Kaufman Brothers media analyst Todd Mitchell issued a report on the state of the multichannel TV business last month, one day after Comcast COO Steve Burke’s presentation at the Goldman Sachs Communacopia Conference in New York. We talked to Mitchell about his bullish stance on the nation’s largest MSO and investors’ reaction to Burke’s comments (see chart).
What makes Comcast, to quote you, "a beast unto itself?"
Todd Mitchell: One, they have the scale that gives them a very, very competitive cost structure. And two, they have a generally very strong consumer offering out there, both in price and in [quality]: They’ve got a very strong video-on-demand offering [and] a decent set-top box offering. And then third, they’ve got a very high degree of homogeneity across the plant, which means they can leverage that in terms of their sales and marketing spend. I would juxtapose it with Time Warner [Cable], which has been able to, on a blended basis, deliver very strong metrics – the same sort as Comcast. But the fact is there is not that homogeneity in plant. And what you’re seeing is certain markets outperform, certain markets under-perform, and overall it looks the same. But the reality is that you’re tapping out those over-performing markets. And the follow through on the under-performing markets won’t be as strong because the plant’s not as strong, and the offering’s not as strong. Whereas with Comcast, what you see is a real consistency to the offering across the plant, a relatively low level of penetration, whether it be basic subs as a percentage of homes passed or advanced services as a percentage of basic subs. And so I think you see a much more linear scaling to it.
Yet the Street doesn’t see the potential for Comcast?
Mitchell: Comcast stock is under pressure today [Sept. 19], given their comments at Goldman Sachs [Communacopia Media Conference]. But basically what was different from what they said at the earlier conference [Merrill Lynch] was not that much, but it was a more iterative format though. The things that they pointed out are, one, there’s competition out there. And they did say "Verizon has a very strong offering. We don’t think AT&T has as strong an offering. In the overlap we have with Verizon, we are seeing sub loss to them." That’s not new. And two [Burke said], "We think the DBS guys will be very promotional in the holiday season on this HD thing." And that’s not new information either. And I think what [Burke] layers on was, "Look, we’ve had six quarters of constantly increasing net add comps in every product line, and that may not happen forever."
That’s why they’re forecasting some bad numbers?
Mitchell: What I think you can extrapolate from that is that they probably have a negative data comp this quarter, and they probably have net sub losses, as opposed to a gain. There are two things that are going on. One, remember they did 2.5 million set-top boxes in front of the digital [conversion]. And that gunked up the system a lot. Just think about it. Two and a half million people who the cable guy visited at their house. They pissed off a few people. And they put people at a decision-making, which they were not normally at, so naturally you’ll get some churn off of that. And that may carry over into the third quarter. But what I don’t think people are picking up is that there is also a decision-making process internally for Comcast. They have the opportunity to let a basic sub – who pays them $45 for analog service and almost zero margin contribution – churn if they can add a voice subscriber at $45 and a 45% margin contribution. Investors hate to see basic sub losses in cable. But the fact of the matter is, if the environment is getting more competitive, what you want to compete on is what adds the most to your financial results incrementally. So sometimes you do cull low-quality subscribers to do that. And I think Comcast is very conscious of that, and what it will be about for them is RGU growth, not sub growth, and adding as many high-quality RGUs as opposed to low-quality RGUs, or maintaining low-quality RGUs.
So the market is overreacting to Comcast’s comments?
Mitchell: I think that Comcast is one of those stocks that – more than almost anything I’ve ever covered – trades on backward-looking information as opposed to forward-looking information. And maybe because it’s so broadly held, a lot of the people who own it don’t understand it. But yeah, I think this is a totally knee-jerk reaction and not reflective of the competitive dynamics on the ground.
Anything else significant from Comcast’s comments?
Mitchell: I think the most significant thing was signaling that there could be some negative comps in terms of RGU growth, and that there is competition out there. Both should not come as a surprise to people. And I think that also – and I don’t know how to position this comment – just two quarters ago they made comments at a Bear Stearns conference that were taken as too optimistic in front of the quarter, and they got pounded. So they could be, in their own way, not necessarily trying to talk it down, but [thinking] let’s not talk it up. Because I know that they had several investors come back to them after the comments at Bear and what they reported for the quarter and say, "What the hell were you talking about?" Major investors. I think that [Comcast is] acutely conscious of those kinds of issues.
So they were being purposefully conservative with their public comments?
Mitchell: Yes. Within the context of there being some negative metrics [forthcoming], but that doesn’t speak to poor fundamentals.
Rob Garretson is a business and technology writer based in Gaithersburg, Md.