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Comcast strategic report
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CAMBRIAN GROUP
TEAM MEMBERS
Richard Creedon, Lead
Cailee Moberg
Alec Larson
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TABLE OF CONTENTS
EXECUTIVE SUMMARY ...... 1
PART I: INTRODUCTION
COMPANY OVERVIEW ...... 4
PART II: ANALYSIS
COMPETITIVE ANALYSIS . . . .9
Overview...... 9
Internal Rivalry ...... 10
Entry Conditions...... 12
Substitutes and Complements.. . ..12
Supplier Power. . ..13
Buyer Power...... 15
FINANCIAL ANALYSIS ..15
Revenue...... 15
Profitability...... 16
Liquidity and Financial Health...... 18
Stock Performance...... 19
SWOT ANALYSIS...... 21
Strengths ...... 21
Weaknesses ...... 22
Opportunities ...... 23
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Threats ...... 23
PART III: RECOMMENDATIONS
STRATEGIC RECOMMENDATIONS . .26
Cable Segment...... 26
NBCUniversal...... 27
APPENDICES ...... 30
REFERENCES...... 39
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EXECUTIVE SUMMARY
Comcast Corporation is a market leading consumer entertainment, information, and communications company, serving over 50 million homes in 39 states and the District of Columbia. The Companys core business is providing video, high-speed internet, and phone services through its cable segment, generating about 94% of its revenues. Additionally, it offers a wide range of entertainment products, from regional sports and news networks, national programming networks, two professional sports teams and their arena, and a number of entertainment-based internet businesses. It also completed the purchase of NBCUniversal in January of 2011.
Comcast is a multiple system operator (MSO), providing its services via a distribution network of fiber-coaxial cables through which it bundles its different products. As a result, opportunities for expansion to reach new customers are very limited, but areas already covered are relatively safe from direct competition from other multiple system operators. Instead, Comcast is faced with intense competition with direct broadcast satellite firms for customers within the regions it currently covers. Additionally, Comcast faces increased competition from providers that are finding ways to circumvent the barriers inherently present in the MSO business model, including Verizon Fios. Considering these aspects of the competitive arena Comcast is competing in, it is evident that it must pursue the goal of increasing penetration in areas covered by its network to increase revenues.
Given the importance of providing popular cable products to pursue its goal of increased penetration, Comcast is faced with the challenge of quickly adapting its services to remain current with evolving technology in entertainment and media. Because it is relatively simple for customers to change providers, it is essential that Comcast continue to offer exceptional products and customer service. Moreover, it cannot fall behind technologically, and must continue researching and developing cutting edge services in specialty cable products such as DVR, On Demand, and HD television. The ultimate challenge faced by Comcasts cable segment is
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grow and evolve with developments in entertainment technology, convincing consumers that its services are complements, not substitutes.
Comcast generates tremendous, generally predictable, cash flow from operations, which it must use to continue to pursue vertical integration through mergers and acquisitions. However, this strategy does expose the Company to additional risks. It is essential that Comcast pursue these purchases with a strong focus and plan designed to target companies that with benefit from synergies from the union. It is always a danger that Comcast will dilute its competitive advantage as a market leading cable provider by buying too many unrelated companies. Therefore, management must ensure that purchases such as NBCUniversal can be efficiently incorporated into a concrete business model for the entire firm. Given CEO Brian Roberts history of success, and substantial experience in the industry, as well as Comcasts healthy cash flow, it is very well positioned to achieve these goals.
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PART I INTRODUCTION
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COMPANY OVERVIEW Company Overview and History
Comcast Corporation, operating from Philadelphia, Pennsylvania, is the largest cable and internet provider in the United States. It was founded in 1963 under the name American Cable Systems, when Ralph Roberts, Daniel Aaron, and Julian Brodsky bought a 1200-subscriber cable system in Tupelo Mississippi. In 1969 it was renamed Comcast Corporation and was incorporated in Philadelphia, and had its IPO in 1972. It continued to slowly expand its cable networks over the next 15 years, both by extending transmission lines of the distribution system, and by purchasing other cable operators. In 1986 Comcast reached the one million customer milestone by buying 26% of Group W Cable.
From this point on, Comcast pursued a more aggressive growth model. With a 50% purchase of Storer Communications Inc. in 1988, it reached two million subscribers, and became the fifth largest cable operator in the country. In that same year Comcast bought American Cellular Network Corporation, entering the cellular telecommunications field, covering a population of two million people. It continued to expand its existing cable and telephone services, making the 1990s a very eventful decade for the corporation. With purchases of Maclean Hunters US cable operations, E.W. Scripps cable systems, Jones Intercable Inc., and Greater Philadelphia Cable Vision, Inc., Comcast reached 6 million cable customers. The Company combined these purchases with the introduction of its first broadband product, the Comcast@Home high-speed cable modem. It also tripled its cellular service territory to cover a population of 7 million, before eventually selling Comcast Cellular in 1999 for $1.7 billion.
During the 1990s, Comcast began to diversify beyond providing cable and internet. It became involved with programming, investing in The Golf Channel, and buying 50.1% of E! Entertainment. Comcast also bought 57% of QVC, a televised home shopping company, as well as moving into sports. It formed Comcast-Spectacor, which owns and operates the Philadelphia Flyers of the NHL, the Philadelphia 76ers of the NBA, and their stadium.
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Additionally, it created Comcast SportsNet, a regional sports channel. In order to pay for these acquisitions, Comcast issued debt, and benefited from a $1 billion investment by Microsoft.
Over the next several years, Comcast continued buying small cable operators, adding an additional two million customers. It bought the Outdoor Life Network, a controlling interest in The Golf Channel, and a further share of E! Entertainment, in addition to launching G4. Over this time period, it introduced the new cable products, high-definition television and video-on-demand. In 2002, Comcast and AT&T Broadband announced their $47.5 billion merger, yielding the largest cable company in the United States. During the rest of the decade, Comcast continued expanding its programming, offering networks such as TV One, Comcast SportsNet Chicago, PBS Kids Sprout, Exercise TV, and FEARnet. It also continued buying other cable operators, and television networks, including the remaining shares of E! and The Golf Channel. Comcast continued developing the diversity of its cable products, offering Digital Voice service, Xfinity, and DVR programming, as well as forming Comcast Interactive Media, a division to develop and grow the Companys Internet businesses. Finally, their strategy of mergers and acquisitions has culminated in the 2011 blockbuster purchase of NBCUniversal with partner General Electric.
