Cord-Cutting Accelerates; Streaming Eats Pay TV...Charter and Comcast Shares Get Punished

Charter and Comcast Shares Get Punished for Cord Cutting

Over-the-top video services such as Netflix and Amazon Prime are eating away at pay-TV's customer base, but Comcast says cord-cutting isn't the end of the world.

By Chris Nolter Oct 26, 2017 12:29 PM EDT

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It's getting ugly out there for pay-TV operators.

Comcast and Charter Communications added to the tally of third-quarter cord cutting in Thursday earnings reports. Comcast lost 125,000 video subscribers while Charter's pay-TV rolls declined by 105,000, reflecting the broader trend of Netflix (NFLX) and other streaming companies luring away traditional cable customers.

Shares of Comcast were falling 1.4% to $36.31 on Thursday afternoon, with the video losses coming in at the mid-point of the revised guidance that the company provided in September. But Charter was tumbling more than 8% to $316.50 as it reported greater-than-expected subscriber losses and also missed forecasts for other key metrics.

Comcast badly wants to hold onto its video subscribers, although Chairman and CEO Brian Roberts told investors during a Thursday morning investor call that the cable operator has been preparing for the world of cord cutting.

"We anticipated this shift," Roberts said. Comcast invested in its Emmy-winning X1 entertainment operating system that allows users to watch Netflix or Alphabet's YouTube via its platform, developed a remote control that recognizes voice commands and launched the Xfinity streaming app, among other initiatives that enhance its video service.

When customers cut the cord to Comcast's pay-tv offering, Roberts and other executives suggested, they don't kill the cable operator's model.

"Broadband connectivity, both residential and business -- that's now a $20 billion-year business," Roberts said.

"That is a big portion of our company. That's growing at double-digit revenue growth, and it is very accretive to our margin." Over the next five years, he added, broadband usage will only increase with the growth of the Internet of things, smart home applications, virtual reality, 4K video, smart electrical grids and other applications.

Cord cutting actually improves some of Comcast's metrics, cable unit CEO David Watson told investors.

While Comcast still wants customers to buy a package of video, mobile phone service, home security and other services, as the company has said that the bundle of services reduces customer defections. Or course, the package also boosts revenues. At the same time, though, Comcast actually has higher profit margins if consumers cut out other services. "The economics are very encouraging if they do select broadband only," Watson said, noting not only the higher profit margins but also the lower cost to deliver just broadband.

Comcast prepared investors for the subscriber losses back in September, when it warned that it would lose 100,000 to 150,000 video subscribers. Without hurricanes Harvey and Irma, CFO Mike Cavanagh said, video subscriber losses would have been 105,000 -- toward the lower end of the previous guidance.

Meanwhile, Charter's video losses were more than double the 40,000 that Wall Street expected. Wells Fargo analyst Marci Ryvicker noted that $10.46 billion in third-quarter revenue and $2.84 billion in Ebitda were below consensus.

The market's reaction on Thursday might have been less negative if Charter had warned investors as Comcast did. "When Comcast infamously cut their Q3 unit growth guidance in September, investors were quick to cut their numbers for Comcast," Craig Moffett of MoffettNathanson LLC wrote in a Thursday report. "They were slower to adjust their numbers for Charter. They should have."

Charter "missed an opportunity to reset investor expectations" Moffett suggested. Also, rumors that Softbank, Verizon or Altice were interested in buying Charter also boosted the company's valuation, which Moffett wrote "had gotten distinctly out of whack" with Comcast's.


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