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Comcast and the Cord-Cutting Trend

By Chad Fraser on May 2, 2013

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The pace of “cord cutting”—or viewers canceling their cable subscriptions and switching to online options like Netflix (NasdaqGS: NFLX)—continues to accelerate.

According to figures from Convergence Consulting Group quoted by Ad Age, about 1.08 million U.S. pay TV customers bid adieu to their cable service last year, bringing the total to 3.74 million since 2008. By the end of 2013, that number is expected to rise to 4.7 million.

Cable Powers Comcast to Another Strong Quarter

Cord cutting or no, the cable business continues to be a big revenue generator for No. 1 provider Comcast (NasdaqGS: CMCSA).

In the first quarter, results for which the company reported yesterday, its total number of cable subscribers did fall by 60,000, which was up from a decrease of 37,000 a year ago. However, that was likely related to the fact that Comcast raised rates for 72% of its customers. Video revenue actually rose 3.7% from a year earlier, to $5.1 billion, while the Cable Communications division (including video, as well as other services, like high-speed Internet and voice) reported a 6.7% increase in operating cash flow.

The strong cable results, along with a 12% revenue increase at the NBCUniversal division’s theme park business, helped push Comcast’s overall revenue up 2.9%, to $15.31 billion from $14.88 billion a year earlier.

Earnings rose 20.0%, to $0.54 from $0.45. Excluding a gain on the sale of wireless spectrum licenses, earnings per share rose 13.3%, to $0.51. That topped the consensus forecast of $0.50. Operating cash flow rose 7.4%, to $5.03 billion, while free cash flow (or operating cash flow minus capital expenditures) gained 3.3%, to $3.14 billion.

High-Speed Internet, Voice Offset Lost Cable Customers

Overall, the company boosted its subscriber count (including high-speed Internet, video and voice) by 583,000 (net of cancelations) from a year ago, to 51.9 million. That was largely because the number of high-speed Internet subscribers climbed by 433,000 and voice subscribers rose 211,000, more than offsetting the cable losses. Comcast is now the nation’s fourth-largest home phone provider, after AT&T (NYSE: T), Verizon Communications (NYSE: VZ) and CenturyLink (NYSE: CTL).

The company also controls about 20% of the Internet service provider market and is investing more in its networks: in all, capital expenditures for its Cable Communications division rose 3.6% in the latest quarter, to $1.09 billion. That’s key to helping it hold—and increase—its share of the ISP market.

In addition, as Bloomberg points out, a number of the cable cancellations were likely customers who switched to Comcast’s Triple Play bundles of Internet, phone and cable. “High-speed data continues to be a standout,” CEO Brian L. Robertson told CNBC yesterday. “Triple Play is working for us. We had 8 percent more take rate in this quarter than we did last year. And … over 40 percent now of all our customers take three products. And 70 percent take two products.”

NBCUniversal Further Diversifies Comcast

The company also closed its deal to buy General Electric’s (NYSE: GE) 49% stake in NBCUniversal in March, which lowered its cash and cash equivalents to $1.83 billion as of March 31 from $10.95 billion at the end of the fourth quarter. Its debt has also risen to $45.05 billion from $38.08 billion three months ago.

However, the move will benefit Comcast for years to come, as Investing Daily analyst David Dittman wrote in a March article in our Personal Finance newsletter: “Comcast has leveraged its position as the nation’s leading cable television service provider to grab a major content provider that will generate revenue for it, whether the entertainment runs through its set-top boxes or Time Warner Cable’s (NYSE: TWC) or via DirecTV’s (NYSE: DTV) satellites.”

NBCUniversal operates in a bewildering number of businesses, from TV networks to movie studios and theme parks. In the latest quarter, its revenue fell 2.4% from a year ago. However, if you strip out the Superbowl, which the company broadcast in 2012 but didn’t in 2013, revenue would have risen 2.4%. Operating cash flow jumped 17.2%, to $953 million, thanks to strong results at NBCUniversal’s cable networks, filmed entertainment business and theme parks.

Comcast’s strong financial position will also help it keep increasing its dividend and investing in its high-speed networks, as Dittman points out: “In mid-February, Comcast confirmed the value of its proposition for share­holders, boosting its quarterly dividend by 18.5%, to 0.1925 per share. The company continues to post solid average revenue per user numbers, and its ability to reinvest in growth is matched by few rivals.”

Mini-Packages Coming Soon?

Even so, the trend toward greater personalization, now prevalent in other forms of media, seems likely to spread to cable TV, as well. In March 2012, for example, Time Warner executive Peter Stern said that TV’s future could look a lot like Internet radio streaming service Pandora. In other words, the TV would display your favorite shows as soon as you turn it on, without a lot of channel surfing.

This type of delivery would help cable companies compete with the convenience offered by online streaming. It could also lead to “mini-packages” that offer viewers more choice over the channels they receive—and could lower their monthly bills. “You don’t have to subscribe to as big a package, once we put the tools in place to target the TV to you based on your interests,” said Stern.

Letting consumers opt out of certain channels would hurt cable companies’ revenues (which is why we’re unlikely to see a switch to total à la carte plans), but a move toward more personalized cable packages would have strong appeal to advertisers, because it would let them target their ads more specifically at viewers with specific tastes.

As Trefis.com points out, any move toward greater personalization is likely still years away, but a drastic increase in cord cutting would undoubtedly spur the industry to move in this direction more quickly: “We expect that the shift to personalization will largely be driven by the need to differentiate in an increasingly saturated pay TV industry and to prevent potential cord cutting,” says the site.

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