Comcast (CMCSA -9.50%) management once said it expects to break even on its Peacock streaming service by 2024. But management's no longer confident it can hit that mark.
That's not stopping the team from pushing forward with initiatives to increase revenue and offset the growing costs of content on the service. The media company announced its first-ever price hike, asking customers to pay an extra dollar or two for the service starting next month.
The move should help improve profitability for Peacock, but there's still a long way to go and a lot of hurdles in the way. Meanwhile, accelerating cord-cutting could put even more pressure on the company to make streaming profitable.
Paying up for programming
While this might be Comcast's first official price hike, it follows a string of moves pushing viewers to pay more for the service.
At the start of the year, it eliminated the free ad-supported tier of the service, which let anyone access a limited library of Peacock's programming. In June, the company stopped giving Xfinity internet customers free access to the ad-supported tier, asking them to pay the same amount as everyone else. Now, it's asking everyone to pay an extra $1 for that ad-supported tier and $2 extra for the ad-free tier, making it $11.99 per month.
The moves follow management's decision to increase spending on content for Peacock. It made an internal deal with Universal Studios and struck a deal with the NFL for a playoff game in addition to its ongoing Sunday Night Football simulcast. It also bought back content rights from Hulu, giving subscribers access to broadcast shows the day after they broadcast.
Content spending for the service topped $3 billion last year, and it's continuing to climb. And while subscriber growth has been strong, Comcast needs to start showing progress toward profits. Management maintains its estimated EBITDA loss of $3 billion this year will be the peak, but that's still a long way from breakeven.
The pressure is on
Comcast has seen the profits of its media business fall substantially over the last two years.
While investments in Peacock weighed on profits (even when you remove the effect of the streaming service), EBITDA for Comcast's media segment was down 10% in the first quarter of 2023 compared to the same period two years ago.
The decline in profits is due, in large part, to cord-cutting. And that's not slowing down anytime soon.
With the ongoing writers' and actors' strike, it's likely we won't see a fall season of television. That's likely going to lead to a lot more cord-cutting as customers interested in entertainment programming look elsewhere. Investors should expect to see a drop in media revenue.
The only upside to the strikes for Comcast is a potential decrease in its costs. But that benefit is short-lived, as the negative effects of cord-cutting will affect Comcast's financials forever going forward.
Will the price hike help?
All the moves Comcast took this year have pushed people to pay more for the service, but it could end up stagnating growth as a result.
As of the end of Q1, Comcast counted 22 million subscribers, up from 20 million at the end of 2022.
The company didn't have any big movie releases on the streaming platform in the second quarter, and the third quarter won't have much besides the addition of the Super Mario Bros. film. With the ongoing strikes, it likely won't add much new content. The price hike could result in increased churn at a time when it's not putting out new content to draw in new subscribers.
While Comcast would have to raise prices eventually, its timing could've been better. It likely won't produce the revenue gains needed to help offset the costs of the streaming service. That said, EBITDA losses for the streaming service may improve, but the media business is still suffering. Investors should avoid Comcast stock until there's greater clarity around that.