Comcast Faces Competition From Netflix

In the first quarter of the year, global ad spending jumped 12.5% over the year to $110 billion driven by strong growth in the emerging markets of Latin America and Asia Pacific. Television was the preferred media segment in the quarter with a 16% share of ad spending revenue, and its share grew 9% in the quarter. Analysts expect North America to remain the largest TV ad market and to be worth $47 billion by 2015, with Asia Pacific following at $34.4 billion.

Comcast’s (NASDAQ:CMCSA) Q2 revenues grew 6.1% over the year to $9.53 billion, exceeding the market’s projected $9.28 billion. EPS slipped by two cents over the previous year to $0.31 and also missed the market’s projected $0.32. During the quarter, the company repurchased 17.3 million shares of its common stock for $300 million.

Comcast continued to lose basic cable customers and reported a loss of 3% or 265,000 subscribers to end the quarter with 23.2 million customers. However, the growth in digital subscribers is compensating for losses in basic cable. With Comcast now covering over 80% of its footprint with DOCSIS 3.0, it is able to offer double the speed to existing customers and introduce higher speed services, such as 50 megabits, to over 40 million homes. During the quarter, Comcast reported 9.7% growth in the number of digital video subscribers. High-speed data customers grew 7.3% to 16.4 million and voice customers rose 16% to 8.13 million.

Despite the strong addition to the customer base, management was concerned about competition from fiber optic providers. Comcast also claims to be facing competition from Netflix, whose customers are able to stream movies and TV episodes. Comcast admits that it does not yet have similar capability with its electronic programming guide. However, it is making efforts to improve the user guide experience for the iPad market. Earlier last quarter, Comcast displayed a forthcoming iPad application that allows users to program and control their TVs remotely. Comcast is also working toward enabling users to watch TV shows on the iPad, a move that Viacom has already made by releasing applications such as Dora the Explorer.

Meanwhile, as Comcast waits for its deal with NBC to be finalized, it signed a ten-year retransmission deal with CBS to add to its content library. The deal enables Comcast subscribers to watch CBS content online. Comcast will also have online and on-demand rights to Showtime series, movies, and access to CBS’s late-night shows. CBS is the home of “The Big Bang Theory,” “CSI,” “Survivor,” and “Late Show with David Letterman,” among others. As part of the deal, Comcast will begin carrying the Smithsonian Channel from next year and will expand the distribution of CBS’s College Sports channel.

Comcast’s stock is trading at $18.37 with a market capitalization of $52.2 billion. It reached a 52-week high of $20.56 in May this year.

Ad sales are finally improving at Viacom (NYSE:VIA) as well. Q2 revenues were flat at $3.3 billion and missed the market’s $3.43 billion target. EPS for the quarter stood at $0.69 compared with the market’s projected $0.66.

By segment, media networks reported 6% growth over the year to $2.09 billion. However, the increase was offset by a 10% decline in Filmed Entertainment revenues driven by a 43% decline in the DVD-sale-driven home entertainment segment.

DVD sales were significantly lower owing to fewer releases during the quarter. Earlier last month, Viacom’s Paramount Pictures renewed its agreement with Redbox, the $1 per day DVD rental kiosk company, to enable Redbox to rent out Paramount’s movies on the same day that the DVDs go on sale. Redbox’s deals with other studios enforce a 28-day lag between the day the DVDs go on sale and the day they can be rented out. But Viacom claims that a 10-month test study it conducted with Redbox for the same-day rental model has had minimal impact on DVD sales and instead offers consumers more choice in how they watched movies.

Viacom’s content remained strong, with Nickelodeon breaking records in the quarter and delivering its biggest second quarter audience ever in terms of total viewers. The Nickelodeon family of channels now captures more than half of children viewing television during its programming hours and has a 20 percentage point share lead over other players. For MTV, Viacom announced a multiyear partnership with Warner Music Group through which it will have the exclusive rights to sell advertising inventory related to the WMG’s premium music video content across Viacom’s U.S. digital properties and mobile services, as well as on WMG’s growing network of proprietary artist sites and third-party affiliate sites.

The stock is trading at $38.17 with a market capitalization to $20.5 billion. It touched a 52-week high of $41.79 in April of this year.

Viacom’s venture Epix announced a streaming deal with Netflix today where Netflix will pay Epix $1 billion over the next five years to stream movies 90 days after they appear on Epix. Epix is a pay TV channel jointly owned by Viacom, Lionsgate, and MGM. In the first half of the year, Epix reportedly lost over $90 million, but with the Netflix deal, it is expected to turn profitable as it brings in nearly $180 million in revenues each year. Viacom will surely benefit from the profits derived through Epix as it owns a 50% stake in the channel. Thirty-one percent of Epix is held by Lionsgate and 19% by MGM. Through the deal, Netflix has managed to add significantly to the online content library made available to its subscriber base of over 15 million. Netflix owns movie rights to 46% of the movies shown in U.S. theaters and lets users access its library for as little as $9 a month. With the deal, the company has put significant pressure to cable TV providers such as Comcast’s digital home entertainment segment, for which the roll-out of TV Everywhere seems rather slow compared to Netflix’s growth.