Comcast, the U.S.’s biggest purveyor of cable television, has laid the groundwork for a future where it’s perfectly happy if you don’t subscribe to a TV package.
Of course, the cable giant still wants you to buy as many services as it has on offer, including a fat bundle of TV channels and add-ons like home security. But as cord-cutting continues unabated, Comcast has shifted gears to better cater to people who just want broadband by giving them a new way to access streaming video on TV.
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“There’s a set of customers who see value in the traditional bundle,” says Matt Zelesko, Comcast’s chief technology officer. “But we also understand there’s a set of streaming-first customers — and it’s a growing number — who don’t want traditional TV.”
Increasingly, Comcast sees itself competing against platforms from Apple, Amazon and Roku to deliver a package of over-the-top video entertainment streamed right to the television.
Enter Xfinity Flex: a service for Comcast’s broadband-only customers that provides access to more than 100 internet video and music services, including Netflix, HBO, YouTube, Showtime, Amazon Prime Video and Amazon Music, Pandora and iHeartRadio. It also offers 10,000 free TV episodes and movies, with access to services like Tubi and Viacom’s Pluto TV. When Flex debuted in the spring, Comcast charged $5 per month for a Flex set-top. Now it’s giving those boxes away, complete with a voice-activated remote, to any broadband customer who wants one.
For subscription-video services — including Hulu and NBCUniversal’s Peacock, both of which will soon be joining the Flex platform — customers must pay separate fees. But Zelesko sees an opportunity for Comcast to earn incremental revenue via revenue-sharing deals with content partners. Comcast also offers thousands of titles available to rent or buy on Flex, another area of upside.
“Flex is a gateway for them to extract more dollars from their broadband subscriber base,” says Peter Csathy, founder of consulting and investment firm Creatv Media. “It’s all gravy.” Comcast’s costs are nominal: Flex is built on top of Comcast’s X1 platform, and the wireless set-tops it is giving away cost less than $50 apiece, according to industry estimates. Initially, Flex users also have needed to lease a Comcast-supplied modem but the company is dropping that requirement before the end of 2019.
In addition to popular apps like Netflix and YouTube, Flex provides a range of more niche-oriented services, ranging from Fox Nation and the Lifetime Movie Club to The Jewish Channel and the Anime Network. The operator is adding approximately 10 new over-the-top services each month to Flex, and the SVOD lineup is also available to Comcast’s traditional TV customers with X1.
More broadly, Comcast’s Flex move is an outright acknowledgment that pay TV is less important to Comcast’s future than broadband. “Not all video customers are profitable anymore for us,” said Comcast chief Brian Roberts, speaking at last month’s Goldman Sachs investment conference in New York. Programming costs, he said, are “going to go up more than we would like or can control.”
Like the rest of the pay-TV biz, Comcast has seen the steady melting of the subscription-television iceberg. In the first half of 2019, Comcast’s broadband business raked in $9.24 billion in revenue, up 9.8% — while video revenue dropped 0.6% to $11.22 billion.
In a few years, Comcast will reach a “point of indifference” when the pay-TV business contributes less to the bottom line than broadband-only subscribers, according to Goldman Sachs’ Brett Feldman. Comcast video gross margin per subscriber per month will drop from $34.65 in 2018 to $19.72 by 2024, he predicts. At that point, Comcast’s incremental margins from higher broadband pricing should exceed those of video.
Wrote Morgan Stanley analyst Ben Swinburne in an Oct. 15 note, “While Flex may not have a large near-term impact on Comcast’s earnings, we believe it could be the beginning of a structural pivot in its video business — and by extension the U.S. cable business.”
Comcast has 6 million to 7 million broadband-only subs who are the target for Flex, per Swinburne’s estimates. The operator is focused on using the product to boost its broadband market share, which is around 47% of its footprint, analysts estimate.
But Comcast is in no way abandoning the still-lucrative pay-TV model, especially given that the ecosystem is critical to supporting the NBCU business. Indeed, Flex is designed to potentially bring cord-cutters back into the fold: Later this year, Flex users will be able to upgrade to Xfinity TV on X1 with a few clicks of the remote.
Roberts believes Comcast has landed on the right strategy to tap into the cord-cutting crowd, ultimately aiming to protect the cash flow from its high-speed internet business. “Video over the internet,” he said at the Goldman investment conference, “is more friend than foe to Comcast.”
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