It's hard to believe that a company generating more than $6 billion in free cash flow over the last nine months could be in trouble. However, there are forces at work that could destroy a significant portion of Comcast's (CMCSA +0.36%) cash generating capabilities. In fact, there are two issues facing the company, and both of these challenges could affect Comcast's highly profitable cable business. The company needs to answer these challenges or only half of its business may survive.
Cable should be scared to the Fiber of its being
There is one threat that could unhinge the cable industry, and it comes from a somewhat unthinkable source. Google (GOOG +1.50%) is laying the foundation for this disruptive force called Google Fiber. While it's true that Google Fiber is only in a few cities, the company has aspirations to expand the business.
Google Fiber is currently in parts of Kansas City, Mo. and Provo, Utah. The company plans to expand into areas nearby these locations as well as to parts of Austin, Texas. The company is offering three types of plans, with the most basic requiring either $25 a month for 12 months or a $300 one-time cost for free Internet service that is comparable to some high-speed Internet offerings today.
Google Fiber also offers Gigabit Internet as well as Gigabit Internet plus digital TV. Considering that Google has more than $50 billion in net cash and investments, and generated nearly $3 billion in free cash flow last quarter alone, the company doesn't have to be shy about building this business.
Comcast's Cable Communications business generated more than $4 billion in operating cash flow in the most recent quarter. Obviously anything that threatens this business is a huge problem.
Over the top and not under the radar anymore
The second issue facing Comcast is new offerings in over-the-top video services. Many have suggested that over-the-top services like Netflix, Amazon.com's Instant Video, and Hulu Plus are potential disruptors to traditional cable. While these services primarily broadcast previously run television shows and movies, there are newer entrants that may offer a blueprint for over-the-top programming.
This blueprint comes from the most unlikely source. World Wrestling Entertainment (WWE +0.00%) recently announced it will launch the WWE Network as "the first ever 24/[seven] streaming network." What makes this offering unique is WWE will offer all 12 of its pay-per-view events as part of this network. Each of these events is normally purchased via pay-per-view at a cost of $40 or more per event. By offering the events directly, WWE can cut out the middle man (Comcast and others).
Comcast would have trouble offering a streaming-only service of NBC given the company's cable business, but what about Walt Disney's ABC business? Given that ABC, CBS, and others already offer streaming of their shows online, and many offer apps for different devices, they could offer services directly to customers as opposed to fighting with cable companies.
Even a fool can see this
If you don't think these issues are significant enough to worry for the future of Comcast, consider that the company generated over 70% of its Cable Communications revenue from video and high-speed Internet. These services also accounted for nearly 80% of the company's total operating cash flow.
Google Fiber and over-the-top networks could take both video and high-speed Internet subscribers away from Comcast over time. Given that the NBCUniversal business is somewhat immune to the Google Fiber and over-the-top network risks, this half of Comcast could survive. However, if the company's cable business takes a hit, Comcast may not be able to invest in NBCUniversal for future growth. Investors need to understand the world of cable companies is changing and should be ready to adjust their portfolio accordingly.
