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Comcast's 30-to-1 Odds

The Bauminator recently reported on Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s planned digital terminal adapter (DTA) deployment. (See Comcast Confirms Digital Dongle Project.)

The devices are a key ingredient in the MSO's plan to migrate 20 percent of the homes in its footprint to all-digital television service by the end of 2008. In parallel, Comcast also revealed plans to deploy super-fast Docsis 3.0 Internet service to up to 20 percent of its homes this year. (See Comcast Enters the Wideband Era and Controlling Doc$is 3.0 .) Now, guess what percentage of Comcast's homes will be marketed for Verizon Communications Inc. (NYSE: VZ)'s FiOS service by the end of the decade? That would be 20 percent, of course. Might we be looking at the core of Comcast's FiOS-fighting strategy here?

Verizon's FiOS is generally viewed as a veritable horseman of the cable apocalypse. In the end, however, it may turn out to be more of a corpulent, flatulent bovine than a swift, powerful war steed (pardon the over-the-top barnyard allusions).

As explained by Comcast COO and cable division president Steve Burke back in February, the MSO's all-digital maneuvers are expected to free up 40 analog channels. (See Comcast Spreads the Love .) For bandwidth watchers, that equals 1.6 Gbit/s -- a massive amount of downstream capacity that can be used for high-definition television (HDTV), video on demand (VOD), and broadband Internet applications.

And how much will Comcast have to pay to unearth one and a half Gigs on its network? According to my back-of-the-napkin math, it could be as little as $29 per home passed. Compare that to the more than $1,000 per home passed Verizon is spending to deploy FiOS.

Here's how we get to the $29 figure for Comcast. The MSO currently serves 49.9 million homes. Of those, 49.5 percent subscribe to basic cable TV service, and of that group, 65 percent take digital service. So, a 20 percent slice of Comcast's footprint covers just under 10 million homes. Applying the above video penetration rates yields a total of 4.9 million cable TV subscribers. Of this universe, 65 percent already take digital service.

For argument's sake, however, we'll assume that 40 percent of these digital subscribers still have at least one TV connected to analog service and will need a DTA. The number of analog-only customers left to migrate to digital is 1.7 million. Assuming they own an average of 2.25 televisions per home, all told, we're talking about 5.1 million DTAs.

The Bauminator reported that Comcast is seeking a $35 price point for DTAs. Let's assume however, that the MSO actually pays an average loaded cost of $55 per DTA, including any installation and digital headend charges. The cost for Comcast to access 1.6 Gbit/s for 10 million homes? A paltry $285 million, or $28.58 per home passed.

Table 1: Comcast All-Digital Transition Costs
Homes passed (HP) 49,902,000
Basic subs 24,691,000
Digital cable subs 16,015,000
% of HP going all-digital (AD) 20%
All-digital homes passed (ADHP) 9,980,400
Basic subs in ADHP 4,938,200
Digital cable subs in ADHP 3,203,000
Analog subs in ADHP 1,735,200
Average TVs per home 2.25
DTAs needed 5,185,400
Weighted DTA cost per sub $55
All-digital cost $285,197,000
Avg. cost per home passed $28.58
Source: Cable Digital News analysis




Do you think one of these competitors might enjoy a significant economic advantage? If the more the more than 30-to-1 cost advantage enjoyed by Comcast didn't convince you, perhaps the news that Verizon is already starting to raise FiOS service prices will seal the deal. (See Verizon to Raise Prices, Cut Jobs.).

Also, consider Comcast's continued momentum in residential telephone and broadband Internet services. In the first quarter, Comcast added 639,000 telephone and 492,000 Internet customers, beating Wall Street's expectations. (See High-Speed Internet Drives Comcast's Q1.) For its part, Verizon lost 726,000 residential lines and only added 263,000 FiOS TV and 262,000 FiOS Internet customers. In the wake of the hemorrhaging, Verizon said it would shed 10,000 jobs. Comcast, on the other hand, has added 15,000 jobs over the past 15 months to keep up with new service demand.

Increasingly, in this horse race, Comcast is looking like the thoroughbred.

—Michael Harris, Chief Analyst, Cable Digital News

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rjmcmahon 12/5/2012 | 3:41:25 PM
re: Comcast's 30-to-1 Odds According to this article, VZ is paying $1000 per home passed for FiOS. In previous articles they report investing $23B to date for FiOS and obtaining 1M FiOS subscribers. That's $23,000 per home connected.

So is the FiOS take rate 1/20 (assuming a few thousand to actually connect a home) and are the early FiOS adopters on the hook to pay the full $23,000? Will VZ shareholders be subsidizing the sunk costs?



bahlmann 12/5/2012 | 3:41:25 PM
re: Comcast's 30-to-1 Odds Great story, only I think the 30-1 odds (or as you say "cost advantage") may not just apply to the opportunity, but rather the chance of this ever happening.

