Distribution

Smooth Operator

Cable giant Comcast sees bright skies into Xfinity 9/25/2017 8:00 AM Eastern
Comcast’s Philadelphia headquarters has overseen the rollout of new products and reaped the benefits, including boosts in revenue and cash flow.
TakeAway

Comcast is the 'Multichannel News' 2017 Distributor of the Year

There are no flukes in Cable.

Just ask Comcast, which was the first cable operator to report a full year of positive video subscriber growth in a decade, ending 2016 with 161,000 more customers than in the previous year. That Comcast managed to do that just as over-the-top and alternative video delivery systems were proliferating, gaining legitimacy and chipping away at traditional pay TV customer rolls was remarkable enough, but it was no fluke.

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That growth was a planned, concerted effort that not only yielded a video customer surplus, but was also profitable. Comcast finished the year with a 6.6% increase in cable-systems revenue and a 5.6% rise in cash flow. And it did it all the hard way, with no aggressive promotional pricing or special deals to attract customers that will drop the service in six months.

Instead, Comcast put its collective head down and focused on the fundamentals, rolling out new products like Xfinity Home and Xfinity Mobile at a steady pace and pumping hundreds of millions of dollars to beef up customer service.

The path to positive subscriber growth was a multiyear process, starting with the hiring of former Charter Communications CEO Neil Smit in 2010. It was Smit who initiated a multipronged plan to improve customer service, beef up the network and steer the company on a path toward product innovation and network superiority.

Smit stepped away from day-to-day operations in April — he is now vice chairman of Comcast Corp. — and handed the reins to 20-year Comcast veteran Dave Watson, who moves up to Comcast Cable CEO after serving as the cable unit’s chief operating officer for the past seven years, implementing the plans that he and Smit developed. Watson takes over just as subscriber growth is expected to decline in the wake of two massive storms that devastated homes in Houston and Western Florida. Comcast has said it expects the impact of Hurricanes Harvey and Irma to result in the loss of 100,000 to 150,000 subscribers in the third quarter.

MoffettNathanson principal and senior analyst Craig Moffett observed that the declines weren’t that surprising given that the video subscriber estimates, even at best-in-class Comcast, will have to come down.

Infrastructure Advantage
“We’ve spent 18 years repeating a simple mantra: Cable operators are not media companies, they are infrastructure providers,” Moffett wrote in a research note. “Their infrastructure is still advantaged. Comcast will be just fine.”

But the company is confident that it will continue to hit its financial targets, as well as continue its pace of innovation. For those reasons and more, Comcast is the 2017 Multichannel News Distributor of the Year.

For Watson, Comcast’s success has been the result of the company’s decision to stick to three basic tenets.

“The key for us is that we’re very focused on our core set of operating principles,” Watson said. “Staying focused on sustainable, profitable growth, driving innovation, that’s a big part; and third is to continue to improve the customer experience.”

While that may sound oversimplistic, Comcast has managed to make it work. In the past five years (2012-2016), overall revenue has grown at a 6.2% annual clip while cash flow has risen 7.2% per year. This year, the growth is even more dramatic — in the last 12 months between the first half of 2016 and the first half of 2017, revenue has grown 9.4% to $41.6 billion and cash flow is up 10.2% to $14.1 billion. This in a year that has seen competitive pressures increase as Hulu (25% owned by NBCUniversal) launched its Hulu Live offering, AT&T unveiled its over-the-top product DirecTV Now and networks are queuing up to release direct-to-consumer versions of their channels.

Comcast has used the X1 platform expertly in driving forward what Watson said is its newest mantra — becoming an “aggregator of aggregators.” That means not only offering access to subscription video on demand and over-the-top competitors, but embracing them.

Xfinity subscribers can access Netflix directly from their set-top boxes and over the years Hulu, YouTube and music service Pandora have been added to the lineup. Earlier this year, Comcast reached a deal where Sling TV — the over-the-top MVPD service from Dish Network — received a coveted spot on the set-top (mainly for international and multicultural programming). Just last week the cable operator expanded its relationship with YouTube, allowing customers to launch the online video app merely by speaking “YouTube” into their X1 voice remote.

