In Search Of… Savings

The cable industry’s week-long feeding frenzy over consolidating Time Warner Cable out of existence comes with the theory that growing larger guarantees cheaper programming costs from volume discounts and influence. But hang on, says Wall Street analyst firm Sanford C. Bernstein.

This week, senior analyst Todd Juenger released a report, “Will Cable Consolidation Slow Down Affiliate Fee Growth? We Say ‘No,’” that questions the theory the bigger the company, the more leverage available to keep costs down.

Juenger says that few customers are in love with their local cable company, and programmers know it. If another brawl erupts between CBS and a cable operator, the presumption of leverage to quickly resolve the dispute is more hope than reality because customers will readily abandon one provider for another to get what they want.

“Consumers are much more loyal to their favorite TV networks than they are to their distributor,” Juenger says. “Every time a distributor has tried to fight back by dropping the content from one of these [big programming] companies, it has ended badly for the distributor because consumers will switch distributors, not TV networks.”

Programming carriage wars will continue to hurt cable companies as long as there is a satellite or telco-TV competitor ready to sign up disgruntled customers. If a suite of Viacom-owned networks are dropped during a cable fee dispute, the cable operator will save around $2.75 a month per subscriber. But if that subscriber decides to change providers, operators lose as much as $40 in marketing costs paid to attract that subscriber in the first place.

Juenger believes the only way combining cable operators will save on programming fees is when smaller cable operators like Charter get the benefit of big discounts on programming offered to larger, high volume providers like Time Warner Cable.

Juenger adds bringing Comcast in as a buyer gets complicated because if Comcast tries to drop networks, programmers might have leverage by appealing to the federal government with claims Comcast is violating its agreement with the federal government to avoid abuse of market power to strangle competitors.

Steve Burke is CEO of NBCUniversal and an executive vice president at Comcast.

Comcast is in the enviable position of negotiating with itself for permission to carry Comcast-owned NBC stations over Comcast Cable, earning the company hundreds of millions in retransmission consent fees paid by cable subscribers.

Comcast executive vice president Steve Burke, who also oversees the Comcast-owned NBCUniversal, said retransmission fees are changing the broadcast business, and makes Comcast a ton of money along the way.

“NBC made virtually nothing on retransmission consent two years ago,” Burke told investors at the Bank of America Merrill Lynch 2013 Media, Communications & Entertainment Conference. “This year we’ll make about $200 million.”

Since acquiring NBCUniversal, cable subscribers cannot help but find themselves watching at least one channel owned by the entertainment and cable conglomerate. Burke said in addition to owning NBC local stations in the largest U.S. cities, Comcast also owns or controls an impressive number of popular cable channels including USA, Syfy, Bravo, E!, MSNBC, CNBC, The Weather Channel, and a variety of sports networks. Seven Comcast-owned cable networks earn the company more than $200 million annually, providing almost two-thirds of the programming division’s operating cash flow.

But Burke isn’t satisfied with those earnings, claiming cable companies undervalue the networks’ true worth by 20-25 percent.

“There is a monetization gap between how those channels are doing and how they should be doing measured by how peer cable channels are doing,” Burke explained. “In other words we are not paid as much as we think we should be given our ratings and our positioning by cable and satellite companies.”

Burke told investors the company is positioning to capitalize on the growth of retransmission consent fees that will deliver more revenue to the broadcast and cable programming divisions of Comcast that will be eventually reflected on subscribers’ bills.

“The key to retransmission consent is to have contracts expire with the big distributors that allow you to reopen the existing retransmission consent contracts,” Burke said. “One thing that we really hadn’t figured on when we did the deal was how rapidly retransmission consent was going to establish itself. We underestimated that frankly. That’s a very good thing for NBCUniversal, but not so good I think for Comcast Cable.”

Although Comcast has been very vocal about unreasonable price increases for broadcast and cable television programming owned by other companies, it expects comparable compensation for its own stations and networks.

“As our contracts come up, we will get those revenues the same way CBS, ABC and FOX have,” Burke argues. “I see no reason why we won’t […] get paid in a similar fashion to the way that they get paid in the future.”

Roberts

Brian Roberts, the CEO of Comcast-NBC-Universal has two things to celebrate this week:

1. His exclusive invitation to golf with President Barack Obama at the Vineyard Golf Club on Martha’s Vineyard, joined by World Bank president Jim Kim and former U.S. Trade Representative Ron Kirk;
2. He is a billionaire again.

Thanks to a series of rate increases and improving broadband sales, Comcast’s chief executive has now amassed just over one billion dollars in assets, estimates Forbes magazine.

Much of his net worth rests in more than $800 million in Comcast stock controlled by Roberts. Comcast shares are up almost 30 percent in the last year and over 105 percent in the past 24 months. Comcast reported revenue of $16.27 billion in the second quarter alone.

Comcast’s earnings fueled the buyout of NBC-Universal.

Roberts had been a billionaire club member before, appearing on Forbes‘ 400 Richest Americans list in 1999 after inheriting the majority of his father’s stock, worth $750 million. By 2001, that stock increased in value to $1.2 billion. But by 2003, depressed Comcast share prices meant Roberts’ net value dropped to $625 million.

Executive compensation at most cable operators has increased right along with the prices customers pay for service.

Big, Bigger, Biggest… Bigger Still

Comcast has plenty of available bandwidth to indefinitely expand its High Speed Internet services at speeds up to 3Gbps and believes it has won the legal right to grow its cable business as large as it likes.

Comcast executives admitted Wednesday they have more than enough network capacity to meet the demands of customers, both now and well into the future.

