When multiple pieces of information come together at once, epiphanous conclusions can arise. Keep that thought in mind as I share a recent experience.
I had recently moved to the D.C. area when I began working at Fool HQ. Naturally, I called up Verizon (NYSE:VZ) to activate my phone and DSL. They told me it would take two weeks. Two weeks!?, I screamed, flabbergasted. Just flick the switch, give me a number, and send me a DSL modem!
Not so fast, Mr. Meier, they said. We have to install a fiber-optic cable for your phone and high-speed Internet service. Perhaps you've heard of our latest project, fiber to the premise (FTTP)?
Then came the hard sell for Direct TV (NYSE:DTV). And when the guys came out to install the fiber, I got the hard sell again.
Which is when it hit me -- Verizon is making some serious capital expenditures by piping Direct TV into your home. Essentially, they are building out another advanced network that can carry telephone, Internet access, and TV.
How is that going to bode for cable providers like Comcast (NASDAQ:CMCSA)? We'll get to that in a minute. First, let's take a peek at Comcast's earnings report.
From what I can tell, it looked like an impressive quarter for Comcast. Sales increased 10.5%, and operating income before depreciation and amortization increased 13% due to cost control. Comcast continues to monetize its network well.
But for the six months ending June 30, cash from operating activities decreased 4%. No details were given, but a note at the bottom of the report shows an increase in working capital. As such, free cash flow (cash from operations minus capital expenditures) decreased 25%.
Let's return to the question posed about Comcast's future. I think another competing network will hurt Comcast (and cable) going forward. But that doesn't necessarily mean it will help Verizon. I remained convinced those two titans are inevitably going to beat each other up.
Prices should fall as they compete to fill up and monetize the bandwidth in their pipes. Now, that's great for consumers, but not so great for business and shareholders, as operating cash flows will probably start to fall.
The boat anchor is capital expenditures, which can't be turned off easily. As I said, networks require lots of maintenance and upgrades -- Comcast spends between $3 and $4 billion a year on its network. When revenues or margins drop, I think free cash flow will return to a negative state.
So who will emerge the ultimate winner in this scenario? The champion may be Direct TV, with its programming getting access to households via another sales channel -- and without all those pesky extra capital expenditures.
I used to think cable companies were monopolies, but now I'm not so sure. As I told you to keep in mind at the beginning, interesting things can happen when multiple pieces of information start coming together to form a picture.
David Meier does not own shares in any of the companies mentioned. The Fool has an ironclad disclosure policy.
