Reduced forecasts by the top cable provider may be a sign of interference ahead for a broad range of communications providers
At the UBS Global Media & Communications Conference on Dec. 5, an analyst asked Michael Angelakis, Comcast's (CMCSA) new co-chief financial officer, why he left a cushy job at famed private equity group Providence Equity Partners for a position at Comcast. Angelakis may be wondering the same thing.
The night before, his new company issued a warning that it wouldn't add as many new subscribers as it previously had expected, and that revenue and cash flow would come in below previous forecasts. Analyst Todd Mitchell, of Kaufman Brothers, downgraded the stock to hold from buy, while Standard & Poor's analyst Tuna Amobi reaffirmed a sell rating on the shares. "This is just the beginning" of bad news and stock declines for the company, says Amobi of S&P (which, like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP)). Comcast shares tumbled 12%, to $18.18 on Dec. 5.
Price Undercutting: A Downward Spiral
The cable company blamed "an increasingly challenging economic and competitive environment," highlighting trends that could result in a vicious circle for a broad range of communications providers in coming months. Comcast is suffering as competitors like Verizon (VZ) cut prices on their services. Comcast is also feeling the fallout from a real estate bust that's crimping demand for Internet, TV, and other communications services. Worse, in the face of a persistent economic slump, providers may cut prices further, accelerating the price war and taking an even bigger whack at each other's profits. "I am expecting that, in 2008, you are going to see more of a discount mentality," Amobi says.
Price battles between cable companies and phone carriers are nothing new. In recent months, Verizon and other telecom providers have redoubled efforts to sell packages of video, high-speed Internet, and phone services at 20% to 25% less than comparable packages from cable operators, Amobi says. Verizon is likely to lure some 200,000 Comcast subscribers in 2007, says Tim Horan, an analyst with CIBC World Markets.
Now purveyors of satellite-TV service are joining the competitive pricing foray. EchoStar (DISH) is offering six months of high-definition channel viewing for free. DirecTV (DTV) is discounting its service by $20 a month for the first year. As a result, DirecTV's net subscriber additions in the third quarter nearly doubled, to 401,000, from a year earlier.
Housing Slump Crimps Demand
Comcast isn't the only cable operator feeling the pinch. Charter Communications' (CHTR) CEO Neil Smit said on Dec. 4 that his company experienced a slowdown in the third quarter. He blamed AT&T , Verizon, and satellite TV companies. Verizon could turn up the heat on Cablevision, one of the main cable providers in New York, as it steps up plans to introduce its own version of TV services throughout the state. Cablevision shares slumped 4.2%, to $25.67, while Charter stock slipped 1.6%, to $1.23.
Even as rivalry intensifies amid cable, satellite, and phone carriers, players from all three areas of tech are bracing for fallout from the economy's woes. The housing slump is already causing thousands of residents to cancel their video, data, and phone services altogether. "Some of these customers are ceasing to be a customer of anybody" says Mitchell of Kaufman Brothers. EchoStar said in November that its rate of subscriber turnover rose in the third quarter.
Plagued by the dual ills of competition and falling demand, expect Comcast to mount a marketing blitz. "We've allowed a competitor to take a higher ground in the marketing world on high-definition," Angelakis said, referring to aggressive marketing of high-definition satellite TV channels. "Competition's increased, and we've got to respond."
Costly Outlays for Premium Services
That response will take a financial toll, partly as Comcast increases capital spending to upgrade customers' equipment to handle high-definition and other advanced services. Comcast bumped its capital expenditures for the year by 5% to $6 billion. "As you see more and more advanced services rolled out [by competitors] and high-definition channels multiply, they may have to spend more," says Amobi. Consider Qwest Communications International (Q). Despite the housing market slowdown, the company's board has recently authorized spending of up to $300 million to increase speeds and capabilities of its network in order to grab a bigger slice of the market.
In response to the analyst's question at the conference, Angelakis said he made the job switch because "the aspect of private equity that was most appealing to me was, after you bought the company, what did you do with it?"
With rivals' slashing prices and customers thinking twice about ordering more TV and faster Internet services, he's got plenty to do at Comcast.