When Comcast (NASDAQ:CMCSA) CEO Brian Roberts said during last July's second-quarter conference call that "for years, we felt that video over the Internet is more friend than foe. We believe it plays to our strengths," it would have been easy to chalk it up as a throwaway comment meant to ease concerns about continued cord-cutting. Comcast sells cable television service, and clearly doesn't want to lose any paying customers.
Much has changed in the meantime. A slew of new streaming services like Disney+ have joined Netflix (NASDAQ:NFLX) in its assault on the cable television industry, while telco AT&T (NYSE:T) has continued to (inelegantly) tweak its streaming alternatives to cable entertainment. Even Comcast has jumped into the fray, unveiling an ad-supported streaming service called Peacock in January, that will become available later this year.
The catch? Consumers will still need a broadband connection to enjoy any of those choices.
That's good news for Comcast and its cable cohorts, and bad news for AT&T and its telecom peers. Moreover, if you're a believer in the idea that controlling the medium gives a company an inside track to selling customers the media, then recent numbers from Leichtman Research paint an even rosier picture for Comcast. They also paint a particularly grim one for even the bluest of the blue-chip telcos.
Consumers want broadband from cable names
Investors likely sensed it over the course of last year, but Leichtman Research Group crunched the numbers to confirm it. Last year, cable television companies led by Comcast and Charter added more than 3.1 million broadband internet customers. Conversely, telecom names like AT&T and Verizon (NYSE:VZ) collectively lost more than 600 million high-speed internet subscribers. Comcast and AT&T, in fact, represented the best and worst (respectively) of their segments.
It's not too terribly difficult to connect the dots. Most cable giants are already geographically "there," and face modest competition. The same heavy-duty cables that pipe in television signals are well-suited for ultra-fast internet connectivity. The telecom industry's key names, however, can't squeeze the kind of connection speeds they need to out of old phone lines. They need to lay down expensive fiber optic cables to adequately compete with their cable company counterparts.
That is happening, but not quickly enough to suit consumers. As of the end of 2019, the cable TV industry enjoyed 67% of the United States' broadband market, up from 65% a year earlier. The phone industry's share slumped from 35% to 33%.
Video customers are the prize
None of it is news, but broadband service and the revenue it generates isn't the only piece of pie at stake here. Just as critical -- especially now that streaming video has proven so disruptive to linear (cable) television -- is what cable players can do with an existing broadband customer relationship. The dynamic leaves companies like Charter and Comcast in a better position to be the video entertainment provider of choice for those consumers.
The connection between a provider's broadband service and its own video product hasn't always been etched in stone. Comcast has done well with offering free, basic cable television to its broadband customers through a service called Flex, but Windstream Holdings recently added YouTube TV as a featured offering that competes with its own cable television option.
Cable company Altice USA offers free access to the streaming documentary service CuriosityStream, non-Altice viewers otherwise have to pay for. Comcast is even a third-party seller of Netflix, arguably feeding the beast that threatens its cable business the most. Both pieces of the entertainment industry are still trying to figure out which partnerships and arrangements make the most sense.
One thing is becoming increasingly clear, however: Although the cable/phone/broadband bundle that did so well for a couple of decades is dying, the streaming/broadband bundle is just starting to gel as a marketable product.
The one threat is not a near-term one
While Comcast is winning the war on the broadband front as it positions to take the lead on ad-supported streaming, there are some risks ahead. The same fiber optic investment wireless service providers such as Verizon and AT&T are making to bring 5G connectivity to cellphones can also be used as a means of delivering broadband speed connections to homes. That will create real competition for cable giants in many markets where they've faced little of it for years. In turn, this could make the telco names the convenient choice for cable television entertainment as well.
It's far from an immediate threat to Comcast, though. Altice CEO Dexter Goei commented in December of the telecom industry's 5G expansion plans, "It would take a decade for a wireless carrier like Verizon to build fiber throughout the country if it had unlimited money, and it doesn't have unlimited money."
In the years it could take telco to start build enough infrastructure to start taking back broadband market share, Comcast could easily be further entrenched as the broadband provider of choice, It could also be well entrenched as consumers' preferred ad-supported streaming service. There's much to be said for simply being there first.