“With regard to usage and capacity, we feel the network is flexible and has plenty of opportunity to grow in capacity,” said Neil Smit, president and CEO of Comcast Cable Communications. Smit was responding to a Wall Street analyst asking about future capacity during a quarterly financial results conference call.

Smit noted that some of the biggest bandwidth users served by Comcast are businesses, and the cable operator was well-positioned to service them by extending fiber or deploying its Metro Ethernet product. Residential customers get increased bandwidth through neighborhood node splitting or DOCSIS 3 channel bonding that combines several channels together to increase speed and capacity.

Brian Roberts, CEO of Comcast Corporation, agreed with Smit, adding, “the more the consumer desires speed, the better that is for our company.”

Roberts noted DOCSIS 3.1 — the next generation of cable broadband — was “promising technology.”

“At the cable convention, we demonstrated 3Gbps” over Comcast’s existing cable infrastructure, said Roberts.

Smit

Comcast is easily the country’s largest cable operator, but many believe it is restrained from growing larger through mergers and acquisitions because of antitrust concerns. But thanks to a number of lawsuits initiated by Comcast, the company believes it can now grow as large as it likes.

Roberts admits the question of cable industry consolidation remains a gray area, particularly for Comcast. But he told investors he does not believe there are any remaining legal hurdles preventing Comcast from buying out other cable operators, despite earlier FCC rulemakings limiting the maximum size a cable company can grow through buyouts.

Comcast yesterday announced its last buyout — NBCUniversal — helped fuel a 29% increase in net income in the second quarter, thanks in part to strong results from film and television.

But many of Comcast’s largest gains came from its cable business.

Despite continued losses of video subscribers (159,000 in the second quarter), Comcast’s cable revenue increased 5.8% to $10.47 billion, and operating cash flow grew 5.7% to $4.3 billion. Comcast, which also owns several NBC broadcast affiliates, is playing for both sides of the retransmission consent wars. Its owned and operated television stations have demanded higher fees to be carried on cable systems, many owned by Comcast itself. The increased programming costs fuel subscriber rate increases, which also boost revenue.

Broadband is way up, although the company keeps losing video customers to cord-cutting.

Comcast’s broadband revenue has continued to grow dramatically. Customer additions for High Speed Internet access were up more than 20% in the quarter — the best second-quarter growth in five years — even as subscribers paid more for the service because of rate increases. Customer growth and price hikes delivered 8% growth in broadband revenue. In the last quarter alone, Comcast earned $2.6 billion from its broadband business.

Comcast is not spending a significant percentage of that revenue on enhanced broadband network upgrades. Instead, the company has increased investments to wire office parks and businesses to entice commercial customers, which account for a substantial amount of new customer growth. Comcast is also investing in research and development of new products and services, such as set-top boxes. The company also expects to pay 10% more in programming costs than it did a year earlier.

Year-to-date cable communications capital expenditures have increased 7.1% to $2.3 billion representing 11.3% of cable revenue. Comcast expects that for the full-year of 2013, cable capital expenditures will increase by about 10% over 2012.

Some other highlights from the quarter:

• In the last six months, Comcast completed broadband speed increases for 70 percent of its customers;
• High Speed Internet revenue was again the largest contributor to Comcast’s cable revenue growth;
• At the end of the quarter, 33% of Comcast’s residential high-speed customers take a higher speed tier above its primary service;
• Comcast has pushed Wi-Fi hard, installing more than four million wireless gateways and boosted Wi-Fi coverage to 250,000 hotspots through both cable partnerships and its home hotspot initiative;
• Comcast’s new X1 cloud-based set-top platform has been introduced to more than half of its national service area and will be available everywhere by the end of 2013. By the end of the year, Comcast also expects to push a firmware update to installed boxes to upgrade them to its new X2 platform;
• The average Comcast subscriber now pays the company $160 per month, up 7.4% from last year. Rate hikes, speed upgrades and growing programming packages account for the higher price;
• 77% of Comcast video customers took at least two products and among those, 42% took phone, broadband and television service.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Comcasts Cable and Media Units Grow 7-31-13.flv[/flv]

Bloomberg reports Comcast is still having trouble holding on to its video-only customers, but broadband customer growth continues to explode. Comcast also does well because it owns a number of cable networks and entertainment properties. Expect Comcast to continue evolving its products to bring them closer to the things people do online.  (3 minutes)

Where to put all the cash?

While you received a 2% cost of living salary hike that was eroded away by rising health insurance premiums this year, Comcast CEO Brian Roberts took $29.1 million in total compensation straight to the bank in 2012, walking home with $3.5 million more this year than last.

Most of Roberts’ compensation is tied to incentive pay that rises along with the value of Comcast stock. Roberts base salary remained flat at $2.8 million, but his non-equity incentive awards rose right along with the 61 percent increase in the value of Comcast stock over 2012. Comcast executive compensation was disclosed in a proxy statement last week.

Comcast stock is up another 11% so far in 2013, fueled by earnings increases from its broadband service and rate increases that have helped the company maintain revenue numbers despite basic video customer losses.

Other Comcast executives are sharing in the pay bonanza. Chief financial officer Michael Angelakis deposited $23.2 million in compensation during 2012, a six percent increase. NBC Universal CEO Steve Burke, now part of the Comcast family, saw his pay rise by 11% from $23.6 million to $26.3 million. Executive vice president David Cohen got a 5% salary boost to $15.9 million last year.

The head of the cable division — Neil Smit — did not do as well. He had to make do with only $18.3 million in 2012 — a 1% decline from his 2011 pay of $18.5 million. With that kind of salary, he might be just one step away from buying store brands, clipping coupons, and turning down the thermostat at night.