Comcast’s Earnings Shockers: Ignore The Hype, There Was More Important News

Summary:

• Comcast’s potential spinoff of its linear cable networks is unlikely to have a significant impact, hence management’s efforts to temper analyst excitement.
• Management’s proposal to find a partner for the Peacock streaming service is intriguing, but fraught with complications, including data control and others.
• Comcast’s ACP losses were lower than expected, aided by new NOW Internet packages, but future broadband losses remain uncertain.
• The NBA deal is now admitted by management to be a loss leader. Loss leader strategies rarely work in streaming, making my concerns about the deal even worse.

Well, that was certainly unexpected.

Any of my regular readers know that I like to find aspects of a company that my fellow Seeking Alpha authors haven’t covered, to avoid making readers sit through repeats of past articles. My Comcast Corporation (NASDAQ:CMCSA) articles usually follow this same pattern. However, there seemed to be some positive reaction to my recent Charter Communications, Inc. (CHTR) article’s more broad-based approach.

Even though I know everyone will probably write about it, I can’t talk about Comcast earnings and not discuss the spinoff potential. But I encourage investors not to get too distracted by it. Frankly, it’s unlikely to mean very much even if it happens.

Meanwhile, I think it’s important not to lose sight of the more operationally immediate disclosures that were in Comcast’s report. So I’m going to try to get to all of them quickly.

I also think there were a few, more subtle reveals in Comcast’s earnings report about closely guarded industry secrets that outsiders like us almost never get to see. But that would be a long article in and of itself. Those are what I really want to talk about, but those will have to wait.

Resurrecting The Warner Spinoff Idea

Comcast’s earnings call following its Q3 earnings report was, leading into it, not really expected to be anything special. Obviously, cord-cutting remains rampant, but with the football season now fully underway Q3 usually sees cord-cutting abate at least somewhat. And Epic Universe, Universal’s newest theme park addition, won’t open until next year.

The quiet lasted less than five minutes. The noisemaker was the announcement in the prepared remarks that Comcast management is now giving serious consideration to a spinoff of its linear cable networks. Management basically spent the rest of the hour dialing down expectations that it will have anything to announce in the immediate future, but its success at stilling analyst excitement was middling at best.

Will it happen? No idea. On a certain level it makes sense, the market seems to always reward companies for separating legacy from growth assets even though logically the cash flow from both should be the same before as after.

Many may remember that Comcast actually isn’t the first to have come up with this idea. The proposal largely tracks one made by media analyst Jessica Ehrlich at Bank of America a few months ago. Her proposal was that Warner Bros. Discovery, Inc. (WBD) – currently mired in a whole host of difficulties, not least of which is that Comcast stole the NBA out from under it – should separate its own cable networks from the core company. The proposal received wide coverage, including a thorough analysis by me.

Less commonly remarked upon, however, was that there was a second component to Ehrlich’s proposal: that after spinning off, the linear legacy nets should look to merge with the linear nets of other companies, essentially gathering the entire dying stack of the cable bundle under one roof.

The Second Step Of The Dance

Other companies might well be interested in such a maneuver, if Comcast took the first step and got the ball rolling. Warner Discovery, Paramount Global (PARA) and The Walt Disney Company (DIS) are the other three obvious contenders since two of them have already explored such spinoffs themselves in the past. The third, Paramount, might be a little harder since it is already involved in a corporate transaction of its own and the Ellison’s have presumably put a sort of ‘soft freeze’ on major transformative transactions until they get in the office properly and have time to settle in.

Fox Corporation (FOX) is somewhat less likely. They already sold off everything but their sports and news operations, which are the only categories of cable networks that Comcast and everyone else will probably want to keep, so there’s not much to kick in from the Murdoch’s side.

We’ll ignore for now the obvious antitrust implications of taking all the component content pieces of what is already one of the most abusive monopolies in America and combining them. Let’s assume for a moment the government would actually allow this to happen. That assumption probably became much more plausible with the decisive election victory of President Trump anyway, although the presence of Vice-President-elect JD Vance has to give at least some pause.

Still, Vice-Presidents don’t have quite the influence that some of them like to pretend that they do, so most likely it’s all systems go for mergers for the next four years.

Comcast’s Unique Perspective

However, unlike most of these other players who might follow Comcast down the rabbit hole, Comcast is not just a media company. It is also a cable company. It sells both linear TV networks and the linear bundle that those networks are sold in.

The whole thesis of Ehrlich’s letter was that the linear network SpinCo would be in a position to buy linear networks at attractive valuations and then negotiate with more leverage against distributors.

