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.
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.
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
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