Including those products is all part of the overall strategy of offering customers best-in-class products in almost every category, Watson said.

‘Aggregator of Aggregators’
“We look at each part of our business, every major product area, and we look at innovation opportunities at each one,” Watson said. “With X1, I think we are delivering in its early stages the promise of being an aggregator of aggregators — the best in linear, the best of on-demand, a terrific DVR, a great app, data and applications integrated. Netflix is a good example and soon-to-come will be You Tube. … To me this is constant improvement of our major product areas.”

That’s a far cry from the past, when a Netflix app embedded in any cable operator’s set-top box would have signaled the end of the world. But the evidence continues to mount that SVOD services like Netflix, Hulu and YouTube aren’t replacements for cable, but can complement the service. And making it easier for an X1 customer to access their SVOD subscriptions only enhances the cable operator’s stature in the customer’s mind.

That shift, along with a continued focus on innovation — Comcast still has a mandate to roll out a new product or product enhancement at least once per quarter — has been a key part of Comcast’s success. In the past five months, Comcast has rolled out a new wireless service, Xfinity Mobile, part of its mobile virtual network operator agreement with Verizon Communications; xFi, a cloud-based home WiFi management platform; and enhancements to XFinity Home that allow consumers to remotely control home functions like heating, cooling, lighting and security cameras through their voice remote.

The voice remote, launched in 2015, is one of those product enhancements that has fared even better than its staunchest proponents had hoped. Comcast has deployed about 17 million voice-remote devices and customers now make about 1 billion voice commands per quarter.

“It’s just remarkable,” Watson said of the product.

Comcast has also embraced products from programmers such as AMC Premier from AMC Networks and 21st Century Fox’s FX+, ad-free versions of the AMC and FX pay TV networks available for an additional fee. In an interview, Comcast executive vice president of Xfinity Services Matt Strauss said the offerings are part of an overall evolution of the video product, and of the strategy to entice customers to buy into the entire Xfinity family of offerings, not just one or two things.

Strauss said the strategy could be traced back to Comcast’s initial investments in infrastructure that laid the foundation for the product suite that is available today.

“We’re now at a point where it’s really about scale, and how do we continue to deliver innovative products and services and accelerate how we get deeper and deeper into our base,” Strauss said.

The answer, Strauss said, is to provide elegant, easy solutions to customer problems even before subscribers know they are problems. For example, as the TV audience became more and more fragmented and finding shows grew more difficult, X1 provided a user interface that made it easier to navigate through the thousands of linear and on-demand content choices. Later, X1 added a voice remote, which made navigation even easier.

For high-speed data, the solution was faster speeds. Comcast has increased data speeds 17 times in the past 16 years and by the end of 2017 will have fully deployed DOCSIS 3.1, which will enable speeds of 1 Gigabit per second.

“Speed is important, but access is equally important,” Strauss said. “Most people now connect devices via WiFi. Ensuring we have the best WiFi in the home, as well as the best WiFi out of the home is also very core to the strategy and that’s where you’re seeing us deploy our newest wireless gateway, the XB6 (xFi) which can deliver the fastest in-home WiFi speeds.”

From there, xFi customers would naturally migrate to Comcast’s XFinity Home product, which again incorporates the aspects of other company products, like the voice remote, to control household functions. Comcast is truly selling a bundle, and that bundle is interconnected.

“When we look at the future, today we typically sell on price,” Strauss said. “And the more products you take, the better the price. The challenge there is when you sell on price, essentially you’re making yourself a commodity.

“What we really want to transition to is selling an experience,” Strauss added. “The more products you take from us, you will of course get a better price, but you will also get a better experience. Starting to weave together the portfolio and reinforcing that, I think, is a big opportunity. A lot of that you’re going to see solidly around the home. There is a big opportunity around the digital home.”

The company is obsessed with giving more choice in the video-on-demand side of the business. “We’re breathing new life into what it means to get video,” Strauss said. “Now we have 130,000 choices, the top 100 Nielsen-rated shows, 900 series fully stacked. We added Netflix, not just as an app, but integrating Netflix contextually.”