But it seems highly unlikely that Comcast would be willing to let go of these networks unless it had already decided that it was willing to say no to any oversized price demand their new owners might make for them. In other words, Comcast the content company is almost certainly selling only those networks that Comcast the cable company has already decided it is comfortable dropping if push comes to shove.

This article will be long enough without me going into the veritable legion of complications that would also arise operationally from a company that has had cable and broadcast under one roof for decades and trying to parcel them out into two or more pieces. Suffice it to say, management’s “trial balloon” seems more like hot air than a hot tip. It is maximum complication for what seems likely to be minimal gain.

The Real Point Of Floating The Balloon

To be clear, I give Comcast management enough credit that I believe they already know this. The purpose of this proposal, I believe, is not to launch some long-shot SpinCo scheme in the expectation it will actually restore the linear bundle to growth, but simply to dangle the bait as is. The purpose of the offering is, if you’ll forgive my bluntness, almost certainly simply to see if they can find one last sucker to pay vastly inflated prices for a dying linear business.

The common wisdom is that there are none left, but that is precisely what we all thought before David Zaslav at Discovery bought WarnerMedia from AT&T Inc. (T) for $97 billion including debt. Two years later the combined company’s Enterprise Value was below $60 billion. Comcast only needs one private equity shop, telecom provider, tech giant or smaller media partner to bite.

I have no objection to trying to find such a creature, provided operational disruption from this long-shot bid is kept to a minimum. Remember that Disney’s Bob Iger had a similar “all options on the table moment” a year ago, and ultimately nothing got sold, for all the same complicated reasons I just mentioned. One real effect of the water-testing, however, was to severely demoralize the Disney/ABC troops, who were often the last ones to know about developments in their future.

Comcast will need to make sure that doesn’t happen here. Transparency with not just investors, but with employees will be key. As long as it does that, little harm should come from trying – although I suspect little benefit will come from it, either.

Streaming Strategic Shift

As if that weren’t enough, management also dangled the nugget in front of us that it might be interested in finding a partner for its streaming service Peacock, too.

Once again, this sent everyone practically through the roof clamoring for details and expounding on all the ways it could be transformational; once again, I urge a little more restraint. It’s true that a streaming maneuver could potentially be more significant than a spinoff of a few networks that are almost certainly dying anyway. But it’s not clear how much fire is beneath this smoke, either.

In the first place, Comcast already has a streaming partner; outside the United States, Comcast and Paramount partner together on the SkyShowtime streaming service in much of Europe. This time it specifically referred to Peacock, a service which Comcast has indicated in the past has an overwhelmingly domestic focus. So Comcast is not necessarily discussing a global partnership, just taking another slice of an already partially eaten cake. Globally, it is not completely independent now, and it will not be completely merged even if this goes forward.

Granted, the US is the world’s biggest media market, so a merger/joint venture here is potentially more significant than one in Central and Eastern Europe. But this deal, too, requires sacrifices that neither side of it may be prepared to make.

Sharing Is Caring Too Much To Share

Most media executives have emphasized greatly the past few years the need to get control of not just their content, but the data that is generated when customers access that content. Indeed, it was precisely that need which drove HBO to divorce Amazon.com, Inc. (AMZN) in 2021, the most famous breakup of streaming provider and platform so far, according to then HBO chief Andy Forssell.

“It’s important for us to own the customer. If the viewer is in the app, we can tailor the home page to them. We can tailor what they show them next. We can respond to that in real time.”

Neither Comcast management nor anyone else has given any indication that their assessment in this regard has changed. So any effort to merge streaming services together is fraught with complications. Which of the two parties will yield data control to the other? The way Comcast management is talking, they don’t expect it will be them. But that’s also exactly the attitude their prospective partners would probably take.

Of course, some might say, they’ll just both have access to the data. Problem solved.

Maybe, maybe not. Data sharing is a little bit like cake and cabbage; it’s not really a fair trade if both sides offerings aren’t equally tasty. In Comcast’s case, with a hardware platform but without true digital interactive data, its most “data-parity” dance partner would be fellow cable giant Charter, or perhaps Netflix, Inc. (NFLX) the king itself. Traditional media companies have lower-quality data while true tech companies like Amazon, Apple Inc. (AAPL) and Alphabet Inc. (GOOGL) (GOOG) have far, far better.

But Charter does not have a streaming service to merge with, and Netflix is definitely not interested, so Comcast would have to either aim low or aim high. In either case, the five-year old’s playground “just share” trick probably wouldn’t end the matter.

