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Comcast Rings the Telcos' Bell

Jeff Baumgartner
7/30/2008

Even though it is growing more slowly than before, Comcast shares were up more than 5 percent Wednesday morning after the nation's largest MSO assured investors it would grow revenues between 8 and 10 percent in 2008.

Comcast lost 138,000 basic subs in the second quarter, but MSO execs on Wednesday expressed confidence that the February 2009 digital TV transition could bring produce a sizeable crop of new basic video customers.

Comcast earned $632 million (21 cents per share), up from $588 million (19 cents per share) during the second quarter. Analysts expected earnings of 23 cents per share. The MSO's revenues jumped 11 percent, to $8.55 billion, meeting analysts' expectations of $8.54 billion. Comcast also reiterated 2008 guidance for revenue and operating cash flow growth of 8 percent to 10 percent. Capital spending, meanwhile, dropped 20 percent year-over-year. (See Comcast Records Q2.)

"I'm pleased with where we are," Comcast chairman and CEO Brian Roberts said this morning, summing up the MSO's performance for the first half of the year.

Slower subscriber growth
Still, Comcast couldn't avoid a traditional incumbent cable bugaboo in the second quarter: basic subscriber loss. Meanwhile, growth across more advanced service lines are still growing, but at a slower pace.

In line with expectations, second quarter "seasonality" contributed to a loss of 138,000 basic subs, giving Comcast a total of 24.6 million. Comcast, however, gained 320,000 digital cable subs in the period, extending its total to 16.3 million. Comcast added 823,000 digital subs in the year-ago quarter, a figure pushed up by a "digital acceleration" strategy the MSO enlisted last year ahead of the Federal Communications Commission (FCC) 's ban on set-tops with integrated security. (See Countdown to 'Seven-Oh-Seven'.)

The MSO also signed on 278,000 high-speed Internet subs, versus 339,000 additions in the year-ago period. Revenues tied to the category rose 10 percent, to $1.8 billion, which the MSO attributed to new offers and higher speed tiers. The MSO is deploying a 16 Mbit/s tier called Blast! and is in the process of wiring up 20 percent of its markets with Docsis 3.0 platform by year-end. (See Comcast Has a 'Blast!' in the Bay and Comcast Enters the Wideband Era .) Comcast CFO Michael Angelakis said new, premium Internet tier additions are outpacing those for the MSO's "economy" tier by a ratio of four-to-one.

On the phone front, Comcast added 555,000 IP telephony customers (down from 692,000 adds a year earlier), giving it a total of 5.6 million. Comcast is also unwinding the remainder of the circuit switched voice business it inherited from the acquisition of AT&T Broadband. "Getting out of this business has been a drag on our results. We're glad it's behind us," said Comcast Corp. COO Steve Burke.

Although the MSO's subscriber growth slowed year-over-year, Comcast's performance in the quarter well outpaced telco rivals such as AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). (See DSL's Worst Quarter Ever .)

"Cable is taking share, and it is taking it in gulps," said Sanford C. Bernstein & Co. Inc. analyst Craig Moffett in a note issued this morning. "To be sure, broadband results were far from spectacular, but they bore no resemblance to the disastrously weak broadband results reported by AT&T and Verizon." Moffett believes that U.S. cable will own as much as 90 percent of the broadband net additions when the book on second quarter is closed.

New business lines
Another area Comcast plans to hit the telcos is in the area of serving small- and mid-sized businesses. Revenues for SMB line were up 38 percent in the quarter, as the MSO added 90,000 units, up from 47,000 adds a year earlier.

Burke said Comcast has already hired 2,500 employees dedicated to business services, and has introduced a new, eight-line offering across the board. "So we have the right set of products now to be fully competitive," he said. "This is now a $500 million-plus business."

Digital opportunities
Although Comcast lost basics in the second quarter, the company believes it has a rare opportunity to gain some back as the February 2009 digital transition for full-power broadcast stations approaches.

"It's very, very difficult to precisely determine how big the opportunity is, [but] we think there's between six and eight million people who live in our footprint who currently get their television signals over the air," Burke said. "Somewhere around 20 to 30 percent of [that group] will not be able to get digital signals over the air, in our engineers' estimation."

That means there could be between 1 million to 2 million people in Comcast's footprint that will have to look to cable or satellite to get their television programming.

"The $64,000 question here is how many units is it [the transition] going to generate," Burke noted, adding that he believes Comcast will be in line to sign up a "substantial number of new basic customers."

Earlier this year, Sanford Bernstein predicted, using a "simplistic" assumption, that 10 percent of about 14 million homes that still rely on over-the-air video signals could sign up for cable service as a result of the transition. (See DTV Transition Could Catalyze Cable.)

— Jeff Baumgartner, Site Editor, Cable Digital News

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