As a result, on-demand is growing again — this year, Comcast customers are spending an average of 32 hours a month watching on-demand shows, up 20%.

“When people have said video is in a decline, ratings are in a decline, we see something different,” Strauss said. “We see more and more video consumption moving to time-shifting, we see while live ratings may be declining, the total video consumption is increasing, instead that more is happening outside of traditional measurement. It’s like dark matter, people aren’t seeing it, but we think the total video pie is increasing. And we’re continuing to build the platforms and the capabilities to all people to watch TV smarter and on their terms.”

The emergence of over-the-top players has added to that shift and is continuing to challenge the model, Strauss said, but Comcast doesn’t see any compelling reason to join the OTT fray.

“Part of what is happening in the market, especially on the video side, is you are seeing a lot of increased competition, you’re seeing a lot of competitive offers — in some cases you’re even seeing some of these OTT players offer video at negative gross margins. We’re not going to chase that.”

But the evidence is mounting that younger consumers are increasingly looking outside the traditional pay TV ecosystem for their content needs. Pay TV subscribers fell by more than 900,000 in the second quarter, the worst Q2 performance in history. That’s after a record first-quarter loss of more than 750,000 video customers.

Moffett, who raised his rating on Comcast to “buy” earlier this month after downgrading the stock to “neutral” in June, said he sees the company as the standard for the pay TV business. But he also estimated that the MSO will lose almost 1 million video customers in the next five years, ending 2021 with 21.7 million subscribers, down from 22.5 million in 2016. The analyst does see Comcast adding about 5 million broadband customers in that same time frame, finishing 2021 with 31.1 million high-speed data customers compared to 26 million in 2016.

Competition is also heating up. Google’s YouTube TV expanded to eight additional markets earlier this month, growing its total markets to about 48 cities. In addition, AT&T began pricing its DirecTV Now service even more aggressively in the quarter, at $10 per month for any unlimited wireless subscriber, and returned to offering free Apple TV devices with a three-month commitment.

While weakening subscriber metrics shouldn’t come as a surprise, Moffett said, they aren’t a calamity, either. Pay TV companies, he said, still have broadband pricing power, which should help them in reaching financial targets. That’s just what Comcast said when it predicted the Q3 subscriber loss.

Strauss noted that all the panic over OTT and cord-cutting could be unwarranted. There is no doubt, he said that viewing habits are changing, but life stages and household economics also need to be considered.

As an example, Strauss pointed to Xfinity on Campus, Comcast’s multiscreen managed IPTV service for college students. When the product was in development, Strauss said Comcast realized that the last thing college students wanted was to be tied to a set-top box. So the MSO had to rethink the idea, creating a product that allowed students to download the Xfinity Stream app, offered a cloud-based DVR and would let them watch live TV anywhere on campus. The product has been highly successful and, as students returned for the most recent fall semester, it is deployed in more than 100 schools.

“Millennials do watch TV as much as any other segment,” Strauss said. “They just have different needs and how they want to consume and access it.”

That, Strauss said, has led to Xfinity Instant TV — an in-home, in-footprint, managed IPTV service slated for a Q3 launch — as well as ad-free versions of networks that consumers can buy for a fee. Comcast reached a deal with AMC Networks in August for AMC Premiere, an ad-free version of the popular AMC network for an additional $4.99 per month. A month later, FX Networks announced a deal to offer an ad-free version of its flagship FX channel — called FX+ — to Comcast customers for $5.99 per month.

Strauss said those channels and other services like it are just an example of how Comcast’s foresight in investing in content, infrastructure and innovation have translated into meeting needs even customers didn’t know they had.

“The future we’ve always talked about has finally come, at least for us,” Strauss said. “I think that is because of decisions that we made, not six, 12 or 24 months ago, but years ago, based on where we saw the puck going and ensuring that we would have the technology capabilities and the infrastructure in order to deliver upon the innovation that we believed we were going to need to stay competitive. As a result you’re seeing us deliver on a lot of these products and services. But this didn’t happen by accident. It really happened because of very important strategic decisions we made years ago.”

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