The result of the last 48 years of business for Comcast Corporation has led to the development of a company almost unrecognizable from the one that was founded as American Cable Systems. Today, the Company consists of two main segments, Cable and Programming, alongside its other two main business interests in Comcast Interactive Media and Comcast Spectacor. The Programming segment owns and operates national television networks, including E!, The Golf Channel, VERSUS, G4, and Style. Comcast Interactive Media develops and operates Comcasts Internet businesses, including Comcast.net, Fancast, the Platform, Fandango, Plaxo, and DailyCandy. Comcast Spectacor owns the Philadelphia 76ers, the Philadelphia Flyers, the Wells Fargo Center and provides facilities management services. Comcast also owns non-controlling interests in other networks and content providers, as well as wireless-related companies. Finally, Comcast owns 51% of NBCUniversal, along with its associated television networks, digital media, and theme parks.
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Although the Programming segment and these other business interests are important to Comcasts success, historically the Cable segment has been by far the most significant part of Comcasts business model. This segment utilizes a vast network of hybrid fiber-coaxial cables (a combination of fiber optic and coaxial cable) to reach over 51 million homes. Using the latest technology, Comcast is able to provide high-speed internet, video, and phone services, bundled or individual, over its distribution network. With 22.8 million video customers, 17 million internet customers, and 8.6 million phone customers, Comcasts Cable network generated roughly 94% of 2010 revenues. As a result, the Cable segment represents the heart of Comcast, and will continue to be the focus of its business model as it continues to compete with other providers. Comcast benefits from its established distribution network, which passes a large portion of the nations homes and commercial businesses. With a pre-established network, Comcast can focus on increasing penetration (the percentage of homes passed that subscribe) by developing and offering a superior product. Additionally, bundling video, internet and phone together, along with minimal installation costs of simply providing a cable box, allows Comcast to offer a more convenient, dependable product than many of its competitors. One problem, however, is that expanding the transmission lines from this point on will incur increasing marginal costs, as Comcast already covers most of the major population centers in the United States. Providing cable to sparsely populated areas is not cost effective, and Comcast will be at a disadvantage in these areas with comparison to satellite providers.
The best way for Comcast to increase revenues is to increase its penetration, which it is pursuing through the continued development of its cable products. Comcast has been continuing to increase the quality of XFINITY TV, XFINITY Internet and XFINITY Voice. Recent developments have made its XFINITY TV very popular, with highly convenient, customer- friendly On Demand services. Additionally, Comcast is taking advantage of the popularity of Smartphones, creating mobile applications, allowing customers to receive XFINITY TV on Apple and Android devices.
Going forward, Comcast faces multiple challenges. Historically it has benefited from the protection of high barriers to entry in the multiple system operator business model, but recently firms have been finding ways of getting past that obstacle. Direct broadcast satellite firms have been able
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to mimic Comcasts bundled services through agreements with other companies, although Comcast can provide this service at lower cost, allowing for higher margins. Similarly, new entrants, specifically Verizon Fios, have set up similar distribution networks, but offer purely fiber optic deployment throughout the network, not just the backbone as Comcast does. It will become important for Comcast to determine whether or not it must upgrade the coaxial connections that go directly to the consumer in order to remain competitive.
Another distinct issue that Comcast faces is the rapidly developing landscape of media and entertainment. As younger, more technologically savvy customers enter the market, the demand for advanced, specialty products will increase, as well as the demand for services that synch with the latest technology. Comcast will increasingly have to shift its focus from being a primary entertainment provider, to an essential complementary provider, as young consumers spend more time on their mobile devices, and less time in front of their televisions and desktops.
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PART II ANALYSIS
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COMPETITIVE ANALYSIS
Force Strategic Significance
Internal Rivalry High
Threat of New Entrants Low
Substitutes and Complements Low to Moderate
Supplier Power Very Low
Buyer Power Very Low
Overview
In 2010, Comcasts Cable network generated almost 94% of the companys revenues providing cable, phone, and internet connections to its customers in 39 states and the District of Columbia. Because of this revenue dominance, this Five Forces Analysis will focus on what Comcast deems their cable services segment.
The cable television broadcasting market in the U.S. consists of two different types of firms: multiple system operators and direct broadcast satellite companies. While these two segments differ in their distribution or supply methods, both types broadcast cable television, provide phone communication and broadband internet connections to consumers, while also offering a variety of complementary services, such as video on demand, digital video recording, and commercial-free music channels.
Comcast is what is considered a multiple system operators (MSO) firm, which is a company that operates multiple cable television systems. The direct broadcast satellite (DBS) firms are companies that operate satellite television broadcasts that are direct-to-home signals, which can provide cable television, and also phone and internet connections. Sometimes,
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these two types of firms are considered substitutes for each other but both MSOs and DBS companies provide the same end products to their consumers so they will both be included in the internal rivalry section, regardless of their differing distribution methods. Internal Rivalry
In the cable provider market, there are several large firms competing for market share. As mentioned above there are two different types of companies, categorized by how they deliver their product. DBS firms are satellite broadcast firms and their infrastructure consists of satellites in orbit over the United States, several major relay stations on the ground, and then the receiver satellite dishes at each consumer location. MSOs are the other type of cable provider and their infrastructure is much more significant. MSOs have a highly integrated and expansive ground cable system, similar to the power or phone grid, in order to deliver service to their customers. MSOs then need to expand into new geographic areas by physically adding on to their existing infrastructure, which can be quite costly. Cost of infrastructure is not the only barrier to expansion, as MSO cable providers need to procure local contracts in order to operate and this can sometimes force firms to enter bidding wars. The two different types of firms have slightly different incentives for growth based on their delivery method: DBS firms focus slightly more on consumers out of MSO networks while MSOs focus on increasing penetration in current markets essentially, though, these firms are competing directly against each other on price and quality of offerings.
