Comcast says hurricanes and an Olympics hangover are to blame for poor third-quarter results. However, taking these factors into account video subscribers still show a loss.
Storms’ impact doesn’t account for big decline in video subs
The impact of storms seems to have dragged Comcast’s three main subscriber businesses down in the third quarter. Video subscribers fell 125,000, the biggest third-quarter loss since 2013. Phone subscribers also fell 92,000, versus a small gain in 2016. Broadband continued strong growth, up 213,000, though this was well behind last year’s 329,000 third-quarter gain.
According to Michael J. Cavanagh, Comcast’s CFO:
“Excluding hurricane impacts, we estimate that we would have added approximately 150,000 customer relationships relative to the 115,000 reported, and we would have lost approximately 105,000 video customers relative to the 125,000 reported and added approximately 240,000 high-speed Internet customers versus the 214,000 reported.”
Make no mistake, losing 105,000 video subscribers is still a big deal. Last year the company seemed to have turned around the video business, delivering gains in all but Q2, which showed a small loss. The underlying trend seems to have turned negative again. In other words, rather the defying the broader pay TV industry decline, Comcast has once again succumbed to it.
Video margins continue to slide
Average video revenue per unit increased well ahead of inflation again in the third quarter of 2017. The average subscriber is now spending $86.10 a month for their video service. ARPU increased 0.5% over the second quarter and 3.6% over the third quarter of 2016.
It was not enough to fully compensate for the increase in license costs. Allocated on a per subscriber basis, the amount of ARPU going directly to TV content providers to cover licensing fees increased to $48.59 per month. License fees increased 2.4% quarter-over-quarter and 12.6% year-over-year.
In Q3 2014, 47.2% of video ARPU went directly to the TV content providers in license fees. In Q3 2017, 56.4% went to license fees.
There seems no escape for Comcast, or any other traditional pay TV operator, from the downward spiral it is locked in. Escalating content license fees force operators to raise prices. However, they cannot raise prices fast enough to compensate for the huge license fee increases. To do so would accelerate the exodus from pay TV by subscribers. So, they must absorb some of the increase, which decreases margins.
Comcast recovering from an Olympic-sized hangover
Comcast’s TV content businesses saw a big drop in revenue from Q3 2016. Broadcast network revenue was down a whopping 31% from q3 2016, and cable network revenue was down 12%. Advertising led the loss, with revenue down 45% in broadcast ads and 17% in cable ads. Though theme parks posted solid gains, it was not enough to offset the losses. Overall, NBCU revenue was down nearly 13% and total Comcast revenue for the quarter was down 1.6%.
The company still managed to be upbeat. For example, in the earnings report Comcast says that if the effects of the Olympics are removed, underlying broadcast revenue increased 12.3%. As well, while Comcast’s video business suffers at the hands of escalating license costs, NBCU benefits from the trend:
“…revenue from the Cable Networks segment decreased 0.3% to $7.9 billion compared to 2016, reflecting a decline in advertising revenue, partially offset by higher content licensing and other revenue.”
Estimates for year-end
nScreenMedia expects Comcast to finish the year with 22.4 million video subscribers, down about 100,000 from 2016. Broadband subscribers will finish at 25.9 million, up nearly 900,000 on last year. Voice services will fall to 11.5 million from 11.7 million at the end of last year.
Why it matters
Comcast X1 seemed to return Comcast’s video subscriber business to modest growth in 2016.
Even after compensating for the negative effect of east coast storms on Comcast subscriber businesses, the company’s video subscribers would still have suffered a decline.
There doesn’t seem to be any short-term fix for the declines in the video business.