Presenting for his company at last week's Credit Suisse Media & Telcom Week, Comcast (Nasdaq: CMCSA ) Executive Vice President and Co-Chief Financial Officer John Alchin obviously was a man with lots of good news to deliver. Before I looked over his presentation, I'd donned my finest suit of analytical skepticism, but with the success of its triple play driving its fortunes ever higher, it became difficult to argue with the notion that Comcast -- easily the largest of the cable multi-systems operators, with more than 24 million subscribers -- is a company on a roll.
The technological opportunity
What Alchin didn't say is that the success that Comcast is enjoying in 2006 was thought to be just months away as far back as 2002, 2003, and 2004. The technology that is now driving subscriber growth has been available for the better part of a decade, but the cable companies are like that: so circumspect in deploying new technologies as to be almost glacial. In Comcast's case, management delayed the introduction of telephony for several years, eschewing circuit switched technology in favor of its now mature voice over IP product, which really has only been widely available this year.
And so, as Alchin noted, "After three successive years of about 2.5 or 2.6 million RGU net additions (an RGU, or revenue generating unit, is one subscriber taking one service from the company) we are accelerating this year to the point that we added 1.5 million RGUs in the third quarter alone, on our way to about a 4.8 million number for the year." He also pointed out that nearly 95% of those new additions are coming from the ranks of historic Comcast subscribers, rather than through signups of customers obtained from recent acquisitions of properties previously belonging to Susquehana, Time Warner (NYSE: TWX ) , or Adelphia. But with penetration levels still at only about 50% for digital video, 25% for high-speed data, and 4% for the new Comcast Digital Voice product, growth opportunities should continue to emerge far into the future.
The triple play game
"The triple play," Alchin said, "really changes everything about our business and the way that we are marketing to our customers. It's important to take into account that we're really presenting this to the customers as a $33 value for each one of the products that we are offering. So a $99 package for all three products." As he noted, however, the $99 package typically expands, with customer-requested upgrades, to between $120 and $130.
On the digital video side of things, Comcast frequently sneaks up on its customers -- my words, not Alchin's -- with its Digital Starter product that is not materially more expensive than the considerably less robust traditional analog service. But what comes with digital is at least the opportunity to access the video bells and whistles, including high definition, the integrated digital video recorder, and, perhaps most importantly, video-on-demand (VOD). As Alchin observed, VOD provides the cable operators a substantial advantage over their competition. This is true "first and foremost over satellite, because this is something that satellite can't do. They can try to replicate video-on-demand, but they can't do video-on-demand." He also pointed out that cable has a three-year video-on-demand content aggregation head start in the face of "any impending telco entry into the video business."
Video-on-demand also has a key role in the all-important area of churn reduction. "When we look at the difference between the churn of analog versus digital, digital customers on average churn half as much as the analog customers do, and digital customers who use video-on-demand churn half as much again," he said.
Comcast is attempting to use its VOD platform as creatively as possible. Alchin described a recent two-week exclusive window during which the company launched all six "Star Wars" films, the three "Lord of the Rings" movies, and the "Chronicles of Narnia" on the high-definition VOD platform -- all in advance of a subsequent launch on the linear premium channels. "We had a great reaction from our customers," he said. "Fully 25% of all high-def viewing during that two-week period was of the 'Star Wars' films alone."
With its high-speed data offering, Comcast strives to differentiate itself on the basis of features and functions, not on price. As a result, the company has been successful in maintaining a steady level of average revenue per customer (ARPU) in this category. Alchin maintains that Comcast offers a better product, not simply at a better price, but also with better features and functions.
The 211,000 Comcast Digital Voice customers added in the third quarter surpassed the company's telephony additions for all of 2005, when the product was in its infancy and was not offered widely across the Comcast footprint. By the end of September, the product was deployed across 66% of the footprint, and should be available to 80% of that footprint by the end of December. As Alchin also noted, the leverage from this newest product is substantial, since 80% of those adding Comcast Digital Voice are subscribing to all three of the company's triple play products. And the company is in the very nascent stages of targeting small and medium-sized businesses -- a market that Alchin pegged at $20 billion -- as potential telephone customers.
Investing in content
Along with his obvious enthusiasm for the triple play and its effect on the company's growth, Alchin was equally zealous when he discussed the content side of the business, where "we are continuing to invest to differentiate and innovate." As he noted, Comcast recently acquired from Disney the 39.5% of the E! Entertainment network it didn't already own. The acquisition was part of a major arrangement between the two companies that will make Disney television content and films available on Comcast's video-on-demand platform. He observed that the content side also has been a bevy of activity of late, since, "We have done deals with the National Hockey League, and we've done deals with the PGA. Our Golf Channel has in effect become the home of the PGA on television," he said.
Fool's final word
But all of this is effectively a rearview mirror observation of what already has occurred at Comcast. Alchin also took something of a glimpse ahead when he said "We really are in a great position, with growth accelerating, and operationally everything is really falling into place. We've got tremendous momentum with the triple play pairing all of our business across each one of the categories."
At the same time, it appears that the specter of intense competition from the satellite companies and the telcos -- which seemed to sour the market somewhat on the cable operators in the five years before 2006 -- has been reduced. As it relates to cable providers DirecTV (NYSE: DTV ) and Echostar (Nasdaq: DISH ) , the rivalry with cable has been ameliorated by the maturation of VOD. And for their part, telcos Verizon (NYSE: VZ ) and AT&T (NYSE: T ) must, as Alchin indicated, fight an uphill battle to overcome cable's content lead. As such, and with everything seemingly coalescing in his company's favor for now, it's possible to understand John Alchin's ebullience.
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