Historical Perspective on the Cable Industry: How Comcast Is Driving Future Growth

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 |  Includes: CCS-OLD, CMCSA
by: Joseph Scime

In 2008, some industry analysts predicted the ultimate merger of telephone companies, print media, broadcasters, cable stations, and computers into one giant industry. Such media convergence would dramatically change the role of television and shift the balance of power from traditional broadcast, often called "terrestrial" television, to satellite transmission.

In 2011, that is exactly what Comcast Corporation (Nasdaq: CMCSA, CMCSK) and Skype (NASDAQ:MSFT) announced: The companies have entered into a strategic partnership that will enable Comcast customers to communicate with family and friends through HD video calling on their televisions. They will soon be able to make and receive Skype video calls from their televisions, regardless of whether their friends and family use Skype on their home TVs, PCs, compatible smartphones or tablets. Through this arrangement, Comcast customers will be able to experience widescreen HD video calling that is immersive and natural.

Customers will be able to:

  • Make and receive Skype video and audio calls, or send instant messages via Skype on a television while watching their favorite TV show at the same time, and accept incoming calls during a TV show with the help of Caller ID.
  • Make and receive video and audio calls, or send instant messages via Skype on a compatible mobile phone or tablet.
  • Import friends to their address book from their Facebook, Outlook, Gmail and smartphone contact lists, find them on Skype and see when contacts are online and available to talk.

This service will be delivered on the Comcast customer's HDTV through an adapter box, a high-quality video camera, and a specially designed remote control that enables customers to text on Skype as well as control their television. The other calling party does not need any special equipment beyond what is needed to use Skype.

In addition, customers will be able to access mobile features conveniently through Comcast's Xfinity Mobile app, and continue to enjoy conversations by switching from one compatible device (e.g., smartphone, tablet or television) to another.

Historically, industry analysts had concerns that consumers would curtail cable for other entertainment platforms. According to ResearchRecap, a service provided by Alacra, Fitch estimates that only 10-20% of the overall U.S. population is at risk of cutting the cord in favor of alternative platforms. This ‘high-risk’ segment is likely comprised of households that are: 1) middle-income, 2) low in TV consumption, 3) single-person, 4) technology-savvy, and 5) young. Even within this high risk population, there are several mitigating factors, including a currently less compelling line up of content, the OTT viewing experience, sports programming, DVRs, and initiatives taken by pay TV distributors.

Fitch believes that cord cutting will not be material to the media conglomerates’ free cash flow generation or credit profiles, despite some modest demand reduction for content delivered via traditional methods over the intermediate term. Fitch estimates that subscriber losses would have to exceed 4% annually for ratings to be affected:

"Consumer demand for high-quality and expensively produced programming will remain," said Melissa Link-Cohen, Director, Fitch Ratings. "The large, well-capitalized content providers are crucial to the industry and will remain so. We expect them to remain rational players and not sign deals that reduce the long-term value of their content."

Fitch believes the best-positioned sectors in an OTT world are film and TV studios, as the content creators and license holders. Cable networks, particularly premium cable and networks that rely largely on buying syndicated content, face elevated risk of lower audiences and potential business model interruption. Also likely to be negatively affected is the home entertainment segment.

About Comcast Corporation

Comcast Corporation is one of the nation's leading providers of entertainment, information and communications products and services. Comcast is principally involved in the operation of cable systems through Comcast Cable and in the development, production and distribution of entertainment, news, sports and other content for global audiences through NBC Universal. Comcast Cable is one of the nation's largest video, high-speed internet and phone providers to residential and business customers. Comcast is the majority owner and manager of NBC Universal, which owns and operates entertainment and news cable networks, the NBC and Telemundo broadcast networks, local television station groups, television production operations, a major motion picture company and theme parks.

Earnings Est

Current Qtr.

Jun 11

Next Qtr.

