Cable communications and media juggernaut Comcast (NASDAQ:CMCS.A) -- ignored by most investors even though it has more than doubled the return of the S&P 500 index over the last decade -- has gotten some rare attention lately. The massive success of Netflix (NASDAQ:NFLX) has legacy competitors and new entrants trying to capture a little of the streaming TV pie, and Comcast's NBCUniversal is the latest to make a splash with its Peacock service, due out on April 15.
Peacock -- a nod to NBCUniversal's logo -- has attracted its fair share of excitement among shareholders and critics alike, and the company's conservative strategy looks like it has differentiated itself enough that it should do just fine. But just fine may not be what some were hoping for, and some are thinking that Peacock won't be able to stay afloat against the likes of Netflix, Disney+ (NYSE:DIS) Apple+, and others, and that Comcast will cannibalize its already struggling cable TV segment. But they're looking at the puzzle the wrong way.
A recap on Peacock
More details came out about the upcoming streaming service last week. In an investor presentation, Peacock management said it will have three tiers for subscribers to choose from: a free ad-supported version with some limits on what can be streamed and over 7,500 hours of programming at launch; a $4.99-per-month ad-supported tier (free for the 24 million Comcast and Cox cable subscribers out there) with fewer limitations on what can be streamed and over 15,000 hours of programming at launch; and a $9.99-per-month tier for an ad-free experience (or $5 a month for those same Comcast and Cox customers).
Comcast will load up the service with its extensive library of movies and TV shows -- including The Office, 30 Rock, and Parks and Rec, which have been some of the most-streamed programs running on Netflix -- and the paid premium tiers will get next-day access to current seasons of shows, and early access to things like late-night talk shows. Live news and sports will also be available, including coverage of the 2020 Summer Olympics. Additionally, $2 billion will be spent on new content in the first two years in an attempt to keep subscribers interested.
But it's the mix of live sports, news, and reality TV programming that's the real difference-maker for Peacock compared with the other competition out there, with the service essentially mimicking many aspects of the broadcast and cable channels NBCUniversal already operates. Netflix, Disney+, Apple+, and others only address the on-demand show and movie market, leaving out sports, late-night and news, and most Spanish programming. That could help attract viewers in an increasingly crowded streaming TV market. Management expects Peacock to have 30-35 million subscribers by 2024 generating an average of $6 to $7 per user per month.
No need for a savior
While the paid-tier subscriptions will surely be an element to the service's money-making scheme, it does beg the question: What about Comcast's existing cable business? Won't Peacock hasten the cord-cutting movement?
Maybe. However, since Peacock is aiming to bundle its service for free for current cable subscribers -- in part through partnerships like an agreement with Cox for those cable customers, which NBC hopes to replicate with other cable providers in the future -- it's clear NBC is trying not to undercut cable and is offering a free add-on rather than a replacement. After all, for those millions of households that continue paying for cable, all Peacock needs to do to succeed is capture some of the time those viewers spend on a streaming platform. That ultimately would mean more ad dollars for Comcast.
The low price means NBCUniversal will be relying primarily on advertising. Live cable and broadcast TV viewers are already used to ads, so making the switch to internet-based programming will be a cinch. All of this implies Peacock is aimed at being a sort of bridge between traditional TV and streaming. Do bear in mind, though, Comcast doesn't need Peacock to be a runaway success like Netflix or Disney+. Comcast makes the bulk of its money on high-speed internet, and that isn't going to change anytime soon. Three-quarters of the company's profits came from the cable communications segment in 2018, which includes TV, internet, mobile phones, and related services. Through the first nine months of 2019 reported so far, cable communications still accounted for two-thirds of the company's profits -- which includes the addition of the European Sky business that Comcast acquired a year ago.
Besides, even though 222,000 cable customers were lost in Q3 2019, high-speed internet subscriber additions more than offset that and helped Comcast increase its total relationship count by 3.4% to 31.2 million, while Sky added a net 482,000 new relationships in Europe during the period.
It remains to be seen how many of those millions of households around the globe will sign up for Peacock, but it's a safe assumption that a fair number of them will eventually use the service and contribute to Comcast's ad-based revenue stream. Thus, it's important to remember that Peacock isn't meant to be a blockbuster success. It only needs to be a small bolt-on value-added segment to help offset cord-cutting for it to make sense for shareholders.