Comcast: The Broadband Battle is Starting to Heat Up

Comcast Corp. (NASDAQ: CMCSA) reported first quarter earnings this morning that were better than analysts expectations, but a drop in video subscribers and a smaller-than-expected gain in voice subscribers are weighing on the stock. Time Warner Cable Inc. (NYSE: TWC) missed EPS expectations for its first quarter, and CableVision Systems Corp. (NYSE: CVC) reports results tomorrow that are expected to be lower than a year ago.

Comcast posted EPS of $0.45 versus an estimate of $0.42. Revenue grew nearly 23% year-over-year to $14.89 billion, again higher than the consensus estimate of $14.43 billion.

The cable companies are losing subscribers to Verizon Wireless, a joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD) and AT&T Inc. (NYSE: T) both of which offer high speed wireline broadband service in addition to voice and mobile services. And the competition is about to get even keener.

Verizon Wireless’ $3.6 billion bid for additional wireless spectrum from SpectrumCo LLC, a joint venture of Comcast, Time Warner Cable, and privately-held Bright House Networks and Cox Communications Inc., is about to change the landscape. The additional spectrum is what the other wireless carriers and the Federal Communications Commission are examining with a fine-toothed comb, but the cross-licensing agreements that give Verizon and Comcast and Time Warner Cable the ability to sell each other’s products are, perhaps, the bigger deal.

Although the FCC has not yet ruled on Verizon’s acquisition, the companies are acting like the deal is done. A Verizon-Comcast cross-licensing deal in San Francisco adds digital TV to its standard triple-play offer. AT&T, which offers its wireline U-verse high-speed service in San Francisco, has no comparable offer.

Similar deals between Comcast and Verizon are already in place in Portland, Oregon, and Seattle and Spokane, Washington. Verizon and Time Warner have launched a similar bundle in Raleigh, North Caroline, Kansas City, and Columbus and Cincinnati, Ohio. Subscribers can bundle cable services with Verizon Wireless mobile phone service and get the same deal from either the cable company or Verizon.

Cable-like companies such as Netflix Inc. (NASDAQ: NFLX), Dish Network Corp. (NASDAQ: DISH), and DirecTV (NASDAQ: DTV) will also find the going getting tougher. Netflix is at the mercy of content providers like Comcast and Time Warner, which are likely to drive Netflix’s costs higher while lowering their own. Verizon could throttle network speeds for Netflix streaming videos, and although the carrier would eventually be stopped, it might be too late for Netflix. The satellite companies, likewise, could find themselves paying more for content.

As for AT&T’s U-verse and Verizon’s FiOS, neither is as valuable nor has as well-defined a growth path as wireless services. Comcast’s Xfinity broadband service will disappear eventually and be subsumed by the Verizon wireless network.

People want mobility and that means wireless services. At first, the deals between Comcast and Verizon and Time Warner and Verizon will be appealing because the companies will be offering free or low-priced smartphones as well as the convenience of a single provider for all of a customer’s communications needs. But as smaller competitors like MetroPCS Communications Inc. (NYSE: PCS), Leap Wireless International Inc. (NASDAQ: LEAP), and even T-Mobile USA, the US arm of Deutsche Telekom AG (OTC: DTEGY) fall by the wayside, large markets will have at most two choices, Verizon or AT&T, and small markets will not get even that.

The new cross-licensing services launched too late to have any impact on first quarter results, but the deals should make some kind of showing on second quarter results. The smart money says that the deals will be winners.

Comcast’s shares are down -2.7% this morning at $29.76 in a 52-week range of $19.19-$30.88.

For those interested in the Verizon-SpectrumCo deal, the FCC web site has all the relevant documents under Docket Number WT 12-4. To date 539 comments have been filed and thousands of pages of documents.

Paul Ausick