Why Your Cable Provider May Be in Trouble

Netflix has been disrupting cable providers since launching its streaming video service.

In recent years, cable operators like Comcast  (NASDAQ: CMCSA  )  and Time Warner Cable  (NYSE: TWC  )  have faced a variety of new competitive threats. First, satellite TV companies sprang up and phone companies started offering pay-TV services. More recently, the Internet video revolution has led some people to "cut the cord" entirely, relying instead upon "over-the-top" services like Netflix  (NASDAQ: NFLX  ) .

In spite of these challenges, cable operators' profits have been surprisingly resilient. Time Warner Cable's net income doubled between 2009 and 2012, while Comcast's operating income from the cable communications division (which excludes the company's acquisition of NBCUniversal) grew 22% from 2010 to 2012.

However, the slow bleeding away of video customers from cable providers will put severe pressure on these companies over time. Cable operators have kept earnings growing primarily by moving TV customers up to "double-play" and "triple-play" packages that also include Internet and/or phone service. As the base of video customers continues to erode, it will be harder to do this.

Comcast is the largest U.S. cable provider.

Customer drift at Comcast
Let's start by taking a look at Comcast, the largest cable provider in the U.S. In the company's most recent earnings release, it noted that its combined customer count was 52.1 million at the end of second quarter, up 3.1% year over year from 50.5 million.

However, those 52.1 million "customers" are not all unique households or businesses. Comcast sells video, high-speed Internet, and voice services, and double-counts (or triple-counts) the customers who take bundled packages with multiple services.

If we look just at the video segment -- the company's "bread-and-butter" and the largest segment by revenue and customer count -- Comcast's had 21.8 million subscribers at the end of second quarter, down about 1.5% compared to the prior year. In other words, more than 100% of the growth in total customer numbers was attributable to high-speed Internet and voice services.

Comcast's primary tool for driving this growth has been bundling: selling high-speed Internet and voice services to existing video customers. At the end of second quarter, 77% of Comcast's video customers had at least one of the two other services, and 42% of video customers had all three.

Comcast's already-high penetration rate creates one barrier to maintaining the current growth rate in voice and Internet services. The shrinking of the video subscriber base will add to the pressure. With fewer video subscribers left to move up to higher-priced bundle packages, Comcast will have trouble replicating its recent earnings growth in the cable business going forward.

Same old story
A similar dynamic is playing out at Time Warner Cable, the second largest U.S. cable company. In 2012, Time Warner Cable added 1.6 million residential "primary service units" (a measure similar to Comcast's customer count). However, the vast majority of that growth came from the acquisition of Insight, a small Midwestern cable operator. Excluding that acquisition, residential primary service unit growth was less than 100,000 for the full year.

Moreover, video customers have been fleeing. Including the acquisition, Time Warner Cable added 141,000 residential video customers. The Insight acquisition brought 673,000 new residential video subscribers, though. Thus, on an organic level, Time Warner Cable lost more than half a million video subscribers last year: more than 4% of its video subscriber base! In the first half of 2013, the company lost another 300,000 video subscribers.

Time Warner Cable has posted solid growth with business customers recently, which has helped offset the poor residential performance. The company has also aggressively moved data customers into higher-priced, faster services. Still, residential video accounts for roughly half of the company's revenue, and if customers continue canceling their video services, they may also take their data and voice business elsewhere.

Foolish bottom line
The market for cable TV services is under pressure from multiple long-term threats. The advent of satellite TV and the entry of telecom providers into the TV market have made the market much more competitive over the past 20 years or so. Today, the growth of Internet video services is convincing some people to give up pay-TV service entirely.

Despite these competitive threats, Comcast trades for a healthy 16 times forward earnings, while Time Warner Cable trades for 15 times forward earnings. These valuations imply that investors expect at least modest growth -- not decline -- beyond 2014.

Yet the crutches that both companies have been leaning on may become less helpful over time. With fewer video subscribers left, there is less of a market for upgrades to "double-play" and "triple-play" service. Furthermore, new entrants like Google could potentially upend the high-speed data market, disrupting the last bastion of growth for cable operators. As a result of these competitive challenges, I am not inclined to invest in any cable provider for the foreseeable future.

The future of TV
Americans reportedly spend nearly 34 hours a week watching television! However, the disruptive growth of services like Netflix have added a new level of complexity for investors. That's why the Motley Fool's top experts have created a new free report titled "Will Netflix Own the Future of Television?" The report not only outlines where the future of television is heading, but offers top ideas for how to profit. To get your free report, just click here!


