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CMCSA AT A GLANCE

P/E ► 9.71 AVG EV/EBITDA ► 4.15 AVG ROA ► 4.9% AVG ROE ► 7.5% AVG Debt to Equity ► 1.66 AVG Current Ratio ► 0.480 VERY LOW Interest Coverage Ratio ► 2.79 AVG

 

 

 

 

 

 

Comcast (NASDAQ: CMCSA) is the nation’s largest cable television and Internet service provider in terms of customers served.^[1] Comcast served 24.2 million cable customers in 39 states, 14.9 million high-speed Internet customers, and 6.5 million voice (phone) customers at the end of 2008.^[1] In Q3 2009, its revenue grew by 3% to $8.8 billion^[2] while net income rose to $944 million.^[3] The stagnant growth was due in part to Comcast's drop in paid customers, while leading competitor Verizon Communications (VZ) doubled its paid clientele in 2008.^[4]

In December 2009, General Electric Company (GE) sold its NBC Universal division to Comcast for $30 billion. The deal was one of the largest in recent media business history, and gave Comcast additional profitable cable franchises.^[5]

Since Comcast's business is highly dependent on residential customers, Comcast is vulnerable to downturns in the economy. This was evident in the economic downturn in 2008, when Comcast's growth of subscribers slowed- for example, the company only added 1.5 million digital video subscribers in 2008 compared to 2.5 million new customers in 2007.^[6]

Business Overview

NBC Universal Deal

In December 2009, General Electric (GE) and Comcast announced a deal that would give Comcast a 51% stake of media conglomerate NBC Universal.^[7] Comcast will pay GE $6.5 million in cash and merge its cable networks and web assets valued at $7.25 billion in return for the majority stake in one of the largest transactions in recent media business history. Under the terms of the deal, NBC Universal, which includes the NBC media empire along with USA Network, CNBC and Universal Studios, will become a joint venture between GE and Comcast, with the cable company owning a 51% majority stake in NBC Universal, with provisions for Comcast to eventually purchase full ownership. Comcast will benefit from the deal by further vertically integrating backward into the production side of media as well as adding large and profitable cable franchises to its national cable business.^[8]

Segments

Comcast is the nation's largest provider of cable services by number of subscribers, offering a variety of entertainment, information, and communication services to residential and commercial customers.^[1] The company's largest operating segment is its Cable Division, which includes primarily its video, Internet, and phone services.^[1] In 2008, CMCSA served approximately 24.2 million video customers, 14.9 million high-speed Internet customers, and 6.5 million phone customers.^[1] In addition to its Cable Division, Comcast also earns revenue through its Programming Division.^[9]

• Video (55% of Revenue): Comcast offers video services to 24.2 million customers.^[1] Comcast earned about $18.8 billion in revenue from its video segment in 2008, a 6.6% increase from 2007 because of growth in subcribers.^[9] In 2008 and 2007 the company added 1.5 million and 2.5 million digital video customers, respectively.^[6] However, the company lost 575,000 and 180,000 standard video subscribers in each respective year because of increased competition as well as a weakened economy.^[6] These weakened conditions are expected to further decrease the amount of video subscribers.^[6]
• Internet (21.1% of Revenue): Comcast offers high-speed Internet service to about 14.9 million customers nationwide.^[1] In 2008, the company earned approximately $7.2 billion from its Internet services, a 12.9% from a year earlier as Comcast added about 1.7 million subscribers during the year.^[6] Moving into 2009, however, the company expects its Internet revenue growth to slow because of market saturation, increased competition, and weakened consumer spending.^[6]
• Phone Services (7.7% of Revenue): CMCSA provides local and long-distance phone service to about 6.5 million customers.^[10] In 2008, Comcast earned about $2.6 billion in revenue from its phone services, a 50% jump from 2007 because of increased phone subcribers.^[9]
• Advertising (4.5% of Revenue): Comcast's advertising segment earns revenue through progamming license agreements with programming networks. In 2008, CMCSA earned about $1.5 billion in revenue from its advertising, a 0.5% decrease from a year earlier^[9] because of declines in advertising in cable television, most notably in the automotive and housing sectors.^[10] In 2009, the company expects further decreases in advertising revenue because of a further decline in television advertising.^[10]
• Other (3.7% of Revenue): Comcast earns revenue through its regional sports networks, digital media center, on-screen guide advertising, and fees from various other services. In 2008, Comcast earned about $1.3 billion in revenue in its other segment, a 17.6% increase from 2007 as a result of of its acquisitions of several cable stations.^[9]
• Franchise Fees (2.7% of Revenue): Comcast earned about $900 million in revenue from franchise fees in 2008, a 10.1% increase from 2007 as a result the increase in video subscribers.^[9]
• Programming (4.2% of Revenue): Comcast earns revenue in its programming segment mainly through advertising sales and from subscriber license fees for its networks, which include E!, Golf Channel, VERSUS, G4, and Style.^[11] In 2008, Comcast earned about $1.4 billion in its progamming segment, an 8.5% increase from 2007.^[12]

