Comcast Sees Increased Competition in Multi-Media Bundling
Comcast (CMCSA) will need to continue to improve their product in an evolving competitive landscape. Cable companies have used the “bundling” of services to attract customers away from telecom companies over the last few years. The addition of internet and phone services to the traditional cable services helped grow Comcast’s subscriber base thanks to this “Triple Play”. Companies such as AT&T (T) and Verizon (VZ) are fed up with having their landline phone customers gleaned away— Comcast’s phone services grew by 73% in 2007— so they are ready to fight back with their own television services. AT&T is spending more capital than anticipated—somewhere between $4.5 and $5 billion—in pursuit of reaching as many potential customers as possible. Verizon has a similar TV service product called FiOS, which like AT&T’s is growing. With these two prominent names in wireless technology becoming 
major players in bundling, there is no doubt that we will soon see a “quadruple play” bundle.
Frequent readers of this column will recall our bullish article on Comcast published on Feb. 14, 2008. Even as the price has appreciated more than 20% since that piece, we continue to believe there is unrealized value in the company’s stock. Comcast has benefitted from robust sales growth, much of it thanks to the bundling strategy. Compared to what the market has traditionally been willing to pay for Comcast stock, the current price-to-cash flow is 40% below the average of the last ten years. Likewise, the current price-to-sales is 41% below the price that we would expect Comcast to achieve at current sales levels.
Comcast beat earnings expectations in the first quarter, and even though Comcast lost television subscribers in total, the subscribers that remained were paying more on average for their services. This speaks to the power of bundling, and at least while the competitors are building out their services, Comcast has the edge in availability of bundled services. AT&T for example, estimates that by the end of 2008 its U-Verse service will be available in 17 million homes and 30 million homes by the end of 2010. That is a rapid expansion but still just trying to get to the level of access to the market that Comcast already enjoys.
We are not suggesting that Comcast can rest on its laurels because AT&T and Verizon are deploying good products and viable competition to cable and satellite TV providers. In much the same way that customers like the ease, value and convenience of the “Triple Play”, they may be just receptive to the addition of wireless service to the mix. In the likely event that a quadruple play becomes the bundling option preferred by consumers, Comcast would surely like to be able to offer that as well. So, do not be surprised by intensified competition between the so called “cable companies” and “telecom companies” as the lines between them blur and they invade each other’s space in search of profits.
Ockham Research Staff @ May 9, 2008