DTA currently doesn't exist, the $35 figure is Comcast's costs rather than what it will actually cost vendors from a component/manufacturing perspective (is there even enough margin to work with that make this attractive to build?), unknown is whether FCC will require the DTA to support separable security, one-way capability likely won't cut it long term (so all these devices will need to be replaced), how will this support SDV or will it be just like CableCARD (another short term solution). Just because analog reclaim is a great idea, doesn't particularly mean there is an easy (cheap) way to do it. DTA, unfortunitely is it.
rjmcmahon 12/5/2012 | 3:41:24 PM
re: Comcast's 30-to-1 Odds Take up the $23B spend with LR. They are the ones reporting them in past tense.

http://www.lightreading.com/do...

"So what have the two sides been talking about for the past few years if a formal proposal has only just been submitted? G«£The talks really served as a way to gauge both the companyG«÷s interest and the cityG«÷s interest and make sure there is a foundation for a franchise,G«• says Grippo.

As if Verizon spending $23 billion and signing up over a million video customers so far didnG«÷t suggest it was interested.[Ed. note: Again, red tape is fun, isnG«÷t it?]"
paolo.franzoi 12/5/2012 | 3:41:24 PM
re: Comcast's 30-to-1 Odds
You are adding in fixed costs, content costs, costs for construction that has not had electronics placed on it, OSS costs, ya da ya da ya da into this. On top of that you are comparing Apples and Oranges:

"The carrier plans to spend $23 billion to make fiber-optic broadband connections available to 18 million households by 2010. For that princely sum, Verizon will reach about a third of its sprawling territory in 28 states and the District of Columbia."

The actual spending is not clear and it is not clear what costs (passed connected and take rate assumptions) are in that $23B number.

So, your math is simply wrong. FiOS has not spent $23B to date and nobody could correlate that original number to an actual number spent, except Verizon.

seven
fgoldstein 12/5/2012 | 3:41:24 PM
re: Comcast's 30-to-1 Odds > unknown is whether FCC will require the DTA to support separable security, one-way capability likely won't cut it long term...

Security? None needed -- this would be for channels that are sent in the clear now, bottom-tier service. Hence one-way is adequate too. It's a minority of the market but it exists and is tying up channels.

My main concern is that upstream is still too limited. Removing analog will make lots of room for VoD, but if they're not planning on eventually migrating to FTTH, they should at least move the split point higher. The upstream now ends at 42 MHz; it would be better to let it run to 72 MHz or so.
Jeff Baumgartner 12/5/2012 | 3:41:24 PM
re: Comcast's 30-to-1 Odds You raise an excellent question about conditional access: will Comcast be forced to support a removable security element in the DTA? If so, i imagine it will be tough to keep costs waaay down. I'm also curious whether this will solve anything long-term. I think it might be a very good idea to use the DTA with current analog-only subs and for digital customers who have rarely used fourth and fifth TV in the house that need access to the basic tier. but Comcast will have to be very much upfront about what the DTA is capable of and what it can't do do (ie. get switched channels, vod, etc.and other apps that require interactivity). the DTA , as designed, will be very limited, but it may do enough if the goal is regain valuable spectrum.
nodak 12/5/2012 | 3:41:23 PM
re: Comcast's 30-to-1 Odds I have relatives in the Philadelphia area. They are not tech savvy, so they may have misunderstood what the message said, but advertisements from Comcast are telling them if the TV can take in a coax cable now, they will not need an adapter when the digital conversion happens in 2009. From this and past articles, I gather an analog TV will require some sort of adapter to work. Me thinks Comcast needs to work on the message they are sending, otherwise some people will be very upset when things do not work.
spelurker 12/5/2012 | 3:41:22 PM
re: Comcast's 30-to-1 Odds > Security? None needed -- this would be for channels that are sent
> in the clear now, bottom-tier service. Hence one-way is adequate too.
> It's a minority of the market but it exists and is tying up channels.

I agree with you on the security, but that isn't the only concern.

One-way doesn't support SDV, so that means they have some harder choices to make on certain special-interest channels. Do you take away grandma's church-tv channel because it is statistically not watched enough to keep on the broadcast tier that is DTA supported, or do you lock up that spectrum to mollify a few folks with analog TVs? Yeah, it's only 1/10 as much spectrum per channel once it goes to digital, but they are still restricting their options.
rommeliz 12/5/2012 | 3:41:21 PM
re: Comcast's 30-to-1 Odds It is amazing that this $29 matches exactly with what one of COMCAST insiders told me last July. I wonder if you get it by reverse-engineering?

Anyways, I was told that COMCAST is very confident that they can match the BW provided by FIOS. The real concern is people's perception...
fgoldstein 12/5/2012 | 3:41:18 PM
re: Comcast's 30-to-1 Odds > One-way doesn't support SDV, so that means they have some harder choices to make on certain special-interest channels. Do you take away grandma's church-tv channel because it is statistically not watched enough to keep on the broadcast tier that is DTA supported, or do you lock up that spectrum to mollify a few folks with analog TVs? Yeah, it's only 1/10 as much spectrum per channel once it goes to digital, but they are still restricting their options.

No SDV. That's the point of the bottom tier. They can provide the "free" channels easily enough. Grandma can get her church channel because they use so little of the cable spectrum. Bottom-tier service isn't meant to be expansive, but they can still provide a hundred channels of SD digital in the space freed up by ten analogs. But Comcast is expected to leave some analogs on the system for a while yet, just not so many. I think of "motel tier".
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