Make no mistake: Comcast (CMCSA) isn't doing poorly. However, it appears to have only one way to go and that is down. There are many pressures creeping into Comcast's market that will almost certainly introduce a new kind of competition that Comcast does not seem poised to deal with. Mainly, the disruption of television services by Google ( GOOG), among others, has the potential to decrease Comcast's revenues. Lower revenues will hit Comcast hard as it will drag down its profit margins, which have historically been pretty large.
First, Comcast is in a solid position currently as the industry leader in selling a la carte movies and videos to television viewers. To be precise, it currently sells 23% of on demand videos which is a large amount and far ahead of its competition. However, Comcast is among a relatively small number of providers, a number that seems to be adding more competition by the day. Specifically, with the uptake of the Apple TV (AAPL) and Google TV, as well as other set top boxes such as Roku, I expect this number to fall. When you include streaming services such as Netflix (NFLX) or Hulu, this number becomes smaller still.
Not to say that Comcast will become irrelevant, but its share of the market will decrease. Being that on demand videos are high margin for Telecommunications companies, a decrease in market share will also mean a decrease in margins, as the percentage of revenues from these high margin products will be smaller.
This will be exacerbated with the move from cable to online services. The portion of television viewers using online services is very small to be sure. In fact, it is estimated that only 5% of viewers use online streaming services instead of traditional cable television. With a percentage so small, there is really only one way to go, up. And that is why Comcast and other providers are so afraid of Google Fiber. Time Warner (TWC) might have been the one paying for tips regarding Google Fiber a few months ago, but make no mistake, Comcast is just as afraid.
In fact, with the near certainty that Google will expand its Fiber network to more cities, Comcast has already begun rolling out more powerful internet and new services. While in the making for some time, Comcast's new 300 megabyte fiber service is being rolled out at the high price point of $300. These are very steep prices and are much higher than Google Fiber's fees. However, Comcast is rolling this fiber network out in other cities than Google Fiber, and as such, has no reason to charge low prices. Personally, I think at $300 this service will target a niche market and will not see great uptake among common consumers.
The problem for cable companies, truthfully, is that Google doesn't need to compete with them. It will, don't get me wrong - but it's not trying to dominate the cable provider market. It's merely trying to compete in a market that has been short on competition. It's putting the pressure on with its Fiber networks to force the telecos to ante up and increase speeds. (It's doing this to bring more revenue to its core business: advertising, which earns money the more people surf the internet, search on Google, and watch videos on YouTube. All of these things are exacerbated by better internet speeds, higher broadband penetration, and folks filtering through Google searches to find streaming episodes of their favorite TV shows).
It is also worth noting that Comcast's 300 megabyte fiber service is also countering the offerings from Verizon, which also offers a 300 megabyte service. So, it seems that the Comcast is being squeezed by many competitors.
Although much of what I have mentioned paints the picture as bleak for Comcast, none of these changes are coming quickly. While Google Fiber poses a very strong threat to the traditional cable companies, it is only rolling out in one city and will be a fairly slow process at that even. Not that Google is taking its time necessarily, but fiber connections over an entire city are labor intensive.
And when it comes to the disruption of television services and the unbundling of television packages, this has been underwhelming at best. Not long ago, Apple boldly (and possibly arrogantly) claimed that it had cracked the television interface and teased of offering unbundled offerings in a similar way as it does with iTunes. Fast forward to summer of 2012 and now Apple's TV project has turned from a disruptive a la carte app store to a set top box for subscription television packages with a prettier user interface. Apple might be the biggest company in the United States but the oligopoly that is cable providers will not give Apple, Google, or any other company its market without a fight. Added to that, the new Apple TV product will likely not even be available until 2013 at the earliest. Needless to say, this appears to be a slow fight. Still, competitors are coming and I see the squeeze for Comcast coming from too many angles to ward off with no loss of market share, margins or revenue possibilities.
So for Comcast, the inertia of disruption of its core businesses continues. It is not experiencing fast or significant challenges at this very moment but there are many new players in these markets with more consumer oriented business models. Comcast can survive as a big player in this space, but its margins will absolutely decrease as these services become commoditized. Think of it like this: Google doesn't need to bring high margins on the delivery of television and internet as content licenses and advertising more than make up for the revenue gap. Comcast will need to change its core business model in fundamental ways or lose revenue. Personally, I expect the latter.
Disclosure: This article was prepared for Freedonia Freelance by one of our analysts. The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.