Balance Shifts Cable’s Way in Fight for Subs

May 1, 2006  •  Post A Comment

Comcast Corp.’s first-quarter gain in basic cable subscribers might portend that the battle with satellite operators for customers is tilting in cable’s favor.

For years Comcast duked it out with satellite companies DirecTV Group and EchoStar Communications-and lost tens of thousands of basic-cable subscribers in the process. Comcast’s addition of 340,000 digital customers and 47,000 basic cable customers in the first three months of this year is leading many on Wall Street to believe that maybe the era of cable losses in the subscriber war is coming to an end.

What’s more, if Comcast’s results set the tone for other cable operators reporting earnings in the coming weeks, then telephone giants AT&T and Verizon Communications could be facing even stiffer competition from cable operators as the phone companies roll out their own television products this year.

“What we’re seeing across the board is that the rollout of voice has reached a tipping point for most major [cable operators],” said Todd Mitchell, a cable analyst at Kaufman Bros. in New York. “Once they’ve switched to the bundled sale [of television, telephone and high-speed Internet], it is having a positive impact on their business model,” in terms of customer defections and basic-subscriber growth.

Comcast’s first-quarter figures are the clearest sign yet for Chairman and CEO Brian Roberts that his strategy of bundling television, high-speed Internet and telephone services together and augmenting them with advanced products such as video-on-demand, digital video recorders and high-definition television is a sure-fire way to attract new customers-and most important, to keep existing ones.

No More Call-Waiting

The numbers are all the more significant given that Comcast is the last of the major cable operators to begin introducing digital telephone service. Both Cablevision Systems and Time Warner’s cable unit have had a digital phone product available since 2003.

“It looks like after several quarters of waiting, the telephony service is finally gaining some traction for them, said F. Jack Liebau, president of Liebau Asset Management in Pasadena, Calif., and a Comcast investor.

He said that Comcast’s now having phone service in many of its markets will help to calm investors worried about the arrival of deep-pocketed phone companies’ video product.

“Psychologically, the biggest overhang over cable stocks is the perceived threat by the big Bell companies,” he said.

Wall Street liked what it saw, bidding Comcast shares up more than 4 percent last Thursday to close at a six-month high of $30.45 per share.

“The stock price has risen 15 percent over the last four weeks in anticipation of a good first quarter, decreased concern over [Regional Bell Operating Cos.] competition and signs that Comcast’s voice rollout might lead to results in late 2006-07 that are similar to those of Time Warner and Cablevision,” wrote Credit Suisse cable analyst Bryan Kraft in a research note.

Other cable stocks appeared to benefit from the gains at Comcast, with Cablevision Systems advancing 4.5 percent to $19.79, Charter Communications shares climbing nearly 3 percent to $1.18, and Mediacom Communications shares advancing nearly 3.5 percent to $6.90. Shares in DirecTV fell a penny to $17.35 a share, while EchoStar’s stock rose 1 percent to $30.92.

“What was surprising about Comcast’s numbers was that they were good without the full impact of digital voice on the quarter,” Mr. Mitchell said. “The data and digital and basic numbers are good, which means people are responding to the Comcast marketing message.”

Comcast posted first-quarter net income of $466 million last Thursday, triple the year-earlier figure, driven by gains across all of its businesses, particularly its high-speed Internet and digital cable services. Revenue rose 10 percent to $5.9 billion.

Comcast’s core cable operation fueled much of the growth in the quarter, with revenue advancing 6 percent to $5.6 billion. A major factor behind the company’s growth was the addition of 437,000 high-speed Internet customers in the quarter, compared with 414,000 added a year ago, which drove revenue for that business up 22 percent to $1.1 billion.

The video business helped as well, as the addition of 340,000 digital cable subscribers outshone the year-ago gain of 200,000. The 47,000 new basic subs compared favorably with the 29,000 basic-cable subs lost a year ago.

Meanwhile, the company’s phone business reported 211,000 new customer additions in the quarter as the product became available in more markets. A year ago, the company, which was just starting out with its telephone product, added 7,000 customers.

Comcast’s so-called Content segment, which includes the cable channels OLN, E! Entertainment and The Golf Channel, saw its revenue rise 12 percent to $239 million, reflecting increases in network ratings and advertising revenue.

However, segment profit fell to $9 million from $31 million a year ago due to higher expenses associated with OLN’s broadcast of National Hockey League games, which began in the 2005 fourth quarter.

Comcast President and Chief Operating Officer Stephen Burke said the basic-subscriber growth was part of a trend the company noticed in the 2005 fourth quarter as it beefed up its VOD product, which now offers 7,500 titles of TV shows and movies, most of which is free to digital-cable subscribers.

“There is no question that when our customer have it and use it, they have a better television experience than satellite,” Mr. Burke told investors on the company’s earnings call.