While the impact of the recession on second quarter performance was the top-line story coming out of Comcast’s latest earnings conference, company executives’ updates on developments in mobile services, “On Demand Online,” DOCSIS 3.0, digital TV, commercial services, advanced advertising and set-top middleware offered the most solid evidence yet that the industry’s multi-faceted leap into the unknown has real bottom-line potential.
And Comcast executives revealed they’re expanding the next-gen agenda ever further by adding network digital video recording service to the list now that a U.S. appeals court has upheld Cablevision’s original plans to pursue that strategy. “We’ve always believed the network DVR is a great application that satellite can’t replicate,” said Comcast COO Steve Burke.
“There are a lot of different nuances in terms of how you manage the storage, what the actual product is, etc., and with all those different choices come different costs and cost benefits,” Burke said. “We’re working our way through those now. But I think there’s no question some form of network DVR service is going to be in our future.”
Taking on so much all at once is risky, but the payoff could be huge, suggested Comcast chairman and CEO Brian Roberts. “We’re getting the plumbing work done and getting all the operational, capital and other issues behind us,” Roberts said. “You come out of that period and you have a totally different product.”
Toeing the line on capital spending for what Roberts called the “technical repositioning of the company” is a major goal, which, so far, appears doable, noted Comcast CFO Michael Angelakis. “Our cap ex is predominantly growth oriented and focused on generating return on incremental capital,” Angelakis said. While cap ex will increase “modestly” in the second half, he added, the company anticipates the 2009 total will come in under the $5.75 billion spent in 2008, even with the accelerated pace of DOCSIS 3.0 deployments.
Instrumental to success in just about everything is completion of what Roberts referred to as the “two big initiatives” – installing the foundation for delivering broadband at 50 megabits per second and higher speeds and doing away with analog bandwidth consumption on all but a handful of “lifeline” TV channels. Both initiatives have important implications for the bandwidth efficiencies, applications functionalities and market scale that are essential to delivering next-generation services and applications.
“It’s going well,” Roberts said, but quickly added, “It’s a lot of work.”
Executives reported the company is stepping up rollout of wideband. It has now equipped cable systems covering nearly half its footprint with DOCSIS 3.0 wideband capabilities and intends to extend the reach to 80 percent of its base by year’s end, Burke said. “Part of raising the estimate is we’re getting it implemented and we’re a little farther along the line [than anticipated],” he noted.
Comcast, having completed its first conversion to all-digital TV service in Portland, Ore., is “speeding up all-digital as well,” Burke said. “Today over one third of all our systems are actively engaged in the process of converting [to all-digital]. By the end of this year one third of our systems will have completed the conversion process.”
Burke said the costs of digital conversion “are coming in lower than planned. We’re also seeing operational savings post transition in Portland and believe this effort will have attractive ROI in addition to paving the way for 100 high def channels, ethnic programming and other product enhancements.”
Executives reported that early results from the company’s recently launched On Demand Online trial and from initial rollouts of 4G wireless service are buttressing their commitments to aggressive expansion in these areas as well. With 23 programming networks now on board for the 5,000-home On Demand Online beta test, the company is offering over 4,000 titles from cable TV programming for viewing on PCs by authenticated video subscribers.
“We plan to expand this launch nationally this fall,” Burke said. “We think this effort is very important strategically for the cable industry, and we’re pleased to see it starting off so well.”
Comcast, leveraging the WiMAX infrastructure to be shared among participants in the Clearwire venture, launched its “Comcast High-Speed 2go” mobile broadband service in Portland on July 1 and in Atlanta on July 28 and plans to introduce the service in Philadelphia, Chicago and its Washington State system in the fall, Burke said. “While it’s early, we’ve gotten off to a strong start and are ahead of plan,” he added.
High-Speed 2go, supporting up to 4 mbps download speeds to PCs accessing the mobile network via wireless data cards, is bundled with fixed 12 mbps home Internet service at a combined price of $49.99 per month through the first year of service. For an additional $20 per month, consumers can upgrade to the Fast Pack Nationwide service, which includes the same services plus access to Sprint’s nationwide 3G mobile network. “This is a great product, and the good news is it’s bringing a lot of customers into the high-speed data fold who are new to that segment of our business,” Burke said.
