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Should Long-Term Comcast Investors Be Worried About Google and AT&T?

Comcast (NASDAQ: CMCSA  ) soared higher by nearly 2% after the company announced earnings that showed strong broadband subscriber growth. The stock is now sitting near all-time highs, but as investors look at the current state of the broadband market, and the increased competition that Comcast will face from the likes of Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) and AT&T (NYSE: T  ) , should investors be so optimistic looking to the future?

1 segment of significance
Comcast is a large and diversified company whose $16.8 billion in second-quarter revenue came from several segments, with cable and NBCUniversal accounting for more than 65% of total revenue. However, neither of these two segments drove its 3.5% growth.

Instead, broadband's 9.7% year-over-year growth and $2.8 billion in revenue remains one of the company's brightest areas, accounting for more than 16% of total revenue. In the quarter, Comcast added 203,000 subscribers, and now has 21.3 million broadband users. Furthermore, 36% of those are triple-play customers, subscribing to broadband, voice, and video services. Therefore, broadband is clearly an important segment for Comcast.

Looking ahead
With Comcast being such an enormous service provider, much of its success is derived from a lack of competition. Based on today's market, Comcast's advertised 30-megabits-per-second broadband speed is considered strong. In fact, even if speeds are closer to 22 Mbps, as BGR's research implies, Comcast still has a reliable broadband network.

The problem for Comcast is not the present, but rather looking deep into the future. Specifically, the company generates more than 80% of its revenue from voice, video, and Internet, and if this business were ever fundamentally challenged, it could be catastrophic for the company.

Therefore, as Comcast's stock trades near all-time highs, investors should be particularly aware of both Google and AT&T, and how each company's respective broadband services could affect Comcast's Internet and triple-play service presence.

The Google and AT&T threat
Google is building a service called Fiber, which is already available in three cities and the infrastructure is under construction in 34 more. This Fiber network has speeds of up to 1 gigabit per second, or Gbps. Already, the response to Google Fiber has been exceptional, as all customers are required to subscribe prior to Fiber being built in each city.

In response to Google Fiber, AT&T has launched U-Verse GigaPower, a service with speeds up to 300 Mbps, that the company claims can eventually reach 1 Gbps. Already, after launching in Austin, Texas, AT&T has announced plans to bring GigaPower to 21 metropolitan areas.

In recent years, AT&T's U-Verse segment has been one of its fastest-growing businesses, growing at 25% year over year and accounting for almost 10% of the company's total revenue. So, with nearly 11 million U-Verse subscribers, AT&T's GigaPower initiative is just as much about protecting its presence against Google as it is about growing larger.

A sizable disadvantage
Albeit, once these two transcendent networks are rolled out on a large scale, Comcast will be at a major disadvantage from a performance measure. But, unfortunately, Comcast's disadvantage stretches beyond performance and into pricing as well. For example, if AT&T and Google's broadband performance is 10-30 times greater, Comcast must undercut both services significantly on pricing.

However, Comcast's most popular Performance Internet service costs $29.99 per month, but then jumps to $43-$63 per month following 12 months of service. In comparison, AT&T and Google have both locked their prices at $70 per month, which, while greater, is nowhere near a premium to support the increased performance.

Therefore, with consumers being increasingly savvy in search of the best deals, Comcast might very well have a major problem on its hand. The outcome could be either losing subscribers or declining margins as it's forced to lower prices once Fiber and GigaPower spread throughout the U.S.

Foolish thoughts
Comcast's problems extend beyond its broadband business and into its three-way service segment, potentially affecting 80% of the company's revenue. For one, AT&T already offers phone and TV with broadband, and with the acquisition of DirecTV, it has an even larger presence with satellite service. Second, Google is reportedly interested in becoming a virtual network operator, using the network of existing companies to offer other services with Fiber.

Combined, this could mean more bad news for Comcast, but with more than $65 billion in annual revenue, it also means there could be a lot to gain for AT&T and Google, both of which are light years ahead of the competition in broadband speeds and services.

Comcast is scared, but you can get rich as its problems stretch beyond Google and AT&T
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 



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  • Report this Comment On July 23, 2014, at 7:28 PM, MUSCLE13 wrote:

    Brian have you considered the wireless companies may be scared of Comcast with their 8 million Wi-Fi hotspots this year and their MVNO potential? You do know that a majority of wireless data in the US already goes over Wi-Fi not cellular.

    Brian have you considered the video game console industry might be scared of Comcast since they are testing an Electronic Arts powered video game service over cable which has been disclosed in the press for the last year?

    Brian have you considered the DVD business and iTunes store might be scared of Comcast since they announced their cable electronic sell through service of moviesthis year, that the analysts are saying the movie studios are thrilled with?

    Brian have you considered the TV networks that compete with NBC may be scared now that Comcast;s NBC is the number 1 network in ythe 18-49 demo?

    Brian have you considered that John Malone has stated on CNBC that he is convinced that cable the most cost efficient way to deliver gigabit broadband service?

    My guess is you didn't consider it.

  • Report this Comment On July 23, 2014, at 8:06 PM, MUSCLE13 wrote:

    Also Brian - Have you considered Netflix may be scared of Comcast since Comcast now offers the top 100 rated TV shows on demand to its subscribers?

  • Report this Comment On July 23, 2014, at 8:10 PM, MUSCLE13 wrote:

    I also would appreciate a response on each item listed Brian. Thanks!

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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