As phone companies’ fiber-optic television services encroach on cable TV’s turf, cable companies appear to be returning the favor.
Comcast and Time Warner Cable, the two largest U.S. cable operators, both reported first-quarter earnings last week that beat analysts’ estimates, largely on gains in high-speed Internet and telephone service rather than cable TV.
Excluding one-time gains, Comcast profit rose 9.5% from a year earlier as revenue increased 14% to $8.39 billion. Time Warner Cable’s earnings per share of 28 cents beat the 22-cent average analyst estimate in a Thomson Financial survey as sales rose 8% to $4.16 billion. Both revenue figures also beat analysts’ estimates.
While Time Warner Cable and Comcast derived 63% and 56%, respectively, of their first-quarter revenue from cable services, the companies are getting more revenue from high-speed Internet and phone subscriptions by bundling the services for a monthly price that’s less than what customers would pay for separate services.
High-speed Internet sales for both companies rose more than 10% from a year earlier; phone-based revenue surged 65% for Comcast and 39% for Time Warner Cable.
“Comcast’s broadband growth remains strong, and is clearly gaining share. And its digital voice growth is still accelerating,” wrote Sanford C. Bernstein analyst Craig Moffett in a note to clients. “The bundle is working.”
Such gains in Internet and telephone subscribers boosted revenue enough to please investors. Shares of Time Warner Cable, whose majority owner Time Warner Inc. is planning to divest the cable company, rose 1.4% on Wednesday, when its results were announced, while Comcast stock advanced 8.6% the following day.
Comcast in January responded to satellite leader DirecTV’s claims of high-definition programming superiority by launching a video-on-demand service that will boast an HD inventory of more than 1,000 movie and TV series choices a month by the end of the year. That service helped Comcast boost cable-based sales by 5% despite having a subscription base that fell slightly.
Still, Comcast and Time Warner Cable lost a collective 2,000 basic-cable subscribers during the quarter from a combined 38 million subscribers as of the end of last year, likely as a result of more competition from satellite television companies such as DirecTV and Dish Network, which both will report earnings later this month.
Pressure also is mounting from fiber-optic services such as Verizon’s FiOS and AT&T’s U-verse. Earlier this week, Verizon said it tripled its FiOS subscribers from a year earlier to 1.2 million.
As a result, cable companies are willing to bundle just phone and Internet services and forgo television customers committed to satellite or fiber-optic TV, said Ian Olgeirson, senior analyst for research firm SNL Kagan.
“Logically, those subscribers are coming from someplace,” Mr. Olgeirson said of fiber-optic customer growth. “For the most part, it’s a zero-sum game for the multichannel operators.”
Despite such competition, cable companies may have the opportunity to resuscitate cable subscriber growth as over-the-air TV customers prepare for next year’s switchover to digital broadcasts by subscribing to pay television. Verizon and AT&T also will follow through on their plans to raise prices for FiOS and U-verse.
“We continue to think the cable sector is a smart place to invest during periods of slower economic growth,” Citigroup analyst Jason Bazinet said in a note to clients.
Cable companies may continue to hedge their bets by moving their focus away from cable subscriptions. Cablevision, the New York-area cable provider, said in February that it posted a fourth-quarter profit as revenue jumped for its Rainbow Media unit, which includes cable networks IFC and AMC, and its Madison Square Garden division. Additionally, the company is planning to make a $650 million bid for Long Island newspaper Newsday, according to the Wall Street Journal.