Simply put, the current market for cable is dominated by huge companies. The marginal cost of adding a new customer to a firm already entrenched in the market is very low so this, coupled with huge initial investment costs, leads to extremely significant economies of scale. These economies of scale have caused industry-wide consolidation resulting in a market that is now dominated by just a few firms with Comcast, Time Warner Cable, DirecTV, and Dish Network being the major players. Comcast, after obtaining many competing firms, including Adelphia, is the largest in the industry and is about twice the size of its closest competitor (DirecTV) serving over 50 million homes. It enjoys higher revenues, operating margins and net incomes than any other cable provider.
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The cable provider market is extremely competitive. Characterized by relatively undifferentiated products, television from one provider is very similar to the offerings of its competitors. Companies have gone to great lengths to differentiate themselves in this manner with each company offering different auxiliary services to try and induce more demand. These extra services can differ widely based on content and availability. This product competition along with MSOs geographical limitations and differing cost structures to DBS create a compelling competitive landscape. MSOs dominate regions and so their competition with other MSOs is more geographical in nature, with DBS firms able to add customers anywhere with minimal costs. From a price standpoint, DBS subscriptions are generally lower monthly payments but there is the added cost of satellite installation, which is more costly than cable set-up. This industry, however, does not exhibit major price competition. Basic cable offerings are very similar in size and scope and the prices are often similar as well. Switching cable providers can be an expensive and lengthy process so firms do try to take advantage of these relatively high switching costs by enticing new customers with discounts and specials for starting new service. These offers often include sign-up bonuses or discounts for the first 6-months of service. Also leading to the high competition is the very large exit barriers that these firms have, since all are invested heavily in the infrastructure needed to serve millions of households.
This market, while it does have very concentrated providers, exhibits heavy competition. Because all of the firms in the industry have astronomical investments in infrastructure, consumers are spread, and demand is growing, the companies compete heavily for new customers and look for any advantage through expanding coverage, offering extra services, or lowering price. MSOs have a small advantage in terms of technology because they can more easily bundle cable, internet, and phone services but DBS technology has the advantage of more cost-efficiently reaching remote consumers. Overall, the industry which contains two different types of firms that exhibit similar costs structures in existing areas and similar products is very competitive and figures to remain so in the near future.
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Entry
The cable services industry has entry barriers that are essentially impossible to overcome. Both methods of supply, DBS and MSO, require major initial investments to begin operations. In order for a DBS start-up to enter the market, the less-capital intensive approach, they would need to launch a satellite dish which requires a very high initial capital expenditure. Along with that monetary barrier, the satellite would need to be approved by the US government for orbit, which provides a major regulation barrier as well as additional costs. The MSO market is even more formidable to enter because the ground networks of cable needed to compete are extremely expensive to construct. While MSOs do not face quite as formidable a regulatory barrier, the issues of cable contracts and other regulations do play a significant role. MSOs bid for long-term city cable contracts, which can entrench existing MSOs into geographic locations for long time periods.
The industry in general exhibits huge economies of scale. Current providers already have very extensive distribution networks set up and have major informational advantages as well. Any new entrant would have to gain significant market share in order to compete and this is rendered practically impossible by the serious economies of scale as well as the learned experience from operating the technology, distribution systems, and constantly adding new services to the existing provision. The current market participants also benefit greatly from economies of scope as many firms continue to add features such as on-demand video, 3D broadcasts, HD channels, digital video recording (DVR) services, and so on, as well as an ever-increasing functionality with auxiliary devices such as iPhones and iPads. Substitutes and Complements
When considering MSO and DBS firms as competing in the cable provision market, there are very few substitutes to cable television. General substitutes would include any other form of entertainment such as attending live theater or sporting events, movie theaters, video rental stores, and so on. The potentially most threatening substitutes are in the form of video rentals and internet video. There are increasingly more options and devices for streaming videos such as Netflix and its use with Blu-ray players,
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Xbox, and so on. Internet video however lies in an interesting area. Some say that it can be seen as a substitute to cable, and if current offerings are expanded upon in the future, it could prove a legitimate threat. Comcast, however, has stated that it sees internet video more as a supplement to cable television. Currently, studies indicate that very few, if any, cable consumers are leaving and moving simply to online video. This would lend itself to the conclusion that cable consumers simply augment their entertainment by viewing videos online at sites such as Hulu or Fancast. Given the present state of technology, there is no viable substitute for cable television that can offer the huge variety of entertainment that comes with over 200 channels, sports and music packages, DVR services, on demand entertainment, and more that cable television offers, especially at the current price.
When talking about cable services in general, the list of complements can be split into two basic categories: additional services and home goods. In the additional services category, we have auxiliary cable services that the company provides to consumers. These services include internet and phone services as well as additional cable packages such as extra HD channels, premium channels, and DVR. Currently, MSOs have a slight advantage in disseminating these services on the same, existing connection over DBS. With these goods we see positive cross-price elasticity i.e. when the price of basic cable goes down, more existing customers take advantage of the supplemental cable services. The other category of complements, home goods, is less directly related. The home goods section would include items such as television sets, speaker systems, furniture, and other home-theater equipment. Some cable provision companies have formed partnerships with television-makers in order to market directly to television buyers. Comcast has opened a joint retail store with Sony that offers state of the art electronic devices from Sony while also featuring Comcasts most innovative offerings. Since a large percentage of people buying new high- definition televisions also want cable service, this pairing is very fitting. Supplier Power
Supplier power is an interesting issue with Comcast. The main input for cable television service is the programming itself that is shown on television. Mostly this content is produced by the networks themselves ranging from
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the major networks of ABC, NBC, FOX or CBS to cable channels such as USA, TNT, Comedy Central, FX, and MTV and even to premium channels like HBO and Showtime. Comcast does not pay heavily to supply channels, typically several dollars per month per subscriber for the most powerful channels like ESPN, and even less for others. The programming companies earn their revenue by charging companies for on-air advertising between programming. This diminishes almost any supplier power since these companies just come to agreements with cable providers to distribute their content to viewers. Programming companies earn a very small percentage of direct revenue from cable providers, giving them strong incentives to increase their carriage, even at a very low price. As a result, cable providers face very limited challenges securing television content, although acquiring licenses can take time to complete. Comcast also has a significant stake in the programming market as well. They recently purchased a majority stake in NBC Universal while also owning other programmers such as E!, G4, The Golf Channel, Style Network, Versus, and more.
