV and Verizon’s wireless service within a 2-week time-frame, they get a $300 Visa debit card. ^[1]

How is this going to help?

Comcast has seen a decline in its pay-TV subscriber base for the past few years, and it is resorting to several ways to stem the loss. These include enhancing its on-demand service, launching subscription streaming and cross marketing with Verizon.

See our complete analysis for Comcast

The Offer’s Appeal

This offer is initially being launched in upscale markets such as San Francisco, Seattle and a few others. The utility of a $300 Visa debit card might be more appealing to the residents in these markets as they have several options to shop and hang out, making the $300 debit card worthwhile for the customers. Further, Comcast and Verizon have wider presence in these upscale markets and, hence, the offer will gain more visibility than were it to be launched in a smaller city/rural region.

Financial Impact On Comcast

Assuming that Verizon and Comcast split the costs of debit card equally, Comcast’s digital TV cash flows will be reduced by $150 per subscriber. We estimate that Comcast’s average revenue per digital TV subscriber is around $63 per month. Add to this the additional fee paid by HD subscribers, on-demand viewers and the revenue that Comcast earns via advertisements.

The $150 fee for the year is going to hit Comcast’s cash flows directly as this is a pure cost. Therefore it is more useful looking at the free cash flow per subscriber metric.

Taking into account the digital pay-TV service, advertising revenue, HD/DVR service and on-demand service, we estimate that Comcast currently earns about $160 per pay-TV subscriber per year in free cash flows. This implies that the additional cost of acquiring a subscriber via this promotion will result in near break-even for the first year. This seems a little steep.

However, it is likely that Comcast will aim to market higher-priced tiers and will hope to lock in subscribers long term. Additionally, once the subscribers are acquired, there will be an opportunity to market its additional services such as Xfinity Streampix, broadband and digital phone services.

Our price estimate for Comcast stands at $26.60, implying a discount of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. DirecTV asks FCC to halt review of Verizon-cable deals, Fiercewireless, Mar 6 2012 [↩]