Read/Post Comments (37) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2013, at 8:12 PM, garrobo68 wrote:

    I know little about stocks,but if you are wrong about Comcast,comeback and tell the world how wrong

    your article is.Thank you.

  • Report this Comment On September 23, 2013, at 11:05 PM, Jeffkory wrote:

    Bundling sucks- Don't do it.

  • Report this Comment On September 23, 2013, at 11:43 PM, Comcastsucks wrote:

    I have Netflix and I had comcast. It isn't netflix causing their downfall. It's them! I didn't give up cable I switched to AT&T. Two years of tv with speech impediments and intermittent internet, was enough for me! My bill went up and my service went down. Comcast "customer service" and their sense of entitlement will be the end of them! I look forward to the day they go out of business!

  • Report this Comment On September 23, 2013, at 11:47 PM, MoreMovies wrote:

    In the end the Cable Co has 90% of the people that cut the cord. How? The Net. You still may have them for the Net. The Cable for TV can go. I have. Crap Warner. The Net is ok. And going at about 55 here.

    But the B.S Bundling crap needs to go..

  • Report this Comment On September 24, 2013, at 1:59 AM, sporttster wrote:

    Comcast is making its own casket by constantly raising prices. We dropped the triple play because of that. Now we've only got net through them and are constantly looking to replace them with cheaper services. We've got a couple in mind presently so shortly we won't be dealing with them at all. Used to pay $70/month for everything years ago, HBO, Cinemax, the whole works. Now? You can't get hardly anything for that! To get that all you'd be paying probably twice that at least! We went Ooma for home phone, Dish for TV and are considering just going net for TV service. Not worth $100+/month for 300 channels with ads running....nope.

  • Report this Comment On September 24, 2013, at 3:18 AM, engguy wrote:

    "Comcast is making its own casket by constantly raising prices." How so? The content providers, the actual channels have doubled their prices over the last five year, and at this rate all that will happen is that internet television alternatives will face the same increases. Fox (and everything with it) went from $100 million a year to $250 million, and HBO has made similar demands. If you have complaints take it up with the channels, since they are the ones charging you more.

  • Report this Comment On September 24, 2013, at 3:43 AM, ewalls2149 wrote:

    Comcast is so expensive. Their bundle price promise you one thing but when you get the bill your bill over $300.00 amount. Never the price they say you are getting. They to just shut down.

  • Report this Comment On September 24, 2013, at 7:53 AM, tpicciani wrote:

    I have Comcast. Their equipment is out of date but their service has been pretty good. I went from Comcast of 5 years ago to 2 years of DTV then back to Comcast. Since I live in Central Pa and want to see the Philly stations for the sports I'm stuck with Comcast. They have deals with the Philly sports teams and won't release their proprietary content to other providers. So, that's the end of the story at $200/month for the bundle with no premium stations.

  • Report this Comment On September 24, 2013, at 10:53 AM, gskinner75006 wrote:

    I put up an antenna and have never looked back. I now spend exactly zero for TV and even on the fringe, I have plenty of channels to choose from and no Honey Boo boo junk! And now that I have seen what real, uncompressed, HD looks like, I will never go back.

  • Report this Comment On September 24, 2013, at 11:10 AM, withtheflow wrote:

    ESPN! The only reason I'm hooked to a cable is ESPN. If I could get it through a Roku or similar devise Comcast would be history.

  • Report this Comment On September 24, 2013, at 6:17 PM, EndTheIllusion wrote:

    One thing this article forgot to mention is that the cable companies such as Verizon, Comcast, and Time-Warner have so willingly given up customer data to the NSA that they are no longer trusted. While not perfect either, satellite makes a better of two evils choice.

    Once a more trustworthy service comes along, they will defect in droves, and I will be among them.

  • Report this Comment On September 24, 2013, at 6:22 PM, RonaldSpeth1 wrote:

    I agree. I only have internet. I don't pay for TV at lease any more than netflix, and as soon as there is a viable and afordable wireless internet plan and mobile device we won't pay for mobile phones any more either. One plan data only. We will use service like Google, Skype, etc for voice and Netflix or hulu etc for content. One plan data only shared by the family. The company or companies that inovate and go here are the only ones that will survive.

  • Report this Comment On September 24, 2013, at 6:40 PM, Snertie wrote:

    @engguy says "...the actual channels have doubled their prices over the last five year, and at this rate all that will happen is that internet television alternatives will face the same increases.".

    True enough. For years now, the content providers have been raising their rates, and the industry has been content to simply pass them on. But that doesn't mean that consumers are going to tolerate that forever. We've got the basic level of Comcast TV service, and the TV portion of the bill has been going up several times per year. For about $1000-per-year, we get 100 or so channels, over half of which are absolute crap, and in over-compressed low-def video to boot. We only watch a dozen of them, at best.

