Comcast's 30-to-1 Odds
MAY 05, 2008
The Bauminator recently reported on Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s planned digital terminal adapter (DTA) deployment. (See Comcast Confirms Digital Dongle Project.)
The devices are a key ingredient in the MSO's plan to migrate 20 percent of the homes in its footprint to all-digital television service by the end of 2008. In parallel, Comcast also revealed plans to deploy super-fast Docsis 3.0 Internet service to up to 20 percent of its homes this year. (See Comcast Enters the Wideband Era and Controlling Doc$is 3.0 .) Now, guess what percentage of Comcast's homes will be marketed for Verizon Communications Inc. (NYSE: VZ - message board)'s FiOS service by the end of the decade? That would be 20 percent, of course. Might we be looking at the core of Comcast's FiOS-fighting strategy here?
Verizon's FiOS is generally viewed as a veritable horseman of the cable apocalypse. In the end, however, it may turn out to be more of a corpulent, flatulent bovine than a swift, powerful war steed (pardon the over-the-top barnyard allusions).
As explained by Comcast COO and cable division president Steve Burke back in February, the MSO's all-digital maneuvers are expected to free up 40 analog channels. (See Comcast Spreads the Love .) For bandwidth watchers, that equals 1.6 Gbit/s -- a massive amount of downstream capacity that can be used for high-definition television (HDTV), video on demand (VOD), and broadband Internet applications.
And how much will Comcast have to pay to unearth one and a half Gigs on its network? According to my back-of-the-napkin math, it could be as little as $29 per home passed. Compare that to the more than $1,000 per home passed Verizon is spending to deploy FiOS.
Here's how we get to the $29 figure for Comcast. The MSO currently serves 49.9 million homes. Of those, 49.5 percent subscribe to basic cable TV service, and of that group, 65 percent take digital service. So, a 20 percent slice of Comcast's footprint covers just under 10 million homes. Applying the above video penetration rates yields a total of 4.9 million cable TV subscribers. Of this universe, 65 percent already take digital service.
For argument's sake, however, we'll assume that 40 percent of these digital subscribers still have at least one TV connected to analog service and will need a DTA. The number of analog-only customers left to migrate to digital is 1.7 million. Assuming they own an average of 2.25 televisions per home, all told, we're talking about 5.1 million DTAs.
The Bauminator reported that Comcast is seeking a $35 price point for DTAs. Let's assume however, that the MSO actually pays an average loaded cost of $55 per DTA, including any installation and digital headend charges. The cost for Comcast to access 1.6 Gbit/s for 10 million homes? A paltry $285 million, or $28.58 per home passed.
Table 1: Comcast All-Digital Transition Costs
Homes passed (HP) 49,902,000
Basic subs 24,691,000
Digital cable subs 16,015,000
% of HP going all-digital (AD) 20%
All-digital homes passed (ADHP) 9,980,400
Basic subs in ADHP 4,938,200
Digital cable subs in ADHP 3,203,000
Analog subs in ADHP 1,735,200
Average TVs per home 2.25
DTAs needed 5,185,400
Weighted DTA cost per sub $55
All-digital cost $285,197,000
Avg. cost per home passed $28.58
Source: Cable Digital News analysis
Do you think one of these competitors might enjoy a significant economic advantage? If the more the more than 30-to-1 cost advantage enjoyed by Comcast didn't convince you, perhaps the news that Verizon is already starting to raise FiOS service prices will seal the deal. (See Verizon to Raise Prices, Cut Jobs.).
Also, consider Comcast's continued momentum in residential telephone and broadband Internet services. In the first quarter, Comcast added 639,000 telephone and 492,000 Internet customers, beating Wall Street's expectations. (See High-Speed Internet Drives Comcast's Q1.) For its part, Verizon lost 726,000 residential lines and only added 263,000 FiOS TV and 262,000 FiOS Internet customers. In the wake of the hemorrhaging, Verizon said it would shed 10,000 jobs. Comcast, on the other hand, has added 15,000 jobs over the past 15 months to keep up with new service demand.
Increasingly, in this horse race, Comcast is looking like the thoroughbred.
Michael Harris, Chief Analyst, Cable Digital Newshttp://www.lightreading.com/document.asp?doc_id=152873