Comcast’s Olympic Sized Albatross
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Comcast (NASDAQ: CMCSA), the largest US cable operator in terms of revenues and the parent of NBC, has announced that NBC Universal broke even for the London Olympic Games broadcast. Advertising revenues increased by 50% over the Beijing Olympics (2008) to $1.25 billion while it paid $1.18 billion in obtaining U.S. television broadcasting rights.
Comcast’s 2nd Q results show that it continues to lose Pay-TV and gain broadband customers. Revenues went up by 2.2% from the previous quarter to $15.2 billion while profits increased by 32% from $1.02 billion in Q1 to $1.35 billion in Q2. NBC Universal’s revenues on the other hand dipped slightly to $5.5 billion due to Battleship’s poor box office performance with an $83 million loss.
Since the beginning of the year, Comcast has lost 213,000 Pay-TV clients including 176,000 in the second quarter. This has happened for 21 consecutive quarters but the rate of loss has slowed down significantly as compared to 2011. However, it gained 156,000 broadband and 158,000 phone customers in Q2. Broadband internet is where Comcast makes it vig with 90% gross revenues as opposed to 50% for video customers and the reason why the bottom line is expanding faster than the top line.
Comcast paid $4.3 billion to acquire U.S. TV rights for the Olympic Games until 2020. Yet, it looks like that deal is going to continue to be a source of goodwill, but not profit. The Olympics have always been a money pit for the city that hosts the games but is a boon to advertisers. The IOC’s arcane regulations are designed for the IOC’s benefit and neither the athletes nor their business partners in media or advertising whose benefits are seen well after the games conclude rather than from the games themselves.
It’s one of the reasons why the big winner from the London Olympics will be Nike as opposed to official sponsors like rival Adidas. Nike’s ad agency created ads that upstaged their rivals while not having to pay the licensing fees.
Comcast’s rival and America’s second biggest cable operator, Time Warner Cable (NYSE: TWC) also recorded a 7.6% increase in profits to $452 million, with similar revenue trends. Higher gross margins in broadband and the increasing growth rate of business customers are moving Time Warner to emphasize those services. The situation at Comcast is similar.
Total cable/satellite subscriptions dropped sharply in the 2nd quarter in the U.S. and while the trend has not been established yet, it will likely happen sooner rather than later. With deteriorating economic conditions and a shrinking middle class cable TV is rapidly becoming a luxury for many especially when most of the content that isn’t on ESPN (NYSE: DIS) or a special sporting event is available for free on Hulu or Netflix.
Content creation and distribution channels are changing rapidly. The traditional models are all breaking down in the face of YouTube, Hulu and Netflix and the FCC doesn’t quite know how to handle it, so they are acting like a typical bureaucracy, not changing anything. As the mobile and home computing ecosystems evolve across the globe old technology like cable will fade in importance and the moats around the old business models will be breached regardless of what legislators do.
Disney, is, of course, fighting any substantive change trying to protect their massive ESPN revenues (45% of Disney’s top line) and Netflix is going on the content-creation offensive to erode the value proposition of cable’s “200 channels and there’s still nothing on” model.
Because of this rising network fees will hasten the decline of traditional cable subscriptions. They will necessitate either margin shrinkage for the cable operators or higher prices which the consumers are not willing to pay for. Either way the subscriber base will decline voluntarily as the cable companies stop courting them or involuntarily as the value proposition continues to shrink. Not that anyone should be crying for the cable operators who have enjoyed monopoly pricing and control of content distribution for decades and have fought their battles with consumers through the FCC and Congress with the consumer almost always losing.
Comcast has also taken full control of MSNBC by acquiring Microsoft’s 50% stake in the business, something that I’m sure Microsoft is eternally grateful for so they can focus on becoming content distributors themselves through Xbox live and Windows Phone 8, as opposed to content creation, no matter how cheap. The impact of the deal in terms of revenues will be revealed in the coming months. Since the beginning of the year, both Comcast and Time Warner’s shares have soared by 45.3% and 42.8% respectively. While the models may be shifting the increasing margins and tighter control of bandwidth usage will make these stocks good value plays until changing technology tears down their legislative moats.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney, Microsoft, and Netflix. Motley Fool newsletter services recommend Netflix, Nike, and Walt Disney. 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.If you have questions about this post or the Fool’s blog network, click here for information.