By the way, that is far from the only obstacle to merging streaming services; there would certainly be others, and at least a few of them almost as fraught with complications. But for now, I think even that one issue illustrates the ongoing difficulties in a situation where everyone wants someone else‘s streaming service to fall off so they can expand their own market share, but no one is doing quite badly enough to get off the stage.

ACP Losses

Another issue that kind of got lost in the shuffle was the Affordable Connectivity Program ending. Comcast reported that its ACP losses in Q3 were 96,000 broadband subscribers; impressive when you consider that the company’s total reported loss was only 87,000. Apparently, but for ACP ending, Comcast would have returned broadband to growth this past quarter.

There are a few cautionary notes here, though. First, as I explained in my recent article on America’s other top-tier cable company, I’m not quite as convinced that the ACP effect will have fully petered out by the end of the year. I already covered this, so I won’t belabor the point here; I humbly offer my other article as perhaps worth a read.

Front-Loaded Or Back-Loaded?

Comcast stock has long been less influenced by the ACP issue than Charter because of its apparently low exposure to it. Charter reported that it had five million ACP subscribers when the program ended; over 15% of its install base. Meanwhile, Comcast had a relatively meager 1.4 million ACP recipients on its books when the program ended

There’s no obvious reason why Comcast would have such fewer ACP subs than Charter; this appears to have been a deliberate choice by Comcast management not to get too overexposed to the program. Regardless of the cause, Comcast had much less room to fall when the program ended.

But the low loss levels I think came as a surprise even to analysts who were bullish on Comcast broadband. Comcast was almost certainly helped in its retention efforts by the launch of its new NOW Internet packages. These are prepaid subscriptions at substantially lower price points than Comcast’s standard Internet high-speed packages.

This is particularly true when considering that Comcast didn’t actually lose 96,000 subscribers this quarter. As management explained during the call, only one-third of those losses are current; the others are a reserve management took in expectation of fourth-quarter losses.

I find that ratio interesting because it is the exact opposite of what Charter reported. They indicated two-thirds of their ACP losses came in Q3 and only one-third in Q4. If management is right that Charter has that backwards, it would suggest sharply higher losses in their future in broadband. However, if Charter’s ratio turns out to be right, the lower base level means that the benefits to Comcast from overshooting would not be nearly so large.

NBA Monetization Strategy Is Questionable

Finally, there were some interesting disclosures around the NBA. From the beginning, I have argued that the NBA deals are massively overpriced and that it is not necessarily a boon to Comcast they were able to steal them out from under Warner. Indeed, the whole reason the NBA deals left Warner’s exclusive negotiating period to hit the open market was because David Zaslav could not conceive that anyone would be foolish enough to offer $2.5 billion a year for a ‘B’ package that frankly is a lot closer to a ‘C’ package than an ‘A’ one. But here we are. How, I and many others have wondered, is Comcast planning to make money on this?

Even management has admitted now that they won’t. I know some have interpreted management’s statement “it’s a long-term” to simply be a reference to the backloaded nature of sports rights that I have discussed in the past; leagues make their money in the year’s early deals and broadcasters make it in the later years.

As management expounded on their answer, however, I believe that they clearly indicated that they’re not sure they’ll turn a profit on the NBA, as such, at all over the life of the deal. Rather, management indicated that they saw the NBA as a loss-leader for scripted content on Peacock. Basically subscribers come for the NBA and then the company has six or eight months to get them hooked on something else coming out of the Finals.

I am highly, highly skeptical that this will work as management expects. I simply have no room left to repeat everything I’ve said in the past on this issue, but I did want to highlight some of my past work on the issue and how the economics of streaming do not reward such ‘overloading’ and ‘loss leading’ as linear TV does. Platform effects are quite real, but when they’re working they do not require loss leaders and when they’re not, loss leaders cannot help them.

More To Come

The bitter irony is that all the ‘news’ Comcast created in its call is probably not going to amount to very much, while I thought there were some very interesting disclosures in the earnings report that signified potential major shifts in the long-term industry trends that were not followed up by the analysts on the call. I hope to return to these more interesting issues soon. However, I know that they are not what is driving the stock’s trends right now, and I wanted to give my perspective to readers about the questions of the day. While I think there is much more to talk about with Comcast, for now, I must leave it here.

Investment Summary

There was nothing wrong with Comcast’s earnings as such, but much of the smoke about its strategic moves may not amount to much, and some management commentary was concerning. The strong results did not convince me to adjust my Avoid rating.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of PARA, AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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