    We've been using Netflix for over a year now, and have been experimenting with Aereo for the last several months. Both provide content, on demand, and in high-def for a small fraction of what basic Comcast costs. After baseball season is over, we're cutting the TV portion of our Comcast service, and next year will subscribe to MLB-TV.

    As the absurd fees for content continue to rise, the defections will continue. And the younger generation (under 30) doesn't do "wired" connections or what we thought of as traditional TV anyway.

    The "bundle of crap" model is doomed. À la carte is the future of TV.

  • Report this Comment On September 24, 2013, at 7:06 PM, DavidStHubbins wrote:

    Sooooo, Who is your internet provider? How do you stream the internet video to your house? What services are fast enough to do that? Hmmmm...Can you get away from the cable peeps?

  • Report this Comment On September 24, 2013, at 7:46 PM, Chontichajim wrote:

    As each potential competitor like AT&T and Verizon find out how expensive it is to run fiber to or near individual residences, they always seem to back off. I don't expect Google or Apple to get into the fiber laying business (except for a few showcases) because of the cost.

    Everyone wants to deliver content, but few want to build networks.

  • Report this Comment On September 24, 2013, at 8:01 PM, Snertie wrote:

    @DavidStHubbins, Comcast will still be my Internet provider. However, the "basic" TV portion of my bill is more than half than what the Internet portion is.

    When more people get to dumping the TV portion of their bill, Comcast could start to increase the Internet portion to make up for the loss. But then, doing so would make the market for Internet service more attractive to AT&T, Verizon or other players.

  • Report this Comment On September 24, 2013, at 8:18 PM, JULPAC wrote:

    While I agree w/ the author's premise about the demise of cable tv & their "bundles" - Chontichajim's comment hit the nail.

    I can see the major network providers coming through this change of consumer demand because of their existing cable infrastructure - they could easily transition from offering tv services as their "bread & butter" & focus more on providing internet services to residential areas. With the increase of wi-fi technologies I don't even see them having the need to lay cable extra cables as they could easily add a massive industrial strength wifi center for consumers to connect to. Clause* this is just my projected imaginative scenario.

  • Report this Comment On September 24, 2013, at 8:21 PM, itteks wrote:

    Name a company or service which is cheaper, best customer service, product ranges. None with all !!!. If you look a the stocks for Comcast and revenue its doing pretty good, The service is getting better, now products and technology coming including Home security. Watch on and things will get better for the company to survive and soon you will be seeing new exciting stuff which will prove the article is wrong...

  • Report this Comment On September 24, 2013, at 8:30 PM, marichel wrote:

    Withtheflow has it right. Without ESPN in the bundle cable would be dead. ESPN, Disney's cash cow, is able to pay billions for sports rights because most cable customers are forced to have it in their bundle -- whether they watch sports or not.

    So ESPN gets $8 a month from 80% of cable customers guaranteed instead of having to risk charging $20 a la carte a month to the 40% who want sports.

    The cable company gets to charge 80% of their customers $80++ a month because nothing is offered a la carte and you are forced to buy the bundle to get the few channels you actually watch. "All or nothing" and abominable customer service to boot.

    Yes, the days of the bundle are numbered -- but not until ESPN has the "balls" (sports pun intended) to break away from the cable company's bundle and offer their programming in some form of a paid subscription basis.

    ESPN just needs to find a way to make the same or more money. Maybe Apple, Google, Netfix or somebody else can help them figure it out.

  • Report this Comment On September 24, 2013, at 11:54 PM, Saintmark01 wrote:

    I recently relocated to California. Bought a bundle from AT&T. Total of $150 per month with all the premium content and sports I can handle. Best part? U-Verse! Great content, can be accessed from any mobile device, and excellent service. In AZ I had a lesser bundle from Cox - for $290/ month.

  • Report this Comment On September 25, 2013, at 12:55 AM, PMTP wrote:

    Today was a good day. I gave my last converter box back to Comcast and I now only get internet from them. Their service has been so terrible over the years that I found that I was getting stressed out having to call them to correct things. When I pointed out that they broke promises to me their response was "do you have the promises in writing?" I won't miss them.

    I now have free HDTV from an antenna in my attic and I have Amazon Prime so I get a lot of free content over the internet with that membership. I figured out ways to get almost everything I used to watch on Comcast for far less money. I am now truly getting far more for far less. True, I no longer get the Toenail Channel in HD or the Lug Nut Channel (I think they were part of the bundle of garbage I was paying for with Comcast... they told me their customers wanted that junk... I really doubt that... I was with them for years and they never once asked me what I wanted).

