Should Investors Cut the Cord on This Cable Company?

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Pay TV is found in more than 80% of U.S. households, but services like Netflix, Amazon Prime, and Hulu are knocking on the door loudly. Cable companies are keeping their houses in order by increasing prices on customers, but that's not likely to be an effective long-term strategy. Industry trends could eventually spell doom for some cable companies -- but at least one of them knows how to prepare for battle. 

The big deal

Comcast (NASDAQ: CMCSA) completed its purchase of NBCUniversal earlier this year, and so far, that has turned out to be an extraordinary move. Total revenue from NBCUniversal and its four segments (cable networks, broadcast television, filmed entertainment, and theme parks) jumped 12.7% to $23.8 billion in 2012. 

That's impressive, but 63% of the newly merged Comcast's revenue comes from its remaining cable communications segment. Thanks to the company's historic strength and top-tier management, this segment's revenue increased 6.4% to $39.6 billion in 2012. But this wasn't easy revenue to come by. 

Necessary measures

At the end of 2011, you could find Comcast's video services in 43% of Comcast's serviceable homes. By the end of 2012, you could only find Comcast's video services in 41% of those homes. This presented a dilemma, and Comcast chose a simple solution by raising prices. For instance, at the end of 2011, total revenue per customer stood at $138, but that number popped to $149 per customer in 2012. 

Comcast plans to offer more services in order to boost its video revenue, by upgrading its Xfinity brand to X2 (set to be released later this year). This cloud-based set-top box will offer increased content storage, improved customization, more personalized recommendations, and additional web content. 

Comcast's X2 service should give it a defensible position against online streaming services. However, Comcast has had trouble exposing all its content options to consumers. 

Fortunately, Comcast doesn't have to worry much in other areas. Its high-speed Internet service could be found in 36% of serviceable homes in 2012, versus 35% of homes in 2011. And its voice service coverage increased to 19% in 2012 from 18% in 2011. Overall, Comcast's revenue improved 12% to $62.6 billion last year over 2011. 

Not fighting as hard

Comcast isn't the only cable company facing challenges. In the second quarter, Cablevision (NYSE: CVC) lost 20,000 customers, versus a flat reading in the year-ago quarter.

Cablevision is now focused on customer retention and high Internet speeds. While these are logical goals, they don’t exactly lead to investor confidence. And when the CEO of the company states that he thinks the cable industry will mature badly, it’s not a good sign.

Cablevision might follow bottom-line-improving industry trends, but at the moment, there aren’t many reasons to be bullish, and it certainly doesn't look to be a better investment option than Comcast. 

Some investors might consider a company like DirecTV (NASDAQ: DTV). As recently as one year ago, this would have been a great choice, but now the picture isn't quite as clear. 

As Comcast uses innovation as a potential solution to fight off competition and grow revenue in its biggest market (the U.S.), DirecTV relies on Latin America for growth.

DirecTV is still seeing expansion there; Latin America revenue increased 11.8% in its second quarter. However, net subscriber adds of 165,000 weren’t nearly as strong as net subscriber adds of 645,000 in the year-ago quarter. In the United States, revenue jumped 5.2% year over year, but net subscriber losses of 84,000 were higher than the 52,000 net subscriber losses in the year-ago quarter.   


Comcast’s innovation, broad diversification, and consistent growth via numerous revenue streams should offset industry threats and make it a good long-term investment. However, since this isn't a top-notch defensive play to protect against broader downside market moves, strongly consider scaling into a position slowly. 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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