Cable TV provider Comcast (CMST, Financial), reported higher revenue and earnings for the second quarter, exceeding analysts’ expectations. Earnings increased from last year's $2.52 billion, or 52 cents a share, to $3.2 billion, or 69 cents a share. The Street’s average consensus estimate was for 60 cents a share. Revenue rose 2.1% to $21.735 billion but came in shy of the $21.857 billion expected by analysts.
Surpassing analysts’ expectations, however, provided scant solace for Comcast. Although the cable company’s reported earnings beat estimates, all of its revenue growth was predominantly attributable to increased broadband customers.
The question for Comcast, as well as other pay TV media companies, is, will the rate of new broadband customers exceed the accelerated exodus by existing cable TV customers? So far, the results are mixed. Even though Comcast has added Netflix to its X1 platform, the cord cutting continues.
The good news? Comcast added 260,000 broadband subscribers in the period, up 49% from the 175,000 added last year. The bad news? The company lost 140,000 cable subscribers, its fifth straight decline.
It appears that the pay-TV ship is taking on too much water for it to stay afloat.
Even though they had anticipated viewers would be leaving the service and planned accordingly, the rate of departures has increased dramatically. The numbers tell a frightening tale for cable providers.
According to research company eMarkerter’s forecast, the number of Americans who have canceled their cable subscriptions will increase 32.8% this year. This represents a leap from 8 million to 33 million departing customers.
The researcher also predicts that 45 million Americans will have left pay TV for other digital direct-to-customer services by 2020. These numbers account for more than 17% of the population.
Once Netflix (NFLX) soared to the top of the media empire by capitalizing on a streaming technology delivery medium, it upended the entire legacy entertainment company. The change was as profound as it was swift. Panicked old-line media studios and cable operators found themselves on the outside looking in.
While Comcast and other cable-TV operators had expected and planned for declining paying customers, the rate at which viewers have been cutting the cord exceeds their projections.
The risk for legacy media companies looking to enter the digital streaming original content marketplace is that the dominant position of Netflix, which recently surpassed Disney in market capitalization, has set off a free-for-all acquisition spree.
The costs for capturing a portion of the worldwide digital streaming audience are escalating rapidly. Because the rate of departure of pay-TV customers is occurring at much higher rate than cable operators' projections, the massive loss of revenue can’t be stanched or supplanted entirely by expanding the broadband base. As such, Comcast and other companies including AT&T are planning to fund these purchased by assuming additional debt.
The staggering sums paid to purchase rival media companies has sparked justifiable concern about the burden these expenses will create for companies' balance sheets. Even though Comcast has abandoned its quest for Fox (FOX, Financial) studios and its media assets, it still has its eyes on Sky TV; its last bid against rival suitor Fox remains unmatched.
Shares of Comcast declined 17% on Wednesday, reflecting investors' concerns about whether the extraordinary cash outlays can be converted into profitable operations.
Many investors know that given the steep acquisition costs, there will be little room for error in the business strategies for maximining the return on investment. The accelerated rate of cord cutting has only heightened their concerns.
I have no position in any of the securities referenced in this article.
