Cable television has become a game of giants.
Consolidation has made the rich richer while allowing the biggest companies to spread the cost of innovation over a wider customer base. In addition, while the death of the industry has been predicted for years, cord-cutting remains a relatively minor phenomenon.
Yes, some people are dropping traditional pay television in favor of streaming services, but the number has been small. In 2013, the roughly 94-million home cable universe served by the largest cable providers lost 105,000 subscribers, according to data compiled by Leichtman Research Group (LRG). That drop-off grew to 125,000 in 2014, and 385,000 last year, LRG reported, but the mass exodus many expected has not occurred.
That's at least partly because cord-cutters still need internet service, which gives the cable companies -- all of which offer it -- the ability to make bundling very attractive. So far big cable has been able to keep most people from cutting the cord while inching up revenue across their user base. Going forward, there's no reason to believe that these three top cable stocks -- Comcast (NASDAQ:CMCSA), Charter Communications (NASDAQ:CHTR), and AT&T (NYSE:T) won't be able to keep their businesses moving in the right direction.
Comcast has it all
Comcast stands as the only company on this list that makes money off all aspects of the content business. The company produces content through its film and TV divisions, while also delivering it to consumers through its own cables channels, as well as its network, NBC. Comcast also owns the pipeline for cable and internet, closing out the first quarter with 22.4 million pay-TV customers and 23.76 broadband subscribers, according to LRG.
Purely as a cable and broadband company, Comcast has been doing well. In the second quarter, it gained 115,000 total customers, losing only 4,000 cable users, its best second-quarter result in over 10 years, according to its earnings release. The company also raised its revenue per user by 3%, and year to date it has shown 2.8% growth in revenue from its cable communications segment (which includes cable, broadband, and voice).
Comcast also pays a quarterly dividend that sits at $0.275 a share in Q2.
AT&T has become a cable player
Until May 2014, AT&T was merely an annoyance in the cable and internet space. The company offered both services in the markets it served, but it was an alternative to the main players, usually competing based on price, and in many cases offering slower DSL internet service compared to its cable rivals.
That changed when the company bought DIRECTV a little over two years ago. The purchase did not change the company's position as a broadband provider -- where it remains a player with 15 million customers at the end of Q1, according to LRG -- but it made it the No. 1 provider of pay television. With over 25 million subscribers between its U-verse service and DIRECTV, AT&T has surpassed Comcast.
In addition, the company has positioned itself well for the changing world. It can offer U-verse subscribers a cheaper option with DIRECTV. It can also now market internet and wireless phone to DIRECTV customers -- something the company has aggressively done since taking over the satellite provider.
Buying DirecTV made AT&T a a major player in cable which dovetails nicely off its other businesses. Because the satellite service can be offered nationally, AT&T can use it to keep wireless customers hooked or attract new ones. For example it offered a promotion this year where customers getting DirecTV and AT&T wireless service had access to unlimited plans -- something it no longer offers on a stand-alone basis.
Cable is one more tool in the AT&T arsenal, but it's a tool that completes the set in a lot of ways.
And, like Comcast, AT&T pays a dividend, handing out $0.48 per share in its most recent quarter.
Charter is a wildcard
Charter has only been one of the big boys in the cable space since May, when it closed its deal to purchase Time Warner Cable and Bright House Networks. Those two purchases allowed the mid-level operator to become the second-biggest cable player (behind Comcast) and the third-biggest pay-TV provider overall.
Given how new the deal is (the company reports earnings Aug. 9 for the first time since the deals closed), it's impossible to judge how the much larger company will perform, but a bigger operation does have some advantages. Time Warner Cable is the biggest piece of the new Charter, contributing over 11 million cable customers and 13.6 million broadband subscribers, according to LRG.
Charter has a great opportunity to impress those customers because Time Warner Cable has a reputation for lousy customer service. This is a case where any other company gets the benefit of the doubt, and Charter should be able to impress its new user base simply by not being awful. If it can actually raise the bar and deliver improved customer service, the company should be able to leverage that capability into selling more services.
The one negative on Charter, aside from the uncertainty surrounding its fast expansion, is that it does not pay a dividend. This may be the cable company with the most potential, but the lack of dividend may be a reason to look for safer shores in AT&T and Comcast.