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Vicious cycle will torpedo Comcast’s video recovery

Comcast increase ARPU Programming Costs Inflation

Comcast’s X1 continued to drive a renaissance in the video business for the company in Q1 2017. However, the biggest increase in programming fees ever signals the recovery is a temporary blip in the long-term decline of the business.

Modest video subscriber growth continues

Comcast’s video business continues to do well. The company gained 42,000 subscribers over Q4 2016, which is a 0.18% quarterly gain and 0.67% gain year-over-year (YoY). The increase is a little less than the 53,000 gain in made in Q1 2016. Comcast now has 22.55M video subscribers, of which 21.49M are residential customers and 1.02M business.

Broadband, on the other hand, continues to grow at an impressive rate. The company added 430,000 broadband customers in the first quarter, up 5.7% year-over-year. Comcast now has 25.13M broadband customers, of which 23.22M are residential.

NBCU continued to do well, growing revenue to $7.87B, up 14.7% YoY. Business services also did well, increasing revenue 13.7% YoY to $1.5B. Broadband also registered a solid gain of 10%, to reach $3.6B. Video revenue gained a more modest 4.3%, reaching $5.8B.

Video ARPU gains more than offset by programming costs

Comcast ARPU versus Programming CostsAverage revenue per unit for video increased 2%. The average Comcast video customer is now spending $85.4 a month for the video services. However, programming costs increased much more than ARPU. In Q1 2017, $48.61 of ARPU (or 57%) went directly to cover programming costs. That represents an increase of 13% over Q1 2016. Programming costs increased 9% YoY in Q1 2016.

To put this in perspective, video ARPU was $66.4 per month in Q1 2010. Just $25.5, or 38%, was required to cover programming costs. In the last seven years programming costs as a percentage of ARPU has increased 18.6%.

It should also be noted that ARPU and programming cost increases are outpacing inflation consistently. Over the last 6 years, Comcast programming costs have increased an average of 8.9% a year, ARPU an average of 3.4%, and U.S. inflation an average of 1.6%.

Escalating content costs will stall and reverse Comcast’s video recovery

Overall, the U.S. pay TV industry subscriber loses appear to be increasing. The top 11 traditional pay TV providers lost 1.6M subscribers in 2016, and 900,000 in 2015. The most cited reason for leaving pay TV by consumers is cost. 80% say the service is just too expensive. The second most popular reason, cited by 48% of cord-cutters, is they use a streaming service like Netflix or Hulu.

Comcast’s X1 has done an excellent job insulating the service from the contraction felt across the rest of industry. X1 provides an experience equal to the best of the online providers, and significantly better than other pay TV operators.

However, the price difference is an insurmountable advantage for online providers.  Comcast and other pay TV operators are locked into a vicious cycle from which there appears to be no escape. Programmers are getting bigger increases in licensing fees, driving up the cost of pay TV for consumers, and throwing gasoline on the flames of consumer price discontent.

In this environment, Comcast’s excellent user experience will be insufficient to hold on to the slender gains in subscribers it has delivered so far. Expect video subscriber growth to stall this year, and for losses to return in 2018 and beyond.

Why it matters

The excellent user experience of the X1 platform is insulating Comcast from the overall contraction of the pay TV industry.

The increase in programming costs is driving price rises in pay TV, and driving the growth in cord-cutting.

This trend will ultimately stop Comcast video subscriber growth, and return the company to video losses in 2018.

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(3) Comments

  1. The only reason I still have Comcast’s video service is because dropping it would only save me $20/month with phone and Internet service. Of course my bill just inexplicably went up $15 this month, so I need to investigate why that occurred.

  2. Nice post, but I respectfully have to differ with the conclusion. In 2016, Comcast was the only major cable operator to add subs, a continuation of a trend that has been gaining steam due to the success of their X1 platform. X1 includes the most innovative: (a) cloud DVR service; (b) Sports Guide App; (c) TVE App; (d) OTT & online video integrations. These new products are great, and are positioning Comcast to be the strongest retailer of TV news, sports and entertainment programming in the U.S. While content costs will rise, so too will ultra-premium products — SundayTicket & RedZone for consumers; advanced TV ads for brands — that will add plenty of profit to the bottom line.

    • Sub gains in Q4 2015 and Q1 2016 were both higher (marginally) than in Q4 2016 and Q1 2017, Brian. With the Olympics and heavy advertising in 2016 I expected the momentum toward growth to continue. Particularly since sub losses in the overall market are higher. That tells me the underlying problem for pay TV subs is cost, not features (which Comcast has aplenty.) And the cost problem is getting worse, not better. The other systemic problem is content costs. Again, for Comcast that problem is getting worse not better.

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