Sanford Bernstein senior analyst Craig Moffett, terming the Portland pricing strategy “quite aggressive,” questioned what the long-range bottom-line prospects are for the service. Burke said the $49.95 promotional price would jump to $69.95 next year, but noted the bundling doesn’t significantly dilute margins on new broadband signups given that promotional pricing has long been part of the company’s fixed broadband service marketing effort.
“One way to look at it is you’re getting high-speed data subscribers you’d otherwise have promoted for, plus you’re getting the Comcast 2go subscribers,” Burke said. Once the price resets to $69.95 the margin on the combined product will be in excess of 40 percent, he added.
But the “really important” fact to note is that “40 percent of the customers we’re getting in Portland are brand new to Comcast,” he said. “So they’re lapsed DSL customers or customers who otherwise would potentially be getting DSL. For us this is a way to grow our high-speed data business in the home and to add a new business line. We’re very comfortable that this is a product that is an enhancement to our high-speed data business that can grow the overall pie.”
Comcast can use a boost to broadband sales, especially in light of what was acknowledged to be a disappointing showing in the second quarter when the company netted just 65,000 new signups. While officials attributed the weak performance in part to lack of promotional focus on broadband during the quarter, the company, like other cable MSOs, has been outpaced by AT%26T and Verizon in the rate of new signups in each of the past three quarters.
Comcast executives were also asked how telco plans to launch 4G services will affect cable’s 4G plans and whether the MSO has plans to offer voice service over its mobile links. “Our working assumption is the wireless companies are going to do whatever they’re going to do,” Roberts said. “I’m not sure how quickly it really does get here. They’re barely deployed on 3G.”
In any event, he said, “There’s not much we can do. So our view is how best to enter the market. When Clearwire came to us and said we can start from scratch with over 100 MHz per market and have virgin spectrum deployed to innovate with 4G right out of the box, that was very appealing to us. We’ve only launched two markets in just a few months, but it’s very exciting to begin to have the bundle that Steve talked about. And we’re assuming the wireless companies will have their own bundle.”
As for adding mobile voice, officials declined to be specific about their plans. But Roberts did acknowledge that in the long run “voice is going to ride on top of the data as an application. That’s not here today, but a lot of people see that day coming.”
Comcast executives also see a good chance for acceleration in the industry’s deployment of the cable set-top middleware known as EBIF (Enhanced TV Binary Interchange Format) owing to gathering momentum on the advanced advertising front. Speaking of the concerted effort underway through the industry’s Canoe Ventures consortium, Burke said, “We just had a Canoe meeting a couple of days ago. I think we’re making very good progress. You won’t see it in the numbers for awhile. But the industry has really come together well.”
Burke said that, with the need for interactivity to support requests for information, voting and polling in the advertising space, there’s a chance the Canoe partners could have as many as 25 million EBIF-enabled homes in operation by the fourth quarter. “There’s going to be an entire business built on that, and that project is going quite well as are other things that Canoe is doing,” he said. “We’ve got to get interactive advertising moving, and I think we’re making real progress. I think you’ll see some revenue in 2010, and it will become more material in the future.”
Cable’s big push on all these fronts is rooted in an understanding that the industry will need new revenue streams to compensate for the competitive pressure from telcos offering TV services. Asked whether telco or satellite TV service was posing the biggest challenge, Burke responded, “It’s more RBOCs than satellite.” He said that telco TV is now available across about 28 percent of Comcast’s footprint, going to about 30 percent by year’s end. AT%26T and Verizon are about equal in their impact on Comcast markets where one or the other is operating, he added.
Along with voice and Internet access, cable has taken the battle to telcos’ turf with a significant investment in commercial services. “We’re firing on all cylinders,” Burke said, noting revenues from commercial services were up 50 percent in the quarter and in the year to date. This compares to a “mid 30s” growth rate quarter to quarter 18 months ago, he said.
“We’re branching off into new businesses beyond small business customers,” he added. “For example, we’re expanding our cell backhaul operations and now have agreements with wireless carriers contracted for over 2,000 towers. Our goal is to keep this business growing rapidly.”