Comcast’s Pay-TV Subscriber Turnaround Will Be Shortlived

by Trefis Team
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Comcast (NASDAQ:CMCSA) and other cable operators have been losing pay-TV subscribers for many years. However, Comcast managed to turnaround its subscriber losses in the previous two quarters. This can be attributed to the company’s triple play bundling packages, and its advanced platform of X1 and Xfinity Streampix. The U.S. pay-TV industry saw one of its best quarters in years, stemming subscriber losses as the overall market rose by 202,670 subscribers in Q1 2014. [1] While DirecTV (NASDAQ:DTV) and Dish Network (NASDAQ:DISH) saw continued subscriber gains, Time Warner Cable (NYSE:TWC) trimmed its subscriber losses. It must be noted that Q1 generally tends to be good for the industry. We continue to believe that this turnaround will be short lived and the rise of alternative video platforms will weigh over Comcast in the long run. We estimate the company will manage to hold on to its current market share of around 21% but any substantial gain is unlikely. (This does not account for Time Warner Cable subscribers).

We currently have $59 price estimate for Comcast, reflecting more than 10% premium to the current market price.

See our complete analysis for Comcast

How Is Comcast’s Pay-TV Business Trending And What Is The Future Outlook?

Pay-TV operations contribute close to 35% to Comcast’s stock value, according to our estimates. The cable giant has been losing pay-TV subscribers for years now. The overall subscriber base has come down from 24.2 million to 21.7 million in 2013. [2] This can be largely attributed to a combination of market saturation, fierce competition, and the increased focus of providers on acquiring higher-value subscribers. Moreover, some consumers opt for a lower-cost mixture of over-the-air TV and other over-the-top viewing options.

However, the previous two quarters were positive for the company. During Q4 2013 and Q1 2014, the company added 43,000 and 24,000 video subscribers respectively. [2] This can be largely attributed to the success of the company’s triple play bundling packages. Also, Comcast has been actively addressing the issue of subscriber churn by providing advanced features to its customers. The company offers the Xfinity Streampix service in order to cater to the demand for content streaming and X1 platform with advanced user interface. We estimate Comcast’s subscriber base to be around 23 million towards the end of the forecast period, reflecting a marginal increase from the current levels. This does not take into consideration Time Warner Cable’s merger with Comcast. If we consider that, the subscriber base will be around 30 million. The reason we don’t expect much of change in subscriber base is the continued growth of alternative video platforms. Netflix (NASDAQ:NFLX) in particular has been adding more and more subscribers every quarter (See – Netflix Continues To Benefit From Content Superiority). As more and more people embrace lower cost options, including free programming and online video services such as Hulu, Netflix and Amazon Prime, the pay-TV penetration may reduce over the years. It must be noted that there could be more than 10% upside to our price estimate if the company manages to add more video customers and the take the subscriber base northward of 27 million towards the end of the forecast period. Similarly, there could be 10% downside to our price estimate if the company continues to lose video customers and subscriber base falls below 19 million towards the end of the forecast period.

Interestingly, Comcast’s pay-TV revenue has been moving upwards even with declining subscribers. The revenue moved up from $17.9 billion in 2007 to $21.2 billion in 2013. [2] This can be attributed to rise in the average monthly subscription fee which moved up from $62 in 2007 to an estimated $81 in 2013. Comcast enters into various content agreements with different media houses. These contracts take into account annual price increases for the content. It is safe to assume that a large portion of the cost increases is transferred onto end customers. The cable business is highly profitable for Comcast with EBITDA margins northward of 40%. We believe that the uptrend in average monthly fee will continue in the coming years and it will stand around $100 towards the end of the forecast period. However, we estimate slight decline in the company’s EBITDA margins due to the headwinds from the over the top viewing options. It must be noted that if Comcast and Time Warner Cable merger is approved, the equation will change dramatically. Comcast will then control 30% of the U.S. pay-TV market and this will give it enough muscle to negotiate better deals with the content owners (Read More – What Does Time Warner Cable’s Merger With Comcast Mean For The Industry?).

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Notes:
  1. US Pay TV Subscriptions Rise in Q1 as Cable Achieves Best Quarter in Years, IHS, May 15, 2014 []
  2. Comcast’s SEC Filings [] [] []
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