Comcast’s Pay-TV Business: Our Long-Term Projections Suggest Growth In ARPU Will Offset Declining Subscriber Base

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Comcast (NASDAQ:CMCSA) and other cable operators have been losing pay-TV subscribers for many years due to a combination of market saturation, fierce competition from satellite-TV companies and telcos, and consumers shifting to cheaper alternatives. However, Comcast has managed a better subscriber retention rate that its cable-TV peers. This can be attributed to the company’s triple play bundling packages, and its advanced platforms and on-demand streaming options. We continue to believe that the rise of alternative video platforms will negatively affect Comcast in the long run. We estimate the company’s subscriber base will experience a sustained decline throughout our forecast period. However, growth in Average Revenue Per User (ARPU) will compensate for subscriber losses and pay-TV EBITDA will grow from an estimated $9.2 billion currently to $10.2 billion by 2022.

Our price target for Comcast stands at $67, implying a premium of more than 20% to the market.

See our complete analysis for Comcast

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Comcast’s Pay-TV Subscriber Base Will Continue To Decline In Coming Years

Pay-TV operations contribute close to 30% 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 in 2008 to 22.4 million in 2014. [1] The decline would have been more severe if not for a change in calculation methodology by Comcast, which resulted in an increase of around 850,000 subscribers in the company’s pay-TV subscriber base. Comcast is not the only cable-TV company which is losing subscribers. Top cable-TV providers lost around 1.7 million [2] and 1.2 million [3] subscribers in 2013 and 2014, respectively. The subscriber loss in the cable-TV industry can be largely attributed to a combination of market saturation, fierce competition from satellite-TV companies and telcos such as AT&T (NYSE:T) & Verizon (NYSE:VZ), and more consumers opting for a lower-cost mixture of over-the-air TV and other over-the-top viewing options such as Netflix (NASDAQ:NFLX), Hulu etc.

Comcast has actually performed better in comparison to its cable-TV peers. This can be largely attributed to the success of the company’s triple play bundling packages. Triple play bundling is the combining of the three services offered by Comcast — pay-TV, high speed internet and voice — into one package. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale. Additionally, Comcast has been actively addressing the issue of subscriber churn by providing advanced features to its customers such as the Xfinity Streampix service, which enables on-demand content streaming, and X1 & X2 platforms, which have an advanced user interface.

We estimate Comcast’s subscriber base to be around 21.4 million by the end of 2022, reflecting a sustained decline throughout our forecast period. The primary reason for the sustained decline is the continued growth of alternative video platforms including free programming and online video services such as Hulu, Netflix and Amazon Prime. Netflix in particular has been adding more and more subscribers every quarter due to its attractive pricing. (See – Why We Believe Netflix Will Continue To Raise Subscription Fees Periodically In Coming Years) Additionally, Content providers such as Dish Network, Sony, Apple, HBO, CBS, etc., are also entering the lucrative streaming market. These services are priced somewhere in between the subscription fees charged by traditional pay-TV providers and Netflix. As more and more consumers embrace these lower cost options, the pay-TV penetration will reduce over the years.

Growth In ARPU Will Compensate For Subscriber Decline

Interestingly, Comcast’s pay-TV revenues have been trending upwards even with a declining subscriber base. The company’s pay-TV revenues (adjusted for business services) grew from $17.9 billion in 2007 to $21.6 billion in 2014. [1] This can be attributed to rise in the average monthly subscription fee, which moved up from $62 in 2007 to an estimated $80 in 2014. 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 the metric will be just shy of $100 by 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. Consequently, we believe that segment EBITDA will grow from an estimated $9.2 billion currently to $10.2 billion by 2022.

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Notes:
  1. Comcast’s SEC Filings [] []
  2. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group []
  3. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group []