Comcast (NASDAQ:CMCSA) is taking a slightly different approach to its direct-to-consumer streaming service -- called Peacock -- than its fellow media giants Disney (NYSE:DIS) and AT&T (NYSE:T). It's planning an ad-supported service, which CFO Mike Cavanagh says will enable it to grow its viewer base much faster than the competition.

"Our work shows us that consumer demand is there," Cavanagh said at a recent investor conference. "With all the pay-for SVOD services that are proliferating together with traditional video, 80% of folks would be looking for something that has a reasonable amount of ads embedded in the product with premium content."

He also expects strong demand from advertisers as well, as they look to shift budgets from traditional TV and prize premium streaming content to advertise against. Disney's ad-supported version of Hulu produces extremely strong revenue per viewer, and AT&T plans to introduce an ad-supported version of HBO Max in 2021 to take advantage of the trend.

"We think it is an approach that will lead to lower aggregate investment to get to a place where you can achieve breakeven relative to the SVOD models we've seen thus far," Cavanagh added.

Here's what Comcast investors need to know about the media company's streaming plans.

The Peacock logo.

Image source: Comcast.

A relatively small investment

The rights for streaming content have exploded in price as new competitors enter the market. Comcast isn't immune to the price inflation. It reportedly paid $500 million for a five-year license to The Office earlier this year.

But Cavanagh expects the company's aggregate investment in Peacock -- content, technology, marketing, etc. -- to total $2 billion over the first two years of its existence. He also says that represents a quick ramp-up in investment, implying spending won't increase much more over the next three years. He sees the service breaking even by year five.

By comparison, Disney expects to spend $2 billion on a profit-and-loss basis on content alone for the first year of Disney+. On top of that, it anticipates about $1 billion in operating expenses. It also expects its content spending to more than double within five years.

AT&T expects an incremental investment of $2 billion in the first year of HBO Max. That'll ramp to $4 billion by 2024.

The implications of spending less

Comcast's decision to spend less on its streaming service than the competition suggests it's not looking to turn Peacock into a major source of revenue. AT&T expects HBO Max to generate $5 billion of incremental revenue for the company in 2024. Disney says it'll turn a profit on its roughly $5.5 billion aggregate investment in 2024 ($2 billion originals, $2.5 billion licensed, $1 billion operations). Cavanagh's expectation to break even by year five suggests revenue of just $1 billion to $2 billion at that point.

Comcast's revenue per viewer is more closely tied to engagement than Disney+ or HBO Max due to its ad-supported model. It's worth noting Hulu generated $1.5 billion in ad revenue last year with fewer than 25 million average subscribers. Comcast should be able to achieve a similar number of viewers in short order. Current Comcast customers will receive free access to Peacock's ad-supported service (at least its 20 million video customers, but possibly all 29 million residential customers). So, it seems Cavanagh's expecting Peacock to see considerably lower engagement than Hulu, or he thinks Comcast won't be able to sell ads as well as Hulu.

But Comcast has good reason not to invest too much in streaming to make a highly engaging service. It still makes most of its money from premium pay-TV subscribers. 

AT&T has a wireless business that's supporting its focus on profitable pay-TV customers and a transition to streaming video. And Disney sees its direct-to-consumer business as a necessary step to take more control of its operations and get ahead of the cord-cutting trend. 

Comcast doesn't want to disrupt its big moneymaker by creating a service so engaging that it further deteriorates the value of having a cable TV subscription. Ultimately, that will create a leaner content library, one that's less engaging than the competition, but one Comcast thinks will bring in enough viewership to become profitable despite its relatively small investment.

"Our ongoing investment will be success-based," Cavanagh said. That opens the door for Comcast to invest more in order to grow more or to pull back on its investments if it doesn't see the results Cavanagh and his team expected.

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