Why the time is ripe for Comcast to blow past its bordersWhy the time is ripe for Comcast to blow past its borders
The discussion is no longer about offering a low-margin OTT-TV service out of Comcast's footprint, but about generating scale for a broader platform supported by a much more diverse economic ecosystem.
February 26, 2021
Comcast has been asked about if or when it might try to deliver OTT-based pay-TV services outside its cable footprint for years, a move that would seem to have explosive implications for the historically chummy cable industry.
And, for years, Comcast's answer has followed a common theme: It simply would not make financial sense to offer a low-margin OTT-TV service outside its cable borders, where it would lack the benefit of being attached to a high-margin broadband service.
"We, thus far, haven't seen an OTT model that really hunts," Neil Smit, Comcast Cable's then-CEO, said in April 2016, while also acknowledging that there's nothing that would stop Comcast from offering pay-TV outside its borders from a technology or rights perspective. "But we'll continue to stay tuned into the market and be prepared to respond accordingly."
"We don't have any plans to do that," Brian Roberts, Comcast's chairman and CEO, said in May 2016 at a presser at the INTX show in Boston when asked to comment on the company's interest in taking a pay-TV product out of market. But, Roberts, like Smit, did toss in a caveat: "The world always changes, so these answers are good for this moment."
Fast-forwarding to today, and Comcast is at least exploring the idea of offering Flex, a streaming/smart home product offered for no added cost to its broadband-only customers, outside its footprint. Flex, which can be upgraded to deliver Comcast's pay-TV services via the Xfinity Stream app, already supports many of the most popular streaming services, including Netflix, HBO Max, Amazon Prime, CBS All Access (becoming Paramount+ on March 4), Tubi, Pluto TV, Hulu, Pandora, Spotify, and NBCU's Peacock, with support for Disney+ and ESPN+ on deck for Q1 2021. Flex also weaves in Sling TV, the Dish-owned pay-TV service.
Figure 1: Comcast has added Xfinity Stream, an IP-delivered pay-TV app, to Flex, complementing other streaming services supported by a platform that's focused on broadband-only customers.
"Right now, it's working great within footprint, but we're building out plans beyond that," Dave Watson, CEO of Comcast Cable, said on the company's Q4 2020 earnings call, in response to a question about the out-of-footprint potential for Flex.
If Comcast does look further into it, it would seem to tie right in with Comcast's stated interest in licensing X1 in smart TVs on a global basis, with reports that it's already in talks with Walmart about this idea. Meanwhile, Comcast has already taken X1 out of footprint, if one counts Comcast's syndication deals with Cox Communications and three Canadian operators (Rogers Communications, Shaw Communications and Videotron).
Comcast's current stance on expanding X1 and/or Flex out of footprint does signal a much different posture than the one expressed a few years ago. So, what's really changed?
For starters, the discussion is no longer merely about offering a pay-TV service out of footprint and the financial challenges associated with it. Justifying Comcast's point a few years ago, there's clear evidence that the virtual multichannel video programming (vMVPD) business model is a tough one to pull off. As all of the recent wave of price hikes show, vMVPDs are exposed (perhaps over-exposed) to the same rising programming costs that traditional pay-TV providers have always dealt with. Plus, as no-contract services, vMVPDs are also exposed to outsized churn rates.
Instead, the Comcast out-of-footprint discussion would now seem to be motivated by driving more scale into a much broader software/apps platform, and a piece of the business that's not limited or shackled to a pay-TV streaming service. Rather, it's a business that can tie in lots more – revenue-sharing partnerships with OTT partners and the opportunity to expand and accelerate the size and scope of the company's advanced advertising capabilities.
In fact, using the scale and reach of Comcast's platform to succeed in streaming is now one of the "core tenets" of Comcast's long-term strategy. So, going out of footprint with Flex to expand the reach and influence of the platform seems a logical fit.
Figure 2: Click here for a larger version of this image.
(Source: Comcast Q3 2020 earnings presentation)
Plus, does anyone doubt that Comcast would relish the opportunity to finally be able to promote and sell its platform and technologies in major media markets such as Los Angeles and New York, where Comcast, the cable operator, has little to no presence? Of course it would.
In effect, going out of footprint, would give Comcast an opportunity to build a more nationally-focused platform play that has already become a key business growth engine for Roku. Revenues for Roku's fast-growing Platforms business, which encompasses advertising, subscription revenue sharing and license fees from TV makers that use Roku's operating system, soared 81%, to $471.2 million, in Q4 2020.
And even if Comcast did go out of footprint with an OTT-TV service that competed against pay-TV services from other cable operators, the idea isn't quite as explosive or controversial as it was just five years ago.
Cable operators that have already adopted a broadband-first strategy and have few concerns about pay-TV losses, such as Cable One, probably would welcome such a move or at least meet it with barely a shrug.
Almost ten years ago, we discussed the potential of a "video Armageddon" if telcos and cable operators were successful in obtaining the distribution rights to go out-of-footprint with video. Back then, the scuttlebutt centered on the possibility that Verizon would be among the first to do so. The irony is that Verizon eventually gave up on the idea, has since distanced itself from media to instead focus on networks and connectivity, and put go90 out of its misery. What's more, Verizon now promotes YouTube TV more heavily than its own Fios TV service.
Dish/EchoStar was also making noise about OTT-TV services back then and actually went through with it with Sling TV. Sling TV has had its moments but has not become the savior of Dish's overall pay-TV business.
Comcast: a second Roku?
MoffettNathanson analyst Craig Moffett believes Comcast would be smart to broaden Flex's reach, holding that the operator already has the "right" content partnerships, a US distribution partnership with Cox, and potential to explore in Europe with Sky.
He notes that Comcast could secure close to a national footprint for Flex if Charter Communications would play ball. Charter and Comcast have held talks on Flex, but recent comments from Charter CEO Tom Rutledge indicate that those talks are going nowhere as the company instead sizes up the potential for its own Worldbox platform. Then again, this could also be Rutledge just being a shrewd negotiator and playing hard to get.
"In a perfect world, Flex would become a second Roku," Moffett explained in a research now following Comcast's Q4 results. "Yes, Flex is financially too small to measure. But the idea that Comcast could organically grow its own Roku is an intriguing idea … They have the right assets, with both the distribution to make it an immediate force and the content relationships to make it differentiated. And it happens to be a good product."
And, as noted above, making this about a bigger platform play with a much broader business to underpin it, rather than one focused on a low-margin pay-TV service delivered out of footprint, would help to address the financial shortcomings that Comcast cited just a few years ago.
— Jeff Baumgartner, Senior Editor, Light Reading
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