"Comcast Revenue by Business Segment" ^[9]

Financial Analysis

"Comcast 5 Year Financial Overview" ^[13]

Comcast earned approximately $34.3 billion in revenue in 2008, a 10.9% increase from 2007 that followed a 23.7% increase in revenue in 2007.^[14]

• The growth in revenue in 2008 was attributed primarily to the 10.7% growth in revenue in Comcast's Cable segment as the company added about 4.2 million net customers in the Cable division during the year.^[14]
• Overall, Comcast's revenue has increased over 78% since 2004 as the company has expanded its services to new markets across the country.^[13]

In 2008, Comcast's operating expenses followed its growth in revenue and increased by 10.5%, driven primarily by higher expenses in the Cable division as a result of the growth of Cable customers as well as increased marketing costs. Comcast earned $2.5 billion in net income in 2008, a 1.6% decrease from 2007 because of one-time costs associated with its acquistions of several cable companies.^[15]

Trends and Forces

NBC Universal Sold to Comcast

In December 2009, GE sold its NBC Universal division to Comcast for $30 billion in one of the largest transactions of recent media business history.^[5]

The deal obviously gives Comcast more power due to the addition of powerful cable franchises, but many critics also argue that the deal brings harm along with the good. For example, some argue that it brings the issue of net neutrality into further light, with some calling for the FCC to create and implement Net Neutrality rules that protect the interests of other companies doing business on the Internet.^[16] Meanwhile, FCC Commissioner Michael Copps argues that the deal proves that media conglomerates are still very much a current issue.^[17]

Thus, although the deal brings Comcast under scrutiny for issues regarding to conglomerates and net neutrality, the deal figures to improve Comcast's business in the foreseeable future.

Vulnerable to Strength of U.S. Housing Market Economy

With more than 85% ^[18] of television owners already paying for cable or satellite services, the number of new potential cable customers is limited. New homes are an important source of new customers for cable companies and as a result, growth in the cable industry is closely tied with growth in the housing market. Because of the weakened housing industry in 2008, for example, Comcast only added 1.5 million digital video subscribers in 2008, compared to 2.5 million in 2007.^[6] Furthermore, the company believes that weakened consumer spending in 2009 will further slow expansion of its Cable services.^[6]

Comcast also relies on advertising in earning its revenues- in addition to the $1.5 billion in Cable revenue Comcast earned in 2008, 43% of its Programming revenue was earned from advertising during the year.^[19] Because of weakened advertising spending in 2009, Comcast expects that its advertising revenues will decline during the year.^[10] Furthermore, Comcast is also vulnerable to a secular decline in television advertising as many advertisers are leaving television advertising and instead advertising on the Internet.

In September 2009, Comcast's CFO announced that, as the U.S. Housing Market improves, subscriber growth will improve and strengthen along with it.^[20]

Bundling Expands Product Offerings, but Increases Competition

Comcast's already large customer base--the largest in the industry^[1]--means that their best future customers may already be in their base. Given the limited universe of potential new cable customers, a significant growth area is selling to their current cable customers other services, namely Internet and voice services. Comcast brands this strategy their "Triple Play," otherwise known as bundling.

Bundling is the marketing strategy of cross-selling customers across cable, Internet, and voice services. Comcast's "Triple Play" and costs approximately $99 per month. Consumers benefit because they have one consolidated monthly bill, and one company to deal with if there are problems. However, this strategy also increases the amount of competitors that Comcast must face, including Verizon Communications (VZ) and AT&T (T). In Q4 2008, the company lost 233,000 basic video subsribers due to the economic downturn and increased competition.^[21] Furthermore, Comcast is feeling similar pressure as its phone service counterparts, as a secular shift towards mobile phones reduces the amount of households that use a traditional phone line. In Q4 2008, the company only added 340,000 phone subscribers compared to estimates of 425,000.^[21]

Anti-trust regulation threatens Comcast's market share

In late 2007, the FCC ruled that Comcast and other cable providers could not establish exclusive contracts with apartment buildings.^[22] In the past these contracts have stifled competition by preventing smaller cable providers and telcos from offering service in the same complexes. These new rules could open up as many as 25 million U.S. households to Comcast's competitors.^[23] Meanwhile, greater competition could significantly erode Comcast's pricing power.^[23]

In 2007 the FCC chairman Kevin Martin began pushing the commission to find if cable providers provide service to 70% of potential subscribers in areas that they service.^[24] If the FCC finds that this threshold has been met, it would open the door to more stringent regulation. Among the measures up for debate, are an unbundling of cable channels and a cap on Comcast's growth. The former would make offering cable service much less economical for comcast, while the latter has obvious negative consequences.