    I could go on for hours... but I won't. I think these companies have been so greedy and disrespectful of what their customers really want that it is only a matter of time before someone figures out how to destroy their profitability with a new business model that focuses on giving customers what the want. Now that is a show I'd pay to see!

    I just need to figure out the Foolish investment that will pay off when that happens!

  • Report this Comment On September 25, 2013, at 7:49 AM, blacklab13 wrote:

    Has anyone seen (or heard) how the cable company's are over in Europe, or Asia or Japan..

    I'm just wondering if their service and costs are just as bad as they are here.. I've got Comcast and I hate them.. But the onyl other Internet provider in the area is Fairpoint (DSL) and they suck ever worst than Comcast..

  • Report this Comment On September 25, 2013, at 8:56 AM, trdhrdr007 wrote:

    My cable provider is the only game in town & has been for the last 25 years. They engage in business practices that are questionable at best. The town I live in has been building out a fiber optic network that should go live within a month....& I can't wait to switch.

  • Report this Comment On September 25, 2013, at 10:16 AM, jrandallc1 wrote:

    I tried Tmobile 4G for up to 4 devices for my Internet provider but it was not robust enough to stream content for the entire house. When a competent Internet solution presents itself I will cancel everything with Vz/Comcast. Until then trying to manage so many different content providers is too much of a hassle, especially if I still have to pay one of these horrible companies for Internet services. Not an Apple fan but I wish they, or Google, would roll out Internet & content services.

  • Report this Comment On September 25, 2013, at 12:54 PM, bob0917 wrote:

    The problem with your prediction is that in order to receive content you need a high bandwidth internet connection which many of these same people receive with their cable package. Normal DSL (6Mbps MAX) is okay for one video stream but if anyone else in the house is doing something with the internet while you are watching Netflix the stream will start to have problems, watch something in HD and the problem gets worse. The last time that I looked ATT was bonding 2 phone lines to give their customers 2 X DSL speed (12 Mbps MAX) but ATT customers can also see bandwidth problems. As far as I know the only way that you can get a reliable high bandwidth connection that can handle HD streaming video while allowing you to use your internet connection for other things is a cable provider which in my area can be up to 40 Mbps.

    I rarely watch TV so I am fine with DSL but if someone in your home has the TV fired up most of the time then one way or the other the cable providers have their hooks in you.

  • Report this Comment On September 25, 2013, at 1:45 PM, jhsblue wrote:

    Video subscriptions are falling, but Comcast is more than making up for it with voice and internet service. If you're getting all your entertainment over-the-top via internet, then you're probably burning up a lot of bandwidth which any carrier will charge you for... if not today then tomorrow.

  • Report this Comment On September 25, 2013, at 5:27 PM, gskinner75006 wrote:

    Don't be surprised if one day the FDA regulates T.V., Internet, etc... the same was as drugs. The psychological addiction of this stuff is far greater then the physical addiction of nicotine, heroin, etc... I wonder how may have died during a blackout from a brain fart when everything shut down.

  • Report this Comment On September 25, 2013, at 8:05 PM, Estrogen wrote:

    I'm an At&t engineer and we are getting hit by all of this too. Our brass is constantly looking for new revenue streams: Digital home (security mostly), digital car (high end, nothing Iphone can't do already), and Fiber to the business (will serve secondary purposes of getting rid of old expensive to maintain copper network).

    I'd agree, these companies are going to be churning customers to each other and lowering prices.

    Not sure about CATV companies, but At&t still a nice dividend paying toll booth company as we have cell business as well, which also runs over our fiber backbone.

  • Report this Comment On September 26, 2013, at 1:27 AM, therylmccoy wrote:

    Maybe it's time for Comcast to follow the model of Netflix... IF YOU PAY FOR SERVICE, DITCH THE COMMERCIALS.

  • Report this Comment On September 27, 2013, at 12:44 PM, 2good2betrue wrote:

    The reasoning for this article is flawed while probably correct, is but one small glimpse at the cable business (these are extremely large and diverse companies). You forget that TWC and Comcast own a good chunk of the content distributed by other carriers. Netflix, DirecTV, AT&T are all customers of these two cable giants... Then there is advertising, redistribution services for smaller cable operators, reseller agreements with hotel/apartment clients, business services, etc. Cable is growing in ways that most people couldn't possibly understand - least of which is this article which doesn't really speak to anything that would cause an investor in cable any pause.

  • Report this Comment On September 28, 2013, at 4:36 AM, b9f8 wrote:

    Why? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

    Why do people pay, to watch TV propaganda?

