Comcast Corporation (NASDAQ:O:CMCSA) is a largely healthy business. The company has reported consistent topline growth in at least the last four years. The latest quarter (3Q2015) was also marked by a decent uptick in revenue to $18.7 billion from $16.79 billion a year earlier. Revenue beat consensus expectation of $18.03 billion while EPS of $0.80 was in-line.
Despite the impressive operating results, Comcast Corporation (NASDAQ:CMCSA) isn’t comfortable. The management feels the company needs to modernize to stay relevant, at least, if that means creating new sources of revenue and sidestepping the pressures of streaming services such as Hulu and Netflix, Inc. (NASDAQ:O:NFLX).
What is Comcast up to?
The year 2016 is likely to see Comcast invest more in its modernization. Virtual reality and wireless services are likely to feature prominently in Comcast’s modernization agenda in the New Year and beyond.
Virtual reality investments
Comcast Corporation (NASDAQ:CMCSA) has invested in at least three virtual reality startups in 2015, a theme that is likely to continue in 2016 and beyond. In its latest virtual reality investment, Comcast joined with Htc Corp (TW:2498) and Samsung (KS:005930) to back Baobab’s $6 million early stage financing. Baobab creates animated virtual reality films and it has introductory work called Invasion.
Through its venture arm, Comcast also participated in the $30.5 million funding for NextVR Inc., a startup that broadcasts live events in virtual reality format. NextVR’s live virtual reality broadcasts include NBA season opening game and a Democratic presidential debate. Time Warner Inc (NYSE:N:TWX) is another major media backer of NextVR.
In another virtual reality investment, Comcast joined in the $10 million fundraising for virtual reality social media AltspaceVR Inc. in mid-2015.
Why virtual reality?
Comcast Corporation (NASDAQ:CMCSA) is betting that virtual reality can help it expand or at least hold its audiences amid pay-Tv disruption from streaming services. In the last quarter, 48,000 subscribers dropped out of Comcast’s video service. Although the loss was smaller than 81,000 video subscriber departures a year ago, it still showed the threat of online streaming services to traditional media. Perhaps through virtual reality investment, Comcast can slow down video subscriber defection, boost broadband subscription or find new ways to generate revenue.
Wireless services
Comcast Corporation (NASDAQ:CMCSA) is expanding into cellular business in an apparent effort to make up for the pay-Tv subscriber loss and video offensive by wireless carriers such as AT&T Inc. (NYSE:N:T). Towards the wireless services business, Comcast has brought back its previous deal with Verizon Communications Inc. (NYSE:N:VZ). The deal allows Comcast to sell wireless services using Verizon’s network. The company is also working to strike a similar cellular network sharing relationship with Sprint Corp (N:S). Comcast also intends to bolster its wireless offerings using Wi-Fi hotspots. The company operates millions of Wi-Fi hotspots across the U.S.
Comcast has experimented with wireless business before without success, but the management is confident that the latest efforts will pay off.
With the explosion of mobile video, Comcast is betting that venturing into wireless business will enable it to modernize its video delivery. That should allow the company to put an end to video subscriber loss and possibly reclaim its lost video subscribers. The company will also be able to fend off the disruption of streaming services and carriers AT&T, which is getting bigger in video through DirecTV acquisition. In addition to reselling wireless services, Comcast is also keen to tap incremental revenue in the segment by selling handsets. The company’s CEO, Brian Roberts, recently hinted that they might sell phones as part of wireless offerings.
Is Comcast’s core decaying?
Comcast Corporation (NASDAQ:CMCSA)’s core businesses, Comcast Cable and NBCUniversal, remain key operations for the company. Through them, Comcast generates money to investment in emerging markets such as virtual reality and wireless services. Despite intense competition from over-the-top video services and competition from wireless Internet, Comcast continues to strengthen its core operations to protect them against total decay.
In the latest quarter, Comcast continued to stabilize its broadband business, increasing broadband subscribers by 320,000 in the quarter despite the 48,000 loss of video subscribers and the 17,000 loss of voice subscribers. Although video subscriber loss remains an issue of great concern, Comcast lost fewer video subscribers in the quarter than a year-ago quarter.
For the time being, Comcast is relying on NBCUniversal to defend against mobile and online streaming disruptions to its video business. However, NBCU is also providing Comcast with an opportunity to diversify its revenue streams.
Not only is Comcast defending against subscriber loss in its core businesses, but the company is also succeeding in boosting income from each of its subscribers. The company reported in 3Q that its average revenue per user (ARPU) rose 4.3% YoY to $143.12. Despite the loss of video subscribers, Comcast’s video ARPU in 3Q jumped 3.9%.
The improvement in ARPU is also providing Comcast with an opportunity to guard against margins erosion. Increased programming costs are a threat to Comcast’s margins, but the company is finding ways to sidestep the margin pressures, thanks in part to ARPU improvements and cost curtailment efforts.
Pressure points
Video/Internet competition
In the video market, Comcast faces competition from the likes of Verizon (FiOS) and AT&T (U-Verse), whoare aggressively building their video businesses. The overlap of Comcast’s video offerings and rival services such as U-verse and FiOS has continued to increase, reaching 20% and 15%, respectively in most markets.
Comcast’s broadband Internet business is also facing growing competition from wireless Internet providers, who have continued to entice subscribers with high-speed and low-cost Internet packages.
Streaming video threat
Online streaming services are a thorn in the flesh of traditional media companies and Comcast is one of those taking the heat in the rise of over-the-top video services such as YouTube and Hulu.
Programming costs
With the rising programming costs, Comcast Corporation (NASDAQ:CMCSA) may find it difficult to expand cable margins. Although ARPU improvement is helping the company to guard against margins erosion, continued increase in programming expenses could neutralize ARPU improvement, thus putting a dent on margins.
Focus on business services
To diversify its revenue streams within the core operations, Comcast Corporation (NASDAQ:CMCSA) is aggressively building its business services arm, where revenues rose 19.5% to $1.2 billion in 3Q. Comcast business has primarily been consumer-oriented. In the business space, Comcast is initially targeting SMBs, and the campaign there is so far successful.
Capital return
Comcast Corporation (NASDAQ:CMCSA) intends to spend $6.75 billion in buybacks in 2015, having increased the 2015 buyback budget from $4.25 billion. The company’s current buyback authorization is $10 billion.
Bottom line
Comcast Corporation (NASDAQ:CMCSA)’s strategy of strengthening core operations while modernizing its business model gives hope for a better future despite threats from LTE Internet and online videos.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.