The other aspect of supplier power would be in the supply of the electronic equipment that is needed for cable service such as cable boxes, remote controls, and cable. The supply of these goods each comes from competitive markets so supply firms cant exert much, if any, power in dealing with cable providers. These companies get around this issue by producing most of this directly related equipment in joint ventures or through strong, long-lasting contracts and relationships.
Overall, supplier power is a very limited issue in the cable provision industry. Producers of the first major input, programming, are strongly incentivized to increase carriage, and therefore cannot compete on price very convincingly. Comcast purchases the other inputs either through joint ventures or from companies in very competitive markets that need to compete with each other for contracts from a small number of cable providers. Most cable providers now are very large companies, and so represent significant revenue sources, and giving them substantial buyer power and can actually put pressure on its suppliers rather than the other way around.
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Buyer Power
Buyer power is the one area in which DBS and MSOs face a noteworthy difference in the Five Forces. DBS consumers sell directly to individuals, as well as to some distributors. They face millions of individual buyers and so they face no direct buyer power. The only pressure they do feel is the indirect power of the competitive market since shopping around for the best price or value has become exceedingly easy with the resources available today.
MSOs also sell directly to consumers but they are limited in two ways in which DBS firms are not. First of all, MSOs can only provide to those people already within its distinct geographic areas. They must have a distribution network set up in the area to reach any potential customers. For a company as wide reaching as Comcast, this issue in particular doesnt represent a huge threat. Its problem is in expansion and rolling contracts. In each area that an MSO pursues operations, it must acquire permission from local governments to do so. As a result, MSOs can enter bidding wars for the right to provide in a certain area. This issue resurfaces every time a local contract runs out, which could lead to new bidding wars, so MSOs are under heavy pressure to avoid violating terms within its contracts, and to ensure their prompt renewal.
Overall there is very little buyer power in the cable provision market. The demand is very widely spread and there are no large buyers so the only buyer pressure exerted by consumers is the indirect forces of supply and demand, which leads to competition on price, scope of offerings, and quality. In the MSO market, however, the need to hold contracts in geographic locations leads to local governments being able to reduce profit margins of MSOs by provisions outlined in the contracts for their area. FINANCIAL ANALYSIS Revenue
Comcast Corporation has reported consistent yearly revenue growth from 2005 through 2010. However, year over year growth slowed every year between 2005 and 2009. Total sales for 2010 were $37.94 billion,
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representing a 6.1% increase over 2009 sales of $35.76 billion. 2010 is the first year sales growth has increased since 2005 (growth in 2009 was 3.9%). This total growth acceleration was seen in all three segments (cable, programming, and corporate and other) and indicates Comcasts recent increased investment in marketing, technology and product development, and new focus on enhancing the customer experience was a strong strategic move for driving revenue growth.
Cable segment revenue was $35.8 billion, up 5.6% from 2009. Programming segment revenue grew by 11.9% to $1.7 billion due to the strength of the current advertising market and improved ratings at E!. Corporate and Other revenue grew by 27.5% to $501 million, reflecting new revenues generated from Comcast-Spectacors acquisition of Paciolan and advertising revenue growth at Comcast Interactive Media.
Revenue continues to be largely driven by the cable segment, which made up 94.3% of 2010 total revenue. Increased cable revenue has consistently been attributable to both an increased number of total customers and increased revenue per customer. The number of customers grew 4.70% in 2009 and 3.99% in 2010. Customers for Digital Video, High Speed Internet, Comcast Digital Voice, and Advanced Services have grown consistently since 2008. However, Video customers, currently Comcasts largest service, have decreased each year.
Average monthly revenue per customer was $111.10 in 2008, $118.23 in 2009, and $128.56 in 2010. This reflects the growing number of video customers that purchase an advanced service, such as HD and/or DVR. Advanced Services customers now represent 51% of total digital video customers. Profitability
Operating Costs as a percentage of revenue have been declining across all three segments for the past several years as Comcast improves the capital efficiency of existing and new investments, takes advantage of economies of scale, and sees improved operating efficiency payoffs from previous investments in product development. Operating Cash Flow grew 6.43% in
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2010 to $14.60 billion and Operating Income was $7.98 billion, up 10.62% from $7.24 billion in 2009.
Comcasts ability to keep SG&A costs down and translate this improved operations efficiency through to the bottom line is evident by the fact that pre-tax Income has increased as a percentage of sales since 2008. However, an income tax increase of just under a billion dollars caused Comcasts after tax Net Income to fall to $3.635 billion, down from $3.638 billion in 2009. Earnings per share (EPS) for 2010 was $1.29, a 2.4% increase from $1.26 in 2009.
The Cable segment continues to be the most profitable, although its increase in profitability year over year is the lowest. Operating Cash Flow for this segment grew 6.39% to $14.56 billion in 2010 and the Operating Margin increased to 40.7% from 40.5% in 2009. Comcast has consistently reduced expenditure on expanding the geographical territory of its cable network for the past three years and has instead focused on improving the penetration within the existing network. Success in this objective each year has improved capital efficiency of the existing cable infrastructure and allowed revenue growth with decreasing capital expenditure.
Additionally, previous investments in product quality and technology allow falling cost of providing High Speed Internet per customer and a decrease in Customer Service and Maintenance Labor costs year over year. These cost reductions were partially offset in 2010 by increased video programming costs and a $280 million increase in marketing of cable services. Comcast stated in early 2011 it plan to continue using Free Cash Flow generated by the cable segment to reinvest in the business and return capital to shareholders.
