Industry disruption often happens slowly.
In video streaming, for example, Netflix (NFLX +1.15%) was long ignored by entertainment incumbents eager to reap bumper profits from the cable ecosystem that worked so well for a generation. Time Warner's chief at one point dismissed the streaming challenger as the "Albanian army," but after years of growth inside the U.S. and abroad for Netflix, the equation has changed.
Not only are a slew of new streaming services coming onto the market, including Disney+ and Apple+ late last year, and AT&T's HBOMax and Comcast's (CMCSA +0.03%) Peacock coming this year, but now even the country's biggest cable provider appears to see the light on streaming.
In its fourth-quarter earnings report, Comcast's results and management commentary on the earnings call made clear that the company was looking forward to a future beyond its cable empire and, better yet, sees itself as a big winner in the streaming revolution. Here's why.
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Cord-cutting is accelerating
Investors have been talking about cord-cutting for years, but the vast majority of Americans still subscribe to a traditional pay-TV service. Still, the movement away from cable and satellite TV toward video streaming now seems to be accelerating, according to Comcast's latest numbers.
During the seasonally strong fourth quarter, when cable and streaming subscriptions are lifted by cold weather and the holidays driving more screen time, Comcast said it lost 133,000 residential video subscribers in the period, compared to a loss of just 19,000 in the quarter a year ago. Those losses were likely fueled by the launch of Disney+ and Apple+ in the quarter, as Netflix's domestic subscriber growth was unusually slow as well. However, Comcast's residential cable subscriber loss for the full year nearly doubled from 344,000 to 671,000, a sign that cord-cutting momentum was picking up before the new services came online.
Comcast now sees those cable losses accelerating this year. Not only is Comcast launching its own streaming service, Peacock, but it's also shifting its video strategy as it sees video as primarily a way to add lifetime value to broadband-centric subscribers. It's not chasing more price-conscious customers, as CFO Michael Cavanagh explained on the call, which has led to fewer new customers.
Instead, it's counting on broadband and streaming to drive growth in the coming years.
Betting on streaming
What was even more notable from Comcast's earnings report is how bullish the company is on streaming.
Last year, Comcast introduced Flex, a set-top box that give its broadband subscribers access to over 100 video and music apps to help give them a premium streaming experience even if they aren't cable subscribers. Describing the product, CEO Brian Roberts said, "At Cable, we leveraged X1 to launch our newest service Flex to better serve the segment of our broadband customers that prefer streaming only. Our early results with Flex show that our customers love it. In our first month, we could not keep enough inventory in stock, and we're deploying Flex as fast as we can." The company is introducing a similar platform through Sky, the British cable service it acquired, so its European customers can enjoy the same benefits.
With a unique combination of assets, Roberts sees a bright future for Comcast in streaming, saying, "So, if you include Dave's broadband business, plus Flex and Peacock, I think our company is better positioned as the world moves to streaming than any other company in the world. And I think you could argue, in the next 10 or 20 years, if you look at all those three businesses combined, we could make more money in streaming than anyone else by a lot."
Comcast, in other words, sees cord-cutting as a driver of its future business, rather than a headwind as it's long been thought of. While it's not a company that investors think of as a player in the streaming industry, Comcast does have a unique position and a collection of strengths as an internet provider, a streaming-device maker like Amazon or Roku, and soon a streaming service with Peacock that gives the company and investors a number of ways to get exposure to streaming.
What it means for the streaming industry
Comcast's report is the latest piece of good news for Netflix, as it shows that the transition from linear TV to internet TV is only accelerating, which will favor streaming stocks like Netflix and Roku over the coming years, as well as those looking to gain from the growth of connected TV like The Trade Desk and Telaria.
In Netflix's own earnings call earlier this week, management again sought to deflect concerns about competition from new streaming options, pointing instead to the massive opportunity coming from linear TV. When even Comcast, the nation's biggest cable company, is jumping into the streaming fray, we may be reaching the peak of this wave of disruption that has been building for a decade. With HBOMax and Peacock coming online soon, expect 2020 to be the biggest year yet for cord-cutting. That's good news for streaming stocks like Netflix.
