Please ensure Javascript is enabled for purposes of website accessibility

500,000 Comcast Subscribers Will Cut the Cord This Quarter

By Adam Levy – Jun 21, 2020 at 12:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

But it might not be as bad as it sounds.

Comcast (CMCSA 4.43%) warned investors cord-cutting would get worse in 2020 all the way back in January. That's largely due to a price increase it made at the start of the year. Combined with the economic impact of COVID-19, Comcast's pay-TV business is struggling to keep subscribers.

During an investors conference earlier this month, CFO Mike Cavanagh reiterated comments he made during Comcast's first-quarter earnings call. "Our expectation is that the amount of spread year-over-year will be about the same in the second quarter versus a year ago as it was in the first quarter."

Comcast lost 281,000 more residential video subscribers in the first quarter of 2020 than it did last year. If the spread remains the same, it'll lose 490,000 subscribers in the second quarter. Add in business subscriber losses, and Comcast is looking at potentially losing over 500,000 video subscribers by the time June ends.

Scissors cutting a coaxial cable.

Image source: Getty Images

A shift in perspective

Video subscriptions are only part of the story for Comcast. It's now more focused on broadband internet, which has continued growing even as subscribers ditch the cable bundle. It now has nearly 27 million residential high-speed internet subscribers and over two million business subscribers. And those are relatively high-margin subscribers.

Video revenue no longer produces the meaningful gross profit dollars it used to for Comcast. That's not to say it's not a valuable piece of the business. Comcast's video service, when bundled with its broadband service, reduces churn, increasing the lifetime value of an internet subscriber. That's the same business philosophy as Comcast's Flex platform -- the free connected-TV device it offers internet customers.

"But we're not going to subsidize -- we're not going to spend broadband profitability," Cavanagh said. In other words, bundling discounts for the full cable package will remain minimal. With Flex, Comcast is only offering one free device per household, and a second will cost $5 per month. Similar devices retail for about $100.

It's worth noting Comcast's lack of need for video subscribers to maintain its customer relationships is an advantage over its biggest competitor -- AT&T (T 3.65%). AT&T is losing subscribers even faster than Comcast, and that may be because it doesn't offer high-speed internet service everywhere it offers video service. Its acquisition of DirecTV gave it millions of subscribers and nationwide service capabilities, but it requires AT&T to price the service high enough to make a profit. Comcast only needs to raise prices high enough to cover its costs.

Likewise, Comcast's phone service, Xfinity Mobile, is merely priced to break even on profitability and retain broadband customers. AT&T's wireless service is a core profit driver. Bundling has been a key part of AT&T's strategy, but the disparate pieces of AT&T's entertainment and wireless business make it less effective. By comparison, Comcast only offers wireless service to its internet customers, and it feels no pressure to expand the reach of Xfinity Mobile.

Cord-cutting will continue to get worse

Given the economic impact of COVID-19, Cavanagh expects cord-cutting to get worse. "COVID will, over the full extent of the crisis, put pressure on people's wallet," Cavanagh said. 

Soon-to-be CEO of AT&T John Stankey had a similar comment during the company's first-quarter earnings call." We're expecting that there is going to be a stressed economic environment in the second half of this year [...] So, I would expect that we may see more pressure on [cord-cutting] as we move through the year."

While cord-cutting puts Comcast in a more precarious position with its broadband subscribers, it's not as impactful to the company's bottom line as it is to its competitors' in the near term. Comcast's position with broadband subscriptions remains strong and profitable. The cable segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 41% during the first quarter exemplifies that strength. That compares to an EBITDA margin of 25% for AT&T's entertainment segment.

It's unlikely most of Comcast's video subscribers will also cancel their internet in the near term. But a lack of video subscribers does open the door for competing internet service providers to steal customers away more easily. There's not much of a threat now, but that could change as wireless providers build out 5G networks capable of offering home broadband service. Increased cord-cutting will put more pressure on Comcast's Flex service and Xfinity Mobile to increase switching costs and produce stronger customer retention.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$30.63 (4.43%) $1.30
AT&T Inc. Stock Quote
AT&T Inc.
T
$15.90 (3.65%) $0.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.