The much smaller Programming and Corporate and Other segments still benefit from increasing returns to scale as they grow. The Programming segment generated an Operating Cash flow of $469 million in 2010, a 20.6% increase from $389 million in 2009. The 2010 Operating Margin was 28%, compared to 26% in 2009. The Corporate and Other segment consistently reports a loss in Operating Cash Flow. In 2010 Operating Cash Flow Loss was $434 million, a 20.2% greater loss than the $361 million loss in 2009. The 2010 Cash Flow loss includes $80 million in non reoccurring
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transaction costs related to the NBC-Universal purchase, without which Cash Flow Loss would have been 2.0% lower than in 2009. Liquidity & Financial Health
Comcasts operations have consistently provided the company with increasing levels of cash to put towards financing and investing activities. Net cash provided by operating activities in 2010 was $11.2 billion, an 8.7% increase from $10.3 billion in 2009. Free cash flow in 2010 was $5.4 billion. The 22.0% increase from $4.4 billion free cash flow in 2009 reflects growing operating cash flow and a 3% decrease in capital expenditures due to declining expansion of cable infrastructure. These figures do not include the additional cash provided by the 2008-2010 economic stimulus package, which provided Comcast with $301 million in 2010 and $341 million in 2009.
Net cash used in investing activities has been decreasing since 2007 and was $5.7 billion in 2010. Comcast has a history of aggressive acquisition, which has helped it grow inorganically and increase market power in many geographic regions. However, acquisitions have consistently represented a lower percentage of Operating Cash Flow (OCF). This trend is attributable to OCF growth, increased frequency of joint venture acquisitions, and the use of financing alternatives to cash such as the use of NBCUniversals Cash Flow and Assets to self fund the deal.
Net cash used in financing activities was $155 million, including a $1.2 billion stock repurchase and $1.1 billion in dividend payments. These activities are likely to increase over the next year. Continuing strong financial performance and abundance of free cash have motivated Comcast to announce that one of its main objectives for 2011 is increasing value for shareholders. The Company has lined up aggressive steps to pursue of this goal, including plans to increase share repurchases in 2011 by 75% to $2.1 billion and to increase the annual dividend by 19% to $0.45 per share.
Comcast borrowed $3.4 billion in 2010, 119% more than in 2009. The company repurchased $1.5 billion of their debt in 2010, compared to debt repayment of $4.7 billion in 2009. Comcast has consistently reported yearly borrowings of at least 1.6 billion since 2007. The BBB+ corporate debt
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rating, which is considered investment grade and is the highest among its cable competitors, highlights Comcasts ability to continue borrowing at low cost.
Comcast has strong measures of financial health indicating a low risk of inability to cover obligations in both the short and long term. The Current Ratio (Current Assets/Current Liabilities) for 2010 was 1.08. The company has one of the lowest Net Debt/Equity ratios in the industry at 0.57, indicating that shareholders have almost twice as great of a stake in the company as creditors. Comcast does carry $31.4 billion in Total Debt (Long Term Debt + Current Portion) but is not highly leveraged. The Debt Ratio (Total Liabilities/Total Assets) is 0.63. Comcasts ability to cover this debt is very strong: the Coverage Ratio (Operating Cash Flow/Total Debt) was 0.36 for 2010. Stock Performance
Comcast Equity Performance (4/15/2010 4/15/2011)
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Cable Industry Equity Performance (4/15/2010 4/15/2011)
A rebounding cable market and strength in the advertising industry have driven the Cable industry to sizeable gains in the past year. Changes in expectations about the NBCUniversal deal created additional gains for Comcast in particular. Early 2010 saw the culmination of the cable industrys slowdown that had resulted from decreases in consumer spending as a result of the economic crisis. However, throughout the year, improving industry performance made it clear that the slowdown of previous years was cyclical rather than permanent.
Comcasts announcement of the NBCUniversal deal also took place in early 2010 and was accompanied by a drop in investor confidence due to concerns that Comcasts cash flow would be used to finance the deal. Investor sentiment changed as the details of the deal financing were released and it became clear that the cash flow and balance sheet of NBCUniversal would be used as funding, rather than Comcasts cash flow.
Exceedingly strong performance in the fourth quarter of 2010 and the ability for investors to see the insignificant impact the NBCUniversal acquisition had on the companys cash flow caused accelerated gains in the week following the 2010 earnings report release. Estimates of
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NBCUniversals ability to add approximately $2 billion in Operating Cash Flow upside to Comcast over the next four years now indicate that NBCUniversal may actually help increase the Companys return to investors. Officially, Comcast has stated it intends the primary use of NBCUniversals Free Cash Flow in the future to be re-investment in the business and funding of future redemptions by GE. NBCUniversals financials will be incorporated into Comcasts consolidated financials beginning in the first quarter of 2011.
SWOT ANALYSIS Strengths:
Comcast is the largest cable and internet provider in the United States.
o Its distribution networks reach over 52 million homes in 39 states and Disctrict of Columbia.
o It has one of the oldest and most recognizable brand names among providers.
It is a market leader in the development of cable technology.
o It operates using state of the art fiber-coaxial cables, through which it bundles video, internet, and phone services.
o Its cable services are generally more reliable and weather- independent than satellite providers.
o It is simultaneously developing and adjusting its products to fit new demand, offering services on smartphones and other devices.
o It is a market leader in many of the newest video developments, offering superior HD, On Demand, and DVR services.
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Comcast has a long history of very successful mergers and acquisitions.
o Over the years it has grown to the largest provider by purchasing other providers and assuming their network agreements with local governments.
o It has simultaneously expanded into other areas of entertainment, buying and running multiple programming networks, sports teams and arenas, and internet businesses.
o This history of success has culminated in the purchase of NBCUniversal this year.
