Strong earnings from NBC and continued strength in broadband were the engines driving a spectacular 2014 for Comcast. However, it looks like even the huge investment in Xfinity X1 can’t sustain a recovery in the company’s pay TV business.
Comcast’s revenue grew an impressive 6.4% in 2014, to $68.9B. $25.4B of that revenue came from NBCU, which turned in growth of 7.5% over 2013. Broadband, which has been enjoying phenomenal growth rates over the last several years continued the trend delivering $11.3B in 2014, nearly a 10% increase over last year.
The biggest disappointment in Comcast’s portfolio of services has to be pay TV. Video services eked out a small revenue gain, 1.2%, to reach $20.8B. However, Comcast failed to continue the improving trend in video subscribers in Q4. For the last few years Comcast has been narrowing the Q4 loses, culminating in actually gaining 43,000 subscribers in Q4 2013. This was the first time the company had gained subscribers in any quarter since before 2008. Unfortunately, Q4 2014 saw pay TV giant gain just 6,000 subscribers over Q3, and lose 194,000 for the full year.
The underlying trends in Comcast’s pay TV business continue to look grim. The small video revenue increase came from existing subscribers paying more. Average video revenue per unit increased 2.2% over Q4 2013, to $77.25 a month. This increase is 0.6% ahead of the inflation rate, which was 1.6% in 2014. Video ARPU has increased an average of 1.8% above inflation for the last 6 years. That means customers are paying 10% more, in real terms, for pay TV since 2009.
Worse still, it’s likely every penny of the increase in video revenue, and some, went directly to content providers in 2014. According to DirecTV’s Q4 results, the satellite broadcaster paid 6.2% more in broadcast programming costs in the US in 2014. Assuming Comcast saw a similar increase, it’s likely their pay TV business became slightly less profitable this year. Again, this is a trend that has been in place for several years.
This is particularly galling for the cable company, which has invested heavily in the X1 television platform to try and arrest the decline in the business. Although this seemed an effective strategy as subscriber losses narrowed over the last 3 years, it looks like even X1 cannot overcome the ever-increasing prices.
If the Time Warner Cable acquisition is approved, things are liable to get a lot worse for Comcast residential video services in the short term. TWC’s pay TV revenue declined nearly 5% in 2014, and subscribers fell 4%.
Broadband, on the other hand, couldn’t be healthier. Comcast subscribers increased 1.3 million, revenue grew nearly 10%, and ARPU increased 3% in 2014.
It seems inevitable that Comcast will have more broadband subscribers than pay TV by the end of 2015. I expect the company to have 22.1 million pay TV and 23.2 million broadband customers by the end of the year.*
You can always find the latest Comcast results on the nScreenMedia website. Just select the Trackers menu item and click on Comcast.
Why it matters
The prospects for pay TV services at Comcast continue to look grim, despite its efforts with X1.
Comcast has been raising prices ahead of inflation for the last 6 years.
Programming costs have been increasing faster than Comcast can raise prices.
If the company cannot change these trends, cable TV services will inevitably decline.
*These estimates do not account for the potential change in subscribers if the TWC acquisition goes ahead. The number of broadband subs at TWC already exceeds pay TV, so it is almost certain this will be true for the combined Comcast/TWC.