    OBEY, says so?

    One old rooftop antenna gets me two digital channels, and all the free NBC News & Weather I can stand to watch.

    Who has time to waste sitting,

    hypnotized in front of a TV? The 47%?

    Internet, is a far better learning tool than is TV.

    DSL Extreme, provides all the Information Highway

    I can manage to negotiate at 156KB/s for $26 per month. AT&T Yahoo would not upgrade my 72KB/s speed, so I canceled a few years ago and switched to DSL Extreme, with no long-term contract.

  • Report this Comment On September 28, 2013, at 9:40 AM, fl19 wrote:

    Better question is:

    Why do people pay to watch commercials?

    ESPN is $5 of your cable bill.

    Typical NFL game is 3-1/2 hours of watching TV for 12 minutes of actual football.

  • Report this Comment On September 28, 2013, at 9:43 AM, fl19 wrote:

    With the bulk of the population living in apartments and hi-rise buildings, many people have no choice. Either the rent or the maintenance fee has the cable bill built in. So you pay for it whether you want it or not. And, some places have strict rules about antennas.

  • Report this Comment On September 28, 2013, at 11:51 AM, rapid72 wrote:

    Several good thoughts on this thread. To get video on the net, you gotta pay somebody for the connection, which often means the cable co.

    Cable cos shoot themselves in the foot with lousy service. We get weekly calls from Time-Warner wanting to provide phone and internet. I tell them we can talk when they provide 30 days of TV without interruptions, failures, pixilation, etc. Been waiting 4 yrs so far. A regional co. just took over service to our second home. They don't provide a program guide! Called themand asked why not? Well, we don't in your area. Talked to a neighbor

    and he took me inside, showed me his (different) remote with Guide key, assumiing I was too stupid to use it. Back to the cable co. to ask why him, not me? Gee, I dunno why some folks get it and some don't. Unreal.

  • Report this Comment On September 29, 2013, at 11:32 AM, TMFGemHunter wrote:

    Thanks for the comments, everybody: very interesting conversation. I'll just throw in a few thoughts of my own, in no particular order.

    1) It's true that many people are locked into a particular cable company as part of a bulk apartment/condo deal. So I don't expect those people to ditch cable. However, I suspect those are very low margin deals. In my old condo, we were paying $25-$30/month on a bulk plan for the same service that Comcast sells for $55-$70/month to individuals.

    2) High-speed internet is a bigger competitive advantage than TV offerings for many cable companies today. As others have said, while most DSL connections can handle a single video stream, they can't support multiple people watching over-the-top video like Netflix, Prime Instant Video, Hulu, etc. That said, I think over a long period of time (10-20 years), fiber to the home will grow, which will provide better competition.

    3) The "need" for cable depends a lot on where you live. If I were in an Aereo market, I probably wouldn't be paying for cable. However, I live in an area where there is virtually no "free" TV available by antenna, and where the phone company (AT&T) does not offer TV service. Since I'm in an apartment, satellite is out, too. If I want to watch local sports or other current TV, Comcast is really the only option.

    4) The cable business model works really well for cable channels, as long as they don't kill the golden goose. ESPN gets something like $7B-$8B a year from cable companies.because they're worried about losing subs if they don't have ESPN. How could ESPN possibly earn that much revenue as an a-la-carte offering?

    On a related note, I think people who want to get rid of commercials don't know what they really want. The TV ad industry is a $60B a year business. In other words, it subsidizes your cable bill by about $50/month on average, compared to what it would cost to offer the same content commercial-free. Personally, I think very few people would pay $600 a year to get rid of all of the commercials, if faced with that choice.

    Adam

  • Report this Comment On September 30, 2013, at 5:16 PM, kiddata wrote:

    Comcast has been providing Metro Ethernet service to Govt and Schools for a decade. They branched out to SMB about a year ago. For every four video consumers they lose at $100 a month they're picking up a business at $700-2,000 a month. Which would you rather have?

    On top of this IT supply houses like Synnex are signing on to their agent program. Suddenly they gain a few thousand sales people without any large capitol outlay. I fully expect them to continue to leverage one of the largest IP networks in the Country with 738,000 route miles of fiber. Of all the Cableco's they are the only one with the size to take on ATT and Verizon. Once they start offering national data service its game on.

  • Report this Comment On October 01, 2013, at 1:42 AM, youngmind71 wrote:

    every 6 mos. I call century link and direct tv because my loyalty promos run out and my bill goes up at least $50. It usually takes 3 hrs a day for 2/3 days to get it back down to where it was.

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