Comcast Reports Strong 3Q as it Preps Wireless Launch

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By Tim McElgunn

Oct. 27—As Comcast prepares to move forward with its long-gestating wireless strategy, the company's core cable business outperformed most analysts' expectations for the third quarter, with business and data services continuing to power growth.

The cable operator lost video subscribers in the quarter, but company executives said that the decline was the smallest in a third quarter in nine years. With more subscribers signing on for the company's advanced X1 platform and associated advanced video offerings—including high-definition TV and DVR services—video revenue increased 3.3 percent compared to the year-earlier period, despite the decline in total video customers. The company reported an increase of 129,000 advanced services subscribers for the quarter. With X1 boxes now installed in approximately 25 percent of its 22.26 million video subscriber homes, Comcast reported video revenue of $5.35 billion for the quarter. Comcast said that it is deploying approximately 40,000 new X1 boxes each day and that it is working to accelerate that pace.

Data subscriptions increased by 320,000 in the quarter, bringing total residential and small business data subscribers to 22.87 million. Average speeds increased as well. Chief Financial Officer Michael J. Cavanagh said during the company's earnings call hat 73 percent of data subscribers were receiving speeds of 50 megabits per second or greater at the end of the quarter. And 70 percent of those subs have the company's advanced gateway installed, Cavanagh said.

The growth in data customers with Comcast's advanced services gateway dramatically increased the total number of dual-mode Wi-Fi hotspots in its network. “Our hotspots now number more than 11.7 million across our footprint compared to 4.9 million in last year's third quarter,” Cavanagh said.

Wi-Fi Network Underpins Mobile Plans

Those hotspots will be a critical enabler of the company's emerging wireless strategy as it begins to design a Wi-Fi first mobile offering that will allow users to move between Verizon's cellular network and Wi-Fi hotspots. Comcast CEO Brian Roberts said on the earnings call that the company will “trial and test some things” as it waits for its agreement with Verizon Wireless to come into effect. The three-year-old agreement, includes a six-month notification period before Comcast and other cable operators can begin offering services on the wireless provider's network.

“But it's an opportunity to take the network and the investments we've made, the successful investments that we've made, and try and see if we can continue relationships and product innovation that the team's working on,” Roberts said.

Comcast will try to build the first successful cable mobile virtual network operator, or MVNO—buying capacity on a wireless carriers' networks and reselling services under its own brand. By allowing users to place calls and access the Internet over Wi-Fi connections and connect to Verizon's network only when an acceptable Wi-Fi connection is not available, Comcast should be able to offer services at a significant discount to traditional wireless carriers.

Roberts demurred on the question of whether the wireless MVNO is just a starting point for the company's wireless ambitions or Comcast sees the need to eventually own its own network. “I don't think we feel that we have to necessarily in any way seek owner's economics,” he said. He also avoided saying whether the company has plans to participate as a buyer in the upcoming spectrum auction. Comcast's NBC broadcasting properties, however, will likely participate in the reverse auction that will free up broadcast spectrum and compensate broadcasters for giving up their licenses to that spectrum. “And just to clarify, make sure I was clear, at the NBC side, we intend to participate. The cable side is something we'll continue to study,” Roberts said.

Gigabit Services in 2016

Comcast is also preparing to push its data speeds significantly higher by deploying the latest iteration of the DOCSIS cable networking standard in its plant. DOCSIS 3.1 will support downstream speeds of up to 10 Gbps, with most operators initially using it to offer 1 Gbps services across much of their footprint.

“In terms of DOCSIS 3.1, it's where we have it in the labs,” Comcast Cable President Neil Smit said. “We plan on rolling it out early next year and we think that will give us more speed capability and we're also working on products that will increase the smartness of the internet, not just speed.” Comcast hopes that the higher speeds will help it to achieve continued growth in its data business. “Only 71% of customers have a high-speed connection, so there's market growth opportunity there as well,” Smit said.

In the meantime, the growth in higher-speed data subscriptions during the third quarter pushed revenue up 10.2 percent compared to the third quarter of 2014 to $3.13 billion.

Commercial Services on Track for $5 Billion in Annual Sales

As impressive as its data services growth rate is, Comcast's commercial services arm continues to set the pace for the company. Cavanagh said that Comcast Business Services “has been the second-largest contributor to overall cable revenue growth for 18 of the last 19 quarters.”

Third quarter business services revenue increased 19.5 percent year-over-year to $1.2 billion. The unit is on track to bring in close to $5 billion for the year as it increases penetration of small businesses—which contribute approximately 70 percent of the unit's revenue—and begins a push to capture more of the mid-sized and large enterprise market. Comcast is looking to leverage its experience in serving smaller customers as it moves upmarket.

“If you look under the hood at many of the businesses we are targeting, they resemble an aggregation of businesses, those with branch systems such as banks, retailers and restaurant chains,” Cavanagh said. “In these cases, the needs of the local branches look very much like the small and medium-sized business customers we serve so well today.” That will give the company opportunities with many Fortune 500 companies but Comcast will remain limited in its ability to compete with the largest telcos for truly national accounts.

Voice services growth continued to slow as fewer customers are looking for a landline replacement, instead relying exclusively on mobile phones for voice connectivity. Voice revenue declined by 1.4 percent in the third quarter to $900 million. The decrease came despite an increase of 17,000 voice subscriptions as voice ARPU continued shrinking. Despite the unimpressive results, Cavanagh said, “voice remains an important product for our customers and we believe adds value to the bundle.”

The decline in the voice business was reflected in Comcast's bundled services performance. Both double- and triple-play bundle penetration rose less than one percent. At the end of the quarter, 69.5 percent of customers subscribed to at least two products compare to 68.6 percent a year earlier and 36.4 percent subscribed to a triple play, unchanged from the third quarter of last year.

Cable advertising revenue decreased 0.5 percent during the second quarter, reflecting lower political revenue. Excluding political, the company said, cable advertising revenue increased 8 percent year-over-year.

Total cable revenue increased 6.3 percent to $11.7 billion. Total revenue per customer relationship was up by over 4 percent to $143 per month.

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at tmcelgunn@bna.com