Sep 11

Current Year

Dec 11

Next Year

Dec 12

Avg. Estimate

0.41

0.39

1.60

1.89

No. of Analysts

21.00

22.00

23.00

24.00

Low Estimate

0.32

0.30

1.46

1.56

High Estimate

0.49

0.43

1.72

2.08

Year Ago EPS

0.31

0.31

1.27

1.60

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Revenue Est

Current Qtr.

Jun 11

Next Qtr.

Sep 11

Current Year

Dec 11

Next Year

Dec 12

Avg. Estimate

13.82B

14.03B

55.44B

59.47B

No. of Analysts

20

20

22

22

Low Estimate

13.35B

13.44B

52.48B

55.95B

High Estimate

14.24B

14.49B

57.35B

62.41B

Year Ago Sales

9.52B

9.49B

37.94B

55.44B

Sales Growth (year/est)

45.10%

47.80%

46.10%

7.30%

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Industry Snapshot

The global broadcasting and cable TV market shrank by 0.8% in 2009 to reach a value of $322,848.8 million.

For 2014, the global broadcasting and cable TV market is forecast to have a value of $388,819.2 million, an increase of 20.4% since 2009.

TV advertising is the largest segment of the global broadcasting and cable TV market, accounting for 47% of the market's total value. America accounts for 47.7% of the global broadcasting and cableTV market value.

The opportunities for growth in the emerging markets will be enjoyed by local companies, but the opportunities for cross-border operations still exist. A lack of technology and programming expertise provides opportunities for U.S. companies to partner with the regional operators to gain footholds in overseas markets, pre-empting European and Asian providers. However, as these new markets grow, they will develop the programming to cater to local preferences and culture. To stay competitive, U.S. companies will have to adapt and to develop programs for these new markets, instead of just offering dubbed-over U.S. programming.

The first television networks in America—NBC, ABC, CBS, and DuMont—were actually divisions of major radio networks or subsidiaries of television and radio manufacturers. Recognizing that centralized sales and distribution companies could be more profitable than scattered businesses, networks offered programs to individual stations that the affiliates could not afford to underwrite individually. Advertisers were fond of the network arrangement as well, for it enabled them to reach the entire nation with one commercial contract rather than dozens.

In the early years of television, the networks competed for programs, viewers, and advertisers in much the same manner as they do today. CBS was the recognized leader of the networks by any measure, while a number of other fledgling networks failed to crack the wall separating the leading triumvirate from the rest of the pack.

Beginning in 2009, the industry started to experience shrinkage in contracts as customers scaled back on home entertainment.

During the early 2000s, the television broadcasting industry was challenged by weak economic conditions that had a negative impact on corporate spending and thus advertising revenues. This decline included the fall of many "dot-com" companies that previously had spent hefty sums on advertising. These conditions were made even worse by the terrorist attacks against the United States on September 11, 2001. While the industry achieved positive growth during most of the 1990s, in 2001 revenues fell for the first time in 10 years, dropping from $44.8 billion in 2000 to $38.9 billion in 2001. In addition to a difficult economic climate, the industry has faced a number of other challenges brought on by new competition, regulatory changes, and technological developments.

Fox (NASDAQ:NWS) vaulted from being a medium-sized group to being the largest operation by the end of 1998, with 23 stations (including channels in New York, Los Angeles, Chicago, and Philadelphia) and 35 percent penetration of U.S. television households.

In early 2002, Viacom (NASDAQ:VIA) (home to CBS and UPN) was the industry leader, with 39 stations reaching almost 40 percent of the U.S. market. Fox was second, with 35 stations reaching about 38 percent of the market. Paxson Communications ranked third with 69 stations reaching some 33 percent of U.S. television homes. NBC followed with 13 network-owned stations reaching slightly more than 30 percent of all American homes. Tribune Broadcasting ranked fifth with 23 stations and almost 29 percent penetration. Other industry leaders included ABC, with 10 stations and almost 24 percent market coverage; Univision (33 stations, 21 percent coverage); Gannett Broadcasting (22 stations, 18 percent coverage); Hearst-Argyle (34 stations, 16 percent coverage); and Trinity Broadcasting (23 stations, 16 percent coverage).

