mermigas on media

Cable's data, voice biz encroaching on video

Despite all the fuss about online video and the stampede of television and film producers into digital downloading, at least one major industry player concedes that video content is not the long-term be-all and end-all of the new-media age.

Comcast Corp., the nation's largest cable operator, says that within the next several years half of its cable subscribers will not be taking video programming services from the company but rather data and voice services that don't pose copyright issues but present plenty of untapped opportunities.

"Over the next two or three years, 50% of our subscribing customers will not be in video. Half of our business will be transformed," Comcast chairman and CEO Brian Roberts said last week during a Citigroup media investor presentation. If the prediction that Comcast bases on its core business run rates holds true, it will have dire implications for the hundreds of video companies attending this week's NATPE conference in Las Vegas that are fighting for their share of space on cell phone, television, computer, MP3 and other screens where future demand may wane.

Comcast is not alone in introducing the contrarian notion that video might be subdued by stronger emerging data, voice and transaction services for consumers and for businesses by decade's end. Citi- group analyst Jason Bazinet predicts that by 2010, cable and satellite providers will lose video subscribers as consumers become more scattered among an endless array of personalized data and voice services across competing platforms that thread through the 115 million TV households that will exist by then.

With broadband access growing about 20% annually to about 86% penetration, or 71.4 million households, by 2010, the commoditization and "homogenization of service offerings" across telephone companies, cable, satellite, cell phone, wireless and other communications networks is inevitable, Bazinet says.

Multichannel video services that already enjoy nearly 79% penetration in the nation's 110 million TV households as well as the content creators that supply them risk slowing growth and market shares by the sustained boom in user-generated content. Content saturation will shift value from big traditional players at the top of the media food chain to the middlemen content aggregators and packagers including Google, Yahoo! and Apple, Bear Stearns analyst Spencer Wang says.

At the same Citigroup media conference last week, Peter Chernin, News Corp. president and chief operating officer, also warned about overestimating the profit potential from slippery user-generated content that can be picked up everywhere because it might have limited appeal to consumers and questionable value to marketers.

So, in spite of its public proclamations about the importance of cable's position to offer the killer "triple play" app of video, voice and data services, Comcast is quietly repositioning itself for the ongoing transformation to an Internet Protocol-driven world that will see 50% of its subscribers shift out of video over the next several years. Pali Capital analyst Richard Greenfield points to Comcast's recent $1.3 billion investment in wireless spectrum as just the first in what will be strategic "big-picture acquisitions to enhance its long-term flexibilities." Wild speculation persists that Comcast will use its $3 billion-plus free cash flow to buy Sprint or RCN, or a big content player a la Viacom or NBC Universal.

However, Comcast's recent widespread content alliance with the Walt Disney Co., its foiled acquisition target, marks a continuation of content access through numerous partnerships, its prudent organic development of themed content hubs such as G4 and FearNet and its targeted content investments in regional sports and specialized networks such as E! Entertainment and the Style Network.

Although half of its current $111 billion equity value is related to video, Comcast is becoming less dependent on video price increases to sustain revenue growth as it holds steady its annual $5 billion program cost base even as premium channels, pay-per-view and video-on-demand pricing increases slow, depending upon the timing and quality of available content. In fact, Comcast's 2007 innovation to-do list includes more personalized video applications such as celebrity greetings and online TV planners.

Within five years, Roberts said he expects services for small to medium businesses to be growing by at least a 25% compounded rate and contributing $1 billion in earnings. Comcast will invest $3 billion in capital ($250 million this year alone) to generate $12 billion-$15 billion in annual revenue from small businesses, or more than half of the total $25 billion telecom business market in its 21 million-subscriber household footprint.

Bernstein Research estimates that addressable advertising is an untapped $140 billion linear TV market that provides tractability and information about target consumers that will productively and profitably be applied not only to video but to all forms of data, voice and interactive services out of sheer competitive necessity. Services for small and medium businesses could generate $1.4 billion in earnings on $2.6 billion in revenue by 2011, according to Merrill Lynch analyst Jessica Reif Cohen, who has boosted her target price for Comcast stock from $47 a share to $57.

Those are the kind of robust nonvideo numbers that prompted Comcast's Roberts to declare in his remarks to investors last week, "The next five years will be better than the last five years."