Weaknesses:
Comcast generates a vast majority of its revenues from its cable segment, which strongly resembles a cash-cow business model.
o It is very expensive and difficult for cable companies to expand into new areas, either because population is sparse, or through difficulties related to gaining government permission to enter new markets.
o It is relatively simple to cancel service, which any of its millions of customers can do at any time.
o There are not many small providers that Comcast can purchase to access new markets now that the industry has become so consolidated.
o The main way for the cable segment to experience growth is to increase penetration in already covered areas, a difficult task.
Comcast relies strictly on a distribution network of physical cables.
o Comcast must compete with satellite providers in all of its markets, while it cannot compete in many markets that these providers can easily reach.
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Opportunities:
Comcast has a very strong balance sheet, and generates huge amounts of cash.
o Comcast can continue to practice its successful strategy of purchasing entertainment-related businesses.
o The recent purchase of NBCUniversal will allow Comcast to more aggressively pursue profits in the programming sector.
o Comcast can invest heavily in R&D, in order to offer superior products, and stay ahead of competitors.
Threats:
Comcast is extremely vulnerable to a change in technology.
o Comcast has incredibly large fixed assets, consisting of a distribution network of cables that reaches over 50 million homes. The development of a better technology that would require the replacement of this network would represent a tremendous cost.
o Similarly, a breakthrough in satellite technology that would allow higher quality, cheaper transmission could make the business of providing through physical cables obsolete.
o Comcast is also vulnerable to newcomers like Verizon Fios, who may be better positioned to translate comparable products using the newest popular technology.
Comcast is also threatened by other companies developing superior products.
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o Should one of Comcasts competitors come out with a new service that is a deal-breaker for many customers, Comcast could suffer a significant hit.
Comcast also faces the threat of government intervention.
o Because it owns so many different programming networks, and especially NBCUniversal, Comcast faces the risk of government sanctions and scrutiny.
o In the past, the federal government has imposed restrictions on the percentage of the market any one provider can serve. Although those and other restrictions are not currently an issue for Comcast, changes in restrictions, or significant growth, could introduce new problems.
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PART III RECOMMENDATIONS
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STRATEGIC RECOMMENDATIONS Cable Segment
Comcasts cable segment is the most important part of its business model, generating about 94% of 2010 profits. Although most of its high profile developments in recent years have fallen outside the cable segment, it is essential for Comcast to focus on maintaining its dominance as a provider of video, internet and phone services. Because Comcast is a multiple systems operator, it relies on establishing physical distribution networks to service customers. As a result, expansion of distribution networks is entirely dependent on local licensing agreements. Therefore, once an MSO has established itself within a market, it is extremely difficult and cost- ineffective for another MSO to attempt to enter that market. Keeping this in mind, Cambrian recommends that Comcast continue to maintain its positive relationships with local agencies, and focus only on expanding its distribution networks to match population shifts in areas it already covers. However, in the unlikely event that a rival MSO company terminates its licensing agreements, or Comcast is able to identify a large enough population center to allow profitability, it must be ready to enter that market with all possible speed. Finally, Comcast must also be ready to acquire any MSOs that might become available for sale, assuming that the price is low enough and that the purchase does not violate current regulations (or reasonable adjustments to regulations).
One final competitive issue facing Comcast from the MSO standpoint is the threat of new entrants that are utilizing more advanced fiber optic distribution networks. Verizon Fios in particular is a growing threat, claiming that its network involving fiber optic cable direct to consumer, not relying on coaxial cable for the final stage, offers a better product. Comcast must determine whether its services are truly lacking in this respect, and if so, when the right time to upgrade its infrastructure will be. This threat is significant, because it could become quite costly to pursue such improvements across a network that reaches over 50 million homes. At this point however, Comcast is not seeing a large impact from this competition, and does not need to take immediate action.
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Although Cambrian is recommending only limited competition between Comcast and other MSO firms (primarily Time Warner Cable) it is essential that Comcast compete with its direct broadcast satellite rivals (namely Dish and DirecTV). Comcast benefits from significant advantages competing with DBS firms in markets that it covers. As an MSO provider, Comcast has the ability to bundle multiple different products together, allowing customers to pick and choose the ideal package. DBS firms have partnered with other firms to combine their video products with internet and phone to compete, but Comcast can be much more efficient providing all three itself, giving it a significant profitability advantage. Another advantage of the MSO provider is that the signal is sent out through a physical distribution network of fiber-coaxial cables. Therefore, customers of MSO firms never lose service through bad weather, or blocked signal, benefiting from a more reliable product. Focusing on these advantages, Cambrian recommends that Comcasts top priority is to continue its excellent history of developing and maintaining cutting edge products to maintain current customers, and take new ones away from DBS firms, increasing penetration in the 50 millions already covered.
As increasing penetration must be the main focus of Comcasts cable segment moving forward, it management must pursue significant research and development to create products that serve customers changing demands. Comcast must identify changing trends in how customers wish to use video, internet, and phone services, and design products that meet demand. One of the biggest changes occurring in entertainment today is the growing popularity of mobile devices. Comcast has done an excellent job so far of keeping its products current with the development of new technology, especially in smart phones. It must continue this process, ensuring that its products are viewed by consumers as complementary entertainment goods, not substitutes. NBCUniversal
Moving forward, Comcast is shifting away from its historical division of the company into a cable segment, a programming segment, and two subsidiary companies in Comcast Spectacor and Comcast Interactive Media. The Company will report five different segments, but realistically will be organized around two main components: cable distribution, and
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NBCUniversal. Stephen Burke, considered the logical heir to current CEO Brian Roberts, has been moved to head NBCUniversal, to which Comcast has added national cable programming networks, regional sports and news networks, and several of its internet businesses. This shrewd move will allow Comcast to focus the efforts and coordinate the interests of a varied group of businesses more efficiently. Giving Stephen Burke ultimate control over this number of subsidiaries will allow Comcast to design and implement focused strategies moving forward. It is very important that Comcast view these related business as part of its coordinated approach to providing entertainment services.