Programming Content Debate

Another issue that the networks and the cable television industries faced was that of violent programming content. Under pressure from the federal government, CBS, ABC, NBC, and Fox all agreed to place parental advisory labels on violent programming—in order to avoid having a system imposed upon them. The group unveiled its age-based ratings system that was similar to that of the movie industry in December 1996, which labeled programs (with the exception of news) with one of six categories ranging from children's programming to shows for mature audiences: TV-Y, TV-Y7, TV-G, TV-PG, TV-14, and TVM. Viewers saw the appropriate icon in the upper left corner of the television screen at the beginning of the program and, if the program exceeded one hour in length, at the beginning of subsequent hours. On June 4, 1997, television executives met with representatives of the American Medical Association and the National PTA to review the ratings system. Several networks agreed to add V (for violence), S (for sexual content), and L (for language) to the age-based system.

At the same time, the federal government was proceeding with plans to give parents the ability to black out violent programming with a device called the V-chip. Mandated by the White House and Congress in 1996, television manufacturers were waiting for FCC specifications before adding the chip to new television models and designing V-chip converter boxes. By 1999 V-chips were being installed in new television sets, and the broadcast networks were implementing a system that would help parents select programs based on their content. Many of the major cable networks were also committed to designing their own rating system, although some refused to comply based on First Amendment issues.

1999-2003 Conditions

After rising from $40 billion in 1999 to $44.8 billion in 2000, industry revenues fell to $38.9 billion in 2001 in the wake of a sluggish economy that included the fall of dot-com advertisers and overall reductions in corporate spending. The terrorist attacks of September 11, 2001, only made these conditions worse. However, by 2002 conditions began to improve. Standard & Poor's estimated that revenues would reach $40.5 billion that year.

Major developments like the terrorist attacks of September 11 and the U.S.-led war with Iraq, which began in March 2003, impacted the way broadcast networks delivered news, as well as the costs involved. According to Broadcasting & Cable, a survey conducted by Frank N. Magid Associates revealed that 45 percent of viewers turned to cable news first for the latest information about the war, whereas 22 percent turned first to the so-called "Big Three" networks' evening news broadcasts first. Local TV news came in third, at 20 percent. In addition to lost advertising revenue due to periods of commercial-free coverage, the conflict in Iraq was expected to cost broadcasting networks $30 to $40 millionDuring the early 2000s, the industry faced many of the same challenges that were evident in the late 1990s. Network broadcasters continued to slowly lose viewers to cable operators offering digital services like video-on-demand and high-speed internet access. In addition to cable companies, other forms of competition included the internet, film studios, telephone companies, computer companies, consumer-electronics companies, and publishers.

Consistent with past trends, consolidation continued to affect the industry. ABC, CBS, and NBC took in more than 40 percent of the advertising revenue for the television broadcast industry during the early 2000s, and they were expected to continue to lead the industry in both television advertising and viewership. In addition to providing programming, the networks also owned television stations.

In 1995 cable systems actually experienced a drop in subscribers and reached about 65 percent of television homes. Subscribers balked at price hikes that followed rate deregulation, and some opted for satellite television services. In order to give broadcasters the chance to compete against pay television services and the netlets, the FCC agreed to gradually lift a ban on the syndication of network programming. Previously, networks were wholly dependent on advertisers for their revenue and had access to the airwaves only by permission of the government, whereas cable companies could charge subscribers as well as advertisers. In 1993 the networks gained rights to profit from reruns of their prime-time shows.

This triumph for the networks affected the outside producers that made and financed much of the prime-time programming. Permitted to undertake a greater proportion of in-house production of prime-time programming, the networks could now negotiate for more financially rewarding deals with outside producers. By 1995 all such restrictions on network ownership of programming and on their right to syndicate programs were lifted.

Disclosure: I have no relationship with Comcast or any company mentioned in this article. I have no positions in any bonds, stock or options mentioned, and no plans to initiate any positions within the next 72 hours.