Because I check in with some regularity on the cable stocks, I've received a growing collection of emails seeking thoughts on why their share prices have slid meaningfully since the market's July high. With the two biggest operators -- Comcast
It's no secret that Comcast and its fellow cable operators have ridden a triple-play offering of cable television, telephone service, and high-speed data to phenomenal rates of subscriber additions during the past couple of years. Comcast added about three times as many RGUs -- revenue generating units -- last quarter as it did in the same quarter of 2005. That makes sense, since each successful triple-play installation leads to three RGUs (one each for cable, telephone line, and Internet hookup.)
But for some -- those who believe that growth rates can be linear -- what they saw as a slowing pace of customer additions at the company was somewhat worrisome. Never mind that the second quarter of any year is apt to present a somewhat distorted picture, in part because of college students unhooking their cable TVs when they leave for the summer, along with higher relocation rates generally.
In addition to the slowing pace of customer additions, there's the concern about competition from satellite-TV providers DirecTV
But fear of competitive bogeymen has always dogged the cable operators. In the early days of this decade, satellite video was the looming presence seen yapping at cable's heels. The difficulty with that episode of nervousness was that satellite, while providing a superb one-directional video product, didn't have an interactive platform and, therefore, couldn't offer a robust video-on-demand package to compete with cable. Satellite companies are still battling to figure out how to offer a greater variety of services.
Then, nervous Nellies thought that the Internet services offered by cable companies wouldn't hold up next to the digital subscriber line (DSL) offerings from telecom companies. However, cable-based high-speed hookups have a speed advantage over DSL, not to mention that DSL quality and availability are dependent on both the condition of "twisted pair" copper telephone lines and the subscriber's distance from a company facility.
A real contender in the match for subscribers is Verizon's fiber-optic service -- labeled FiOS -- as part of its own triple play. I believe this is likely to be the culprit for Comcast's market slide, in addition to other cable companies. Incidentally, Verizon hasn't participated in that slide, remaining essentially unchanged during the same period.
Comcast vs. Verizon
I believe that Fools should consider three facts when judging the competition between Comcast (and other cable companies) and Verizon.
First, the telephone company has a heap of catching up to do from a plant construction perspective. As such, it'll be a long time before FiOS can be offered to the majority of Comcast's and Time Warner Cable's 37 million subscribers. In fact, according to Barron's, the company currently overlaps Comcast in only about 20% of the latter's footprint. And the newly arrived credit crunch could make finishing Verizon's expensive build-out even more taxing than it might have been otherwise.
Second, the cable companies have a substantial lead in the all-important area of content availability for their video-on-demand offering. Indeed, Comcast currently offers its subscribers in excess of 9,000 hours of on-demand programming each month.
Finally, it's been demonstrated repeatedly that those subscribers who take a package of services from a provider are reluctant to change carriers willy-nilly. Beyond that, VOD is also an effective churn-reducing agent, so the ability of the telecoms to grab large blocks of cable's subscribers is very much open to doubt.
More to come
At the same time, there are other opportunities for Comcast down the road that make the company stand out. For instance, the company operates a programming entity that includes such TV networks as E! Entertainment, Style, VERSUS, and the Golf Channel. While that unit remains a relatively small part of total revenues, it has been increasing -- last quarter the programming segment grew by 22%.
In addition, there's a large number of small businesses in the company's market areas that management believes are potential subscribers to the triple-play package. It'd be easy to throw out potential revenues here, but suffice it to say the incremental contribution for a small business unit could be several million dollars annually.
Also, I've been critical of Comcast's slow pace in selling wireless to its customers. Nevertheless, I do believe that the company's unusually capable management team recognizes that wireless functionality will be a necessary arrow in its quiver as triple-play competition with the telecoms moves more and more to a quadruple-play contest.
So there you have it. The market continues to conjure up concern about other companies running off with Comcast's customers. But thus far, the world's largest cable operator has always outlasted those competitors. And with more services set to contribute to its growth, I believe that Comcast is an awfully solid company that should move toward significantly higher levels. After all, it's difficult to argue with ongoing success.
For further Foolishness:
While the market has yanked on Comcast's share price of late, the company fares much better with our CAPS community, whose players believe by 10-to-1 that the company will outperform the S&P 500. What's your opinion of Comcast? Share it with CAPS.
Fool contributor David Lee Smith wishes he could stop writing about the above-mentioned stocks long enough for the Fools' disclosure policy to let him place an order. But he can't, and so he doesn't. He does welcome your emails. The Motley Fool has a disclosure policy.