Comcast (NASDAQ:CMCSA) is a television juggernaut. But not only is it the second-largest pay-TV provider after AT&T (NYSE:T), it's the largest home internet service provider, and it owns NBCUniversal. With its hand in so many markets, it's hard to figure out what product or service generates most of Comcast's money.
Despite having more internet customers than video subscribers, and despite having a slew of television networks and a film studio at its disposal, Comcast still makes more money from pay-TV subscriptions than any other business. Even with the recent trend of cord-cutting, Comcast has been able to increase video subscription revenue every year. Last year, video subscriptions generated $22.4 billion in revenue for Comcast.
Jacking up prices
In Comcast's annual report, it says the increase in video subscriber revenue -- even in years when it lost subscribers -- is "primarily due to rate adjustments." In other words, it's finding ways to increase the price. As long as it loses fewer customers as a percentage of its base as its average price increases, it will generate more revenue.
In the past, Comcast has been creative with charging customers for HD service and DVR. Recently, it started offering more value through the availability of its X1 set-top box. The X1 platform offers a much-improved user experience for watching cable TV, and it offers some differentiated functionality compared to other pay-TV providers such as AT&T's DirecTV.
Comcast says X1 is now being used by over 50% of subscribers. It also says customers will happily pay more for the service, as it's seen lower subscriber churn among customers with X1.
What's more, Comcast is once again starting to add video customers. After a decade or so of intense pressure from telecom companies offering enticing sign-up offers, the market is consolidating, and there's less direct competitive pressure on Comcast. AT&T, for example, merged with DirecTV, and stopped focusing on expanding its U-Verse TV service. The industry changes coupled with Comcast's X1 platform enabled it to add 161,000 net new subscribers in 2016, and another 42,000 in the first quarter of 2017.
To be sure, cord-cutting remains a major threat to the pay-TV industry, and Comcast -- despite adding new subscribers recently -- is not immune. In fact, the rate of cord-cutting is accelerating this year, as more people cut the cord than ever before last quarter.
Growing costs of cable TV
While Comcast generates more revenue from cable TV subscriptions than any other service it provides, it's not clear if it's the most profitable business for the company. One of the biggest factors pushing Comcast to raise its subscription price is the cost of video programming. Last year, programming expenses climbed 10.1% to $11.6 billion. That's on top of a 7.1% growth rate in 2015.
What's more, Comcast writes, "We anticipate that our programming expenses will increase at a higher growth rate in 2017." Indeed, programming costs increased 11.7% in the first quarter this year.
Comcast has some big contract renewals this year, and media companies will be pushing for every last penny per subscriber as overall distribution falls thanks to cord-cutting. Comcast may also pay extra for additional rights such as nationwide streaming in order to compete with services like AT&T's DirecTV Now.
Comcast's video subscriber revenue isn't growing nearly as quickly. It increased just 3.9% last year and 3.6% the year before. It did grow a bit faster, 4.3%, in the first quarter this year as more customers take on X1, and it added a significant number of new subscribers.
Comcast doesn't break out its expenses between video, internet, and phone subscribers, but its Cable Communications unit remains its biggest revenue and profit driver overall. TV subscribers are the biggest piece of revenue in the unit, and that's how Comcast makes most of its money.