On the other hand, the NBCUniversal deal does raise some serious issues for Comcast. NBC itself is widely diversified across entertainment services, and depends significantly on revenues from its theme parks, and sales at the box office. Buying NBC now exposes Comcast to the additional risks involved in these two areas, which are far outside Comcasts traditional area of expertise. It will probably take some time for Comcast to develop the kind of competitive advantage that it has in cable providing, if it ever can. There is also another issue stemming from the merger, that of the Hollywood culture of NBC that is not present in the MSO business model. Comcast will have to exert significant energy developing a new corporate identity that can accommodate NBCUniversal within the culture that has allowed it to be so successful over the last 40 years. It seems that investors, worried about these issues, had been holding Comcast below fair value, but relaxed their concerns after the deal went public. Comcasts share price climbed 13% in the month following the deal, indicating that investors are comfortable with the price paid for the merger, and impressed with the earnings report. Over the last two months the share price has moved around a bit, but is within 3% of its 3-year high.
Additionally, Comcast must continue searching for companies and programming networks that it can acquire in its historically successful process of vertical integration. Comcasts cable segment generates tremendous cash flow, but is limited in its expansion prospects, so it is important for Comcast to continue investing in positive net worth projects. While it is sometimes worrying when companies lose sight of their initial model, buying up unrelated businesses, Comcast has done an excellent job of targeting entertainment opportunities that fit well with Comcasts focus,
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and benefit from acquisition. It is essential that Comcast continue to pursue this strategy, although it must be careful to avoid regulatory issues.
One final opportunity that Comcast can pursue is the ability to expand its programming to foreign countries. Although it cannot provide cable to customers outside its networks, there is no reason why Comcast should not consider expanding channels to reach foreign viewers. One particular area of expertise is within sports channels. Historically Comcast has been a market leader in forming and developing sports channels, and it could probably apply its knowledge of this industry to a number of different markets.
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APPENDICES Appendix 1
Comcast Income Statement
(In Millions, except earnings per share figures)
2007 2008 % 2009 % 2010 %
REVENUE 31,060 34,423 10.83% 35,756 3.87% 37,937 6.10%
Operating expenses 12,334 13,639 10.58% 14,380 5.43% 15,250 6.05%
Selling, general and administrative expenses 6,940 7,652 10.26% 7,662 0.13% 8,091 5.60%
19,274 21,291 10.46% 22,042 3.53% 23,341 5.89%
OPERATING CASH FLOW 11,786 13,132 11.42% 13,714 4.43% 14,596 6.43%
% of Sales 37.95% 38.15% 38.35% 38.47%
Depreciation expense 5,107 5,457 6.85% 5,483 0.48% 5,539 1.02%
Amortization expense 1,101 943 -14.35% 1,017 7.85% 1,077 5.90%
6,208 6,400 3.09% 6,500 1.56% 6,616 1.78%
OPERATING INCOME 5,578 6,732 20.69% 7,214 7.16% 7,980 10.62%
% of Sales 17.96% 19.56% 20.18% 21.03%
Other income (expense)
Interest expense (2,289) (2,439) 6.55% (2,348) -3.73% (2,156) -8.18%
Investment income (loss), net 601 89 -85.19% 282 216.85% 288 2.13%
Equity in net income (losses) of affiliates, net (6) (39) 550.00% (64) 64.10% (141) 120.31%
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- - Other income (expense) 522 (285) 154.60% 22 107.72% 133 504.55%
(1,229) (2,674) 117.58% (2,108) -21.17% (1,876) -11.01%
Income before income taxes 4,349 4,058 -6.69% 5,106 25.83% 6,104 19.55%
% of Sales 14.00% 11.79% 14.28% 16.09%
Income tax expense (1,800) (1,533) -14.83% (1,478) -3.59% (2,436) 64.82%
NET INCOME FROM CONSOLIDATED OPERATIONS 2,549 2,525 -0.94% 3,628 43.68% 3,668 1.10%
Net (income) loss attr. to - noncontrolling interests 38 22 -42.11% 10 -54.55% (33) 430.00%
NET INCOME ATTRIBUTABLE TO COMCAST 2,587 2,547 -1.55% 3,638 42.83% 3,635 -0.08%
% of Sales 8.33% 7.40% 10.17% 9.58%
Diluted earnings per common share $0.84 $0.87 $1.26 $1.29
Dividends declared per common share $0.83 $0.86 $0.30 $0.38
Diluted weighted-avg. number of common shares $ 0 2,885 2,820
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Comcast Balance Sheet
(In Millions)
2007 2008 2009 2010
ASSETS
Current Assets
Cash and cash equivalents $963 $1,195 $671 $5,984
Investments 98 59 50 81
Accounts receivable, net 1,645 1,626 1,711 1,855
Other current assets 961 836 791 966
Total current assets 3,667 3,716 3,223 8,886
Investments 7,963 4,783 5,947 6,670
Property and equipment, net 23,624 24,444 23,855 23,515
Franchise rights 58,077 59,449 59,452 59,442
Goodwill 14,705 14,889 14,933 14,958
Other intangible assets, net 4,739 4,558 4,105 3,602
Other noncurrent assets, net 642 1,178 1,218 1,461
Total Assets 113,417 113,017 112,733 118,534
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses related to trade creditors 3,336 3,393 3,094 3,291
Accrued expenses and other current liabilities 3,121 3,268 2999 3143
Current portion of long-term debt 1,495 2,278 1,156 1,800
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Total current liabilities 7,952 8,939 7,249 8,234
Long-term debt, less current portion 29,828 30,178 27,940 29,615
