Comcast, Time Warner Cable Rely On Broadband Business As TV Programming Costs Soar

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The U.S. pay-TV industry is saturated given that pay-TV penetration has reached extremely high levels. The housing growth has slumped in recent years as the U.S. economy sunk into recession which has limited the expansion of the pay-TV’s market side. Although there are signs of a recovery in the broader economy, the growth in the housing market hasn’t been encouraging. [1]

This begs the question of how pay-TV industry giants such as Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), Dish Network (NASDAQ:DISH), DirecTV (NASDAQ:DTV) and telcos plan to keep up growth. It is getting difficult to gain incremental subscribers and this is primarily being done by poaching them from competitors rather than relying on the housing growth. We believe that diversifying its business lines to focus on higher margin businesses where growth still exists is one key way to defend the overall value of the firm.

See our complete analysis for Comcast

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Pay-TV companies are giving discounts and other lucrative offers and this directly adds to the costs. To make matters worse, the content costs are rising precipitously, and ESPN is one of the primary culprits. Nomura Securities has stated that programming costs saw a substantial jump of about 8% in 2011, and will continue to rise at the same rate over the next two years. [2]

If we look at Comcast, the company’s video programming and advertisement related revenues grew by less than 2% while the programming costs grew by approximately 6% in 2011. [3] This promises to weigh on margins going forward unless it is addressed.

Nevertheless as companies such as News Corp (NASDAQ:NWS) start to bid against ESPN  push more into the sports programming market, it could potentially erode some of ESPN’s pricing power and bring pricing growth under control. This can help mitigate the rise in programming costs in the future but greater competition is just part of the solution.

If we see in the context of the company as whole, Comcast’s total revenues grew by 5.3% for 2011 while total costs grew by 4.2%. [1] This means that the impact of rising programming costs can be mitigated by the diversifying its revenue in other businesses such as broadband and digital voice where growth still exists.

It is imperative for cable companies to invest in other services to diversify their risk and maintain their margins and revenue growth. Comcast and Time Warner Cable have been successful in these efforts so far, and for the meantime, we believe these will offset programming cost concerns.

Our price estimate for Comcast stands at $26.60, implying a discount of about 15% to the market price.

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  1. Chinese Growth, U.S. Housing Data Scares Markets; Stocks End With Rare Down Day, Forbes, Mar 20 2012 [] []
  2. Cable programming costs will continue to rise, LA Times, Apr 9 2012 []
  3. Comcast’s SEC Filings []