The cable TV market is shifting to a new digital system, which is upsetting some customers

In areas all over the United States, cable providers are requiring their subscribers to shift to a new digital system. In January of 2009, subscribers to RCN in New York, Philadelphia, Washington DC, and Chicago reached a 100% digital penetration.^[25] Comcast subscribers have become forced into this transition as well, primarily in the Washington D.C. area. The benefits for Comcast are obvious: they can offer a lot more channels compared to analog offerings. However, many customers are upset that there is no option to maintain the old analog option for a lower price, which is driving down the collective satisfaction of Comcast's consumers.^[26]

Net Neutrality

Congress is considering legislation that would allow broadband Internet providers--like Comcast--to charge for preferred delivery of digital content. “Net neutrality” advocates are lobbying Congress to treat all web content the same, as is the current standard. Comcast and other Internet providers claim they should be able to sell premium service to larger users of their networks, since they are investing heavily to build and maintain such networks. If legislation is passed to prevent Comcast from charging premium prices for differentiated delivery, it would limit Comcast's future revenue growth.

Competition

Comcast's focus on bundling widens the scope of competition beyond cable companies to Internet service providers and voice companies. Comcast's main competition in cable TV is from both traditional cable television providers like Time Warner (TWX) and satellite providers such as DirecTV (DTV and Echostar (DISH). In previous years, Comcast has lost customers to the satellite providers, who have aggressively pursued new customers. After Comcast began expanding its Internet and phone services in its Triple Play Package in 2008, however, the company now competes on many fronts with companies like AT&T (T) and Verizon Communications (VZ).

The table below shows that Comcast has the most room for growth for their Triple Play package, since they have the largest initial base. For all three companies most of the Internet and voice customers are also cable subscribers.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} CMCSA 2008 10-K, Item 1, pg.1
2. ↑ Comcast Reports Third Quarter 2009 Results
3. ↑ Bloomberg: Comcast Profit Increases 23% on Customer Additions
4. ↑ Verizon outpaces local cable competitors Comcast, RCN
5. ↑ ^{5.0 5.1}
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7} CMCSA 2008 10-K, Item 7, pg. 26
7. ↑ WSJ "Comcast, GE Strike Deal; Vivendi to Sell NBC Stake"
8. ↑ Fox Business: GE Agrees to Sell NBC to Comcast in $30B Deal
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5 9.6} CMCSA 2008 10-K, Item 7, pg. 25
10. ↑ ^{10.0 10.1 10.2 10.3} CMCSA 2008 10-K, Item 7, pg. 27
11. ↑ CMCSA 2008 10-K, Item 1, pg. 7
12. ↑ CMCSA 2008 10-K, Item 7, pg. 29
13. ↑ ^{13.0 13.1} CMCSA 2008 10-K, Item 6, pg. 21
14. ↑ ^{14.0 14.1} CMCSA 2008 10-K, Item 7, pg. 22
15. ↑ CMCSA 10-K, Item 7, pg. 24
16. ↑ Information Week: Comcast-NBC Deal Highlights Net Neutrality Issue
17. ↑ Multi Channel: Copps: Comcast/NBCU Faces 'Steep Climb'
18. ↑ [1]
19. ↑ CMCSA 2008 10-K, Item 7, pg. 29
20. ↑ Market Watch: Comcast CFO: Third quarter 'shaping up just fine'
21. ↑ ^{21.0 21.1} "Comcast loses more subscribers; shares down" Forbes.com 2/18/2009
22. ↑ "Comcast Calls FCC Decision To Ban Apartment Cable Deals "A Blow" To Consumers" TheConsumerist.com 10/31/2007
23. ↑ ^{23.0 23.1} "FCC to cut cable's cord into big apartment buildings" BloggingStocks.com 10/29/2007
24. ↑ "Cable Industry Still Fighting Kevin Martin's Ghost" DSLReports.com 2/20/2009
25. ↑ RCN's Major Market Analog Crush
26. ↑ Washington Post: As Cable TV Goes Digital, It's Still Stuck Inside the Box
27. ↑ TWX 2008 10-K, Item 1, pg. 5
28. ↑ TWX 2008 10-K, Item 1, pg. 7
29. ↑ TWX 2008 10-K, Item 1, pg. 8
30. ↑ TWX 2008 10-K, Item 6, pg. 85

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