Deferred income taxes 26,880 26,982 27,800 28,246
Other noncurrent liabilities 7,167 6,171 6,767 7,862
Redeemable noncontrolling interests 250 297 166 143
Total Noncurrent Liabilities 64,125 63,628 62,673 65,866
Total Liabilities 72,077 72,567 69,922 74,100
Equity
Comcast Corporation shareholders' equity n/a n/a 42,721 44,354
Noncontrolling interests n/a n/a 90 80
Total Equity 41,340 40,450 42,811 44,434
$113,417 $113,017 $112,733 $118,534
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Appendix 2
Pro Forma Cable Customer Metrics
(Customers and boxes in thousands, except per customer data; unaudited)
2008 2009 Growth 2010 Growth
Homes Passed1 50,575 51,233 1.30% 51,925 1.35%
Total Video
Total Video Customers 24,182 23,559 -2.58% 22,802 -3.21%
Total Video Penetration of Homes Passed2 47.8% 46.0% -1.81% 43.9% -2.09%
Total Video Net Additions (Losses) (575) (623) 8.29% (757) 21.51%
Digital Video Customers3 17,004 18,415 8.30% 19,740 7.19%
Digital Penetration of Total Video 70.3% 78.2% 7.88% 86.6% 8.37%
Digital Video Additions 1,478 1,411 -4.51% 1,324 -6.15%
Digital Set-Top Boxes3 27,580 36,402 31.99% 49,232 35.24%
Boxes per Digital Customer 1.6 2.0 23.47% 2.5 24.70%
Advanced Services Customers4 7,725 9,158 18.55% 10,120 10.50%
Advanced Services Penetration of Total Video 31.9% 38.9% 6.95% 44.4% 5.48%
Advanced Services Penetration of Digital Video 45.4% 49.7% 4.27% 51.3% 1.57%
High-Speed Internet (HSI)
HSI Customers 14,929 15,930 6.71% 16,988 6.64%
HSI "Available" Homes5 50,283 50,754 0.94% 51,476 1.42%
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HSI Penetration of "Available" Homes2 29.7% 31.4% 1.70% 33.0% 1.60%
HSI Net Additions 1,336 1,002 -25.00% 1,058 5.55%
Voice
Comcast Digital Voice (CDV) Customers 6,470 7,620 17.77% 8,610 12.99%
Circuit-Switched Voice Customers 3 2 -28.57% 0 -100.00%
Total Voice Customers 6,473 7,622 17.75% 8,610 12.97%
CDV "Available" Homes5 46,687 48,406 3.68% 49,767 2.81%
CDV Penetration of "Available" Homes2 13.9% 15.7% 1.84% 17.3% 1.60%
CDV Net Additions 2,021 1,149 -43.14% 990 -13.80%
Combined Video, HSI and Voice Customers 45,584 47,112 3.35% 48,401 2.74%
Combined Video, HSI and Voice Net Additions 2,609 1,528 -41.42% 1,289 -15.65%
Total Revenue Generating Units (includes Digital Video Customers)6 62,588 65,527 4.70% 68,140 3.99%
RGU Net Adds 4,086 2,939 -28.07% 2,613 -11.09%
Average Monthly Revenue per Video Customer $111.10 $118.23 6.42% $128.56 8.74%
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Appendix 3
Statement of Cash Flows and Key Ratios
(In Millions)
2007 2008 2009 2010
OPERATING ACTIVITIES
Net income from consolidated operations 2,587 2,547 3,628 3,668
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
Depreciation 5,107 5,457 5,483 5,539
Amortization 1,101 943 1,017 1,077
Share-based compensation 212 258 257 300
Noncash interest expense (income), net 114 209 160 141
Equity in net (income) losses of affiliates, net 63 39 64 141
(Gains) losses on investments and noncash other (income) expense, net (938) 321 (201) (267)
Deferred income taxes 247 495 832 549
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Change in accounts receivable, net (100) 39 (84) (131)
175 (38) (136) 37 Change in accounts payable and
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accrued expenses related to trade creditors
Change in other operating assets and liabilities (352) (17) (739) 125
Net cash provided by operating activities 8,189 10,231 10,281 11,179
INVESTING ACTIVITIES
Capital expenditures (6,158) (5,750) (5,117) (4,961)
Cash paid for software and other intangible assets (406) (527) (522) (536)
Acquisitions, net of cash acquired (1,319) (738) (88) (183)
Proceeds from sales of investments 1,761 737 102 99
Purchases of investments (2,089) (1,167) (346) (260)
Other 62 (32) 74 130
Net cash provided by (used in) investing activities (8,149) (7,477) (5,897) (5,711)
FINANCING ACTIVITIES
Proceeds from borrowings 3,713 3,535 1,564 3,420
Repurchases and repayments of debt (1,401) (2,610) (4,738) (1,153)
Repurchases of common stock (3,102) (2,800) (765) (1,200)
Dividends paid 0 (547) (761) (1,064)
Issuance of common stock 412 53 n/a n/a
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Other 62 (153) (208) (158)
Net cash provided by (used in) financing activities (316) (2,522) (4,908) (155)
Increase (decrease) in cash and cash equivalents (276) 232 (524) 5,313
Cash and cash equivalents, beginning of period 1,239 963 1,195 671
Cash and cash equivalents, end of period 963 1,195 671 5,984
Comcast Key Ratios
Debt Ratio 0.63
Debt/Equity Ratio 1.67
Current Ratio 1.08
Free Cash Flow / Debt Ratio 0.16
Solvency Ratio 0.12
Debt to Assets 0.27
Net Debt/Equity 0.57
FCF/Total Debt 0.17
Operating Cash Flow/Total Debt 0.36
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REFERENCES
Comcast 2010 10-k filing http://www.comcast.com - Corporate Information http://www.comcast.com - Investor Relations http://finance.yahoo.com/q?s=CMCSK&ql=0 http://www.google.com/finance?q=cmcsk http://www.knowledge.reuters.com/Views/Viewers/PageViewer.aspx?disable PrintIcon=true&fileExt=pdf&docIDs=51610710&id=51610710&docOrigin= Research http://www.knowledge.reuters.com/Views/Viewers/PageViewer.aspx?disable PrintIcon=true&fileExt=pdf&docIDs=51656310&id=51656310&docOrigin= Research http://www.knowledge.reuters.com/Views/Viewers/PageViewer.aspx?disable PrintIcon=true&fileExt=pdf&docIDs=51647277&id=51647277&docOrigin= Research http://pressroom.consumerreports.org/pressroom/2010/01/fiberoptic- providers-are-leading-choices-for-internet-tv-and-telephone-service.html