Comcast Faces Stiff Competition

Even though more Americans may have more time to watch TV, as layoffs continue and working hours are reduced, the economic crisis has taken its toll on cable providers’ revenues. Consumers are showing that they are not willing to pay extra for high-priced premium packages or for a service that is available free.

A recent Pew study found that while the number of broadband connections grew 15% over the year in May 2009, taking broadband penetration to 63% of American homes, 22% of American users cut back on cable TV services. This is indicative of the growing trend of watching content free on the Internet. In fact, a third of consumer-based Web traffic pertains to video — a trend the likes of Comcast (NASDAQ:CMCSA), the country’s largest cable TV provider, is both impacted by and catching up to. Let’s look at their recent results to see how.

Q2 revenues of $8.94 billion grew 4.5% over the year and exceeded the market’s expectations of $8.86 billion. EPS of $0.33 was also significantly higher than analysts’ estimated $0.26 and the previous year’s $0.21. By segment, cable revenues grew 5% to $8.5 billion, the business services segment grew 51% to $0.20 billion, and the programming segment grew 5% to $0.38 billion.

During the quarter, Comcast spent $215 million to buy back 15.5 million shares.

While revenues may have surpassed market expectations, the number of additions to Comcast’s subscriber base wasn’t heartening. The number of high-speed Internet customers grew by only 65,000 compared with 278,500 a year ago. Digital voice grew to 233,350 subscribers, down 58% compared with the previous quarter’s growth. Comcast lost 3% of its basic video subscribers, or an estimated 214,000, compared with a loss of 138,000 customers a year ago.

Advertising revenues fell 20% over the year as Comcast saw customers spend more on video and Internet services, but not on phone. Video revenues per customer grew 7.4% to $117.74, primarily due to higher prices. Monthly revenue from Internet services grew to $42.06 from $41.98 a year ago, but phone revenue per subscriber fell to $38.78 from $39.46.

The ongoing recession is not Comcast’s only problem: they are also facing stiff competition from phone companies. AT&T and Verizon are offering pay-TV service on their fiber optic infrastructures and are eating into 28% of Comcast’s markets. Last quarter, Verizon added 300,000 customers for its FiOS service and AT&T added 248,000 customers for its U-verse service.

To fend off the competition, Comcast has stepped up their efforts to deploy ultra-high-speed Internet of 50 Megabits per second or higher via the DOCSIS 3.0 program. They now aim to launch the service in 80% of their markets instead of the 65% coverage targeted earlier and have already completed 50% of the market coverage.

Additionally, they are continuing to make their cable platform fully digital to wean out the less efficient analog channels and create capacity for other services. Each analog channel uses the equivalent of three high definition (HD) or 10 standard definition channels. Comcast recently completed the conversion for the city of Portland and expect to have a third of their business on all-digital by the end of the year. More than 80% of Comcast’s customers already use digital services, and the conversion will give them access to more programming, faster Internet, and other HD services.

In another area of digital expansion, Comcast recently initiated online video service trials that will permit subscribers to access programming from their content partners, such as HBO, Cinemax and CBS, over the Internet. The online video program, known as ‘On Demand Online’ is akin to Time Warner’s ‘TV Everywhere’. It gives consumers access to cable TV content on computers and mobile phones free while maintaining subscription revenues.

The company also continued with their wireless initiatives. Comcast launched a new application for the iPhone and iPod that will give customers mobile access to a number of Comcast video, voice and Internet services. They also launched Comcast High-Speed 2go in Portland and Atlanta, where they are rolling out 4G high-speed wireless data services.

Their efforts to improve customer satisfaction seem to be yielding results. In June, the American Customer Satisfaction Index (ACSI) improved the company’s rating by 9%, highlighting efforts to monitor customer feedback and better address customer issues. A more reliable network is translating into lower contact rates and fewer trouble calls and repeat trouble calls.

The stock is currently trading at $15.00 with a market capitalization of $43.25 billion.