Executive Summary

In a 2008 CEO exploratory meeting between Apples Steve Jobs and Comcast Brian Roberts, Steve started the meeting emphatically stating “Apple has hundreds of Millions of Customers that love us and Comcast has 20 Million that hate them, why should we considering doing anything with Comcast?” Could time, technology and a dynamic market compel potential competitors to become frenemies? It maybe still early to speculate on the terms or potential fallout, but here are a few things to consider.

Comcast and Time Warner Cable (TWC) recently provided a document with its filings explaining to regulators why they should be allowed to merge. The document distinguishes Apple’s current Apple-TV product from a different set-top box in development. Apples interest in expanding its current Over The Top and Video On Demand offerings are likely focused on Live Linear TV Programming and subscription based revenues.

Apple could theoretically negotiate with the hundreds of local affiliates, national broadcasters and cable outlets but that is unlikely as Intel’s OnCue startup recently proved after failing to launch its Pay-TV service. A hybrid service from other MVPD providers like AT&T, Verizon, Dish or Direct also makes little sense. Cable providers pass 131 million homes while Telco IPTV pass 48 million homes. Cable also has a plug and play advantage over Satellite providers with its required Dish mounted rooftop antenna. Apple could wait for Aereo’s supreme court case to conclude and adopt a similar strategy but time is not on their side nor the technical jurisprudence of our current Supreme Court.

Assets and Leverage

The primary asset causing Apple to reconsider its relationship with Comcast is their legacy Hybrid Fiber Cable network and TV channel carriage/retransmission rights. A new Apple offer would likely include a more affordable and smaller HDTV channel lineup. Apple would see questionable economics from the subscription value alone considering considering Comcast video ARPU is $78/month while costing $35 in carriage and retransmission fees.

Comcast Pay-TV Synthetic Bundles

Comcast CEO Brian Roberts recently stated “we do not want more consumers, we want better customers” meaning customers with incomes that allow higher average revenues per household. This would indicate a potential willingness to hand-off Comcast Digital Starter Pay-TV tier to Apple or potentially add a smaller fourth tier.

If your partner strategy requires you to create a hybrid OTT/MVPD service involving Cable then Comcast/TWC is the only provider you need to convince.

  • Comcast/TWC passes +81 million homes, or 62% of all housing units.
  • Comcast/TWC covers +214 million people, or 70% of the population.
  • Comcast/TWC serves +72.6% of all U.S. cable subscribers.
  • Comcast/TWC serves +30% of all U.S. Pay TV subscribers.
  • Comcast/TWC controls TV Advertising in 9 of the Top 10 DMAs.

Of the nine markets, San Francisco is the highest with 96.2%, with Washington, DC in 9th at 76.4% followed by New York in 10th place with a 40% market share.

Source: Nielsen

The Apple deal would not benefit NBC/Universal in the form of content revenues or ratings as they already have OTT distribution with Hulu+ and others nor was it in Apples deal strategy as they had originally picked TWC as a potential “first partner”.

Comcast/TWC maintains considerable leverage owning 15 regional sports networks that would dictate a major deal advantage.

Depending on where Net Neutrality regulations fall out, they could assert leverage with 36% of fixed broadband subscribers, and require Paid Peering or Content Delivery Network fees.

Pay-TV Market Outlook

Nielsen’s 2015 Advance National TV Household Universe estimates there are 116.3 million TV homes in the U.S., up 0.4 percent from the 2013-2014 estimate indicating extremely low organic growth for the industry. Meanwhile Telco and Satellite providers find growth in Cables TVs wake of dissatisfied consumers.

Pay-TV

Pay-TV net subscribers losses for 2013 totaled -104,521. The declining trend that has continued over the past four years may indicate a larger systemic problem with the Pay-TV business model and/or ineffective consumer value propositions.Pay-TV Net Subscribers

TV Consumers Behaviors

Live Linear programming still dominates viewing behaviors on the big screen.

Source: Experian

21% of viewers using TV Everywhere have growing expectations in and outside the home.

Source: Adobe Digital Index | U.S. Digital Video Benchmark Q1 2014

Pay-TV providers continue up-selling consumers from their basic programming tier, bundling an average of 189 mostly HD channels while viewers average 18 channels per household with 80.5% of individuals watching 10 channels or fewer.


Network broadcasters are loosing prime time audiences and Pay-TV subscription value due to shorter seasonal schedules, declining interest in TV programming and increased commercials.PrimeTimeTVMillennials embracing technology and subscription VOD to fulfill the expectations for commercial free binge watching with original programming and full season first releases.

behaviorsTraditional coach potatoes are being displaced by cord-cutters, cord-shavers and cord-nevers.

Source: Experian

Digital natives are early adopters of technology, have different values when it comes to digital media and entertainment and exhibit increasingly different behaviors.


Value and Satisfaction


Digitalsmith Q1 2014 Video Discovery Trends reports that 5.7% of Pay-TV respondents switched providers in the prior three months, an additional 13.6% plan to “cut” or “change” their current Pay-TV service or “switch to an online app/service” in the subsequent six months. In Q1 2014, dissatisfaction among respondents was at a 22.2% multi-year peak.

Subscriber Retention

Slow organic TV household growth, new competitors, changing values, and shifting millennial behaviors provide Comcast incentives for disruption and combinatorial innovation.

Market specific playbook negotiations are used to retain price shopping/value switching customers irritated with the 6.1% annual rate hikes and enticed by competitors with low introductory pricing. Despite its retention tactics Cable providers experienced significant Net Losses in 2013, primarily in ultra dense markets and largely due to the pricing tactics of Verizon FiOS and AT&T u-Verse who added 1,460,000 multiplay bundles. Satellite providers also added to its subscriber base, many living outside the reach of Cable and Telco networks. Free over the air digital broadcast grew to an estimated +16 million mostly urban homes providing additional pricing pressure on Cable MSO’s basic programming tier.PayTV2013Comcast saw modest growth in Q1, typically MVPDs dominate quarter for growth, it is indeterminable if it can be attributed to Xfinity X1 deployments, promotional pricing or a recent doubling broadband throughput speeds as other cable providers continue loosing subscribers.

Summary

Comcast Pay TV technology investments place them far ahead of other Cable Providers with an internally developed Xfinity STB RDK and tech savy VIPER team. Combating OTT cord-cutting/cord-shaving with Xfinity X1 user experience improvements while slowly unleashing TV Everywhere. Comcast does not report on the number of X1 households but its is estimated to be deployed in less than 2 million homes after 18 months of development and testing. A full deployment of Xfinity X1 will cost Comcast billions while taking multiple years to impact historically poor customer satisfaction scores.

Any potential new revenue growth units outside of the annual rate hikes are likely to come from dynamic ad insertion, addressable advertising and programmatic buying. Cable advertising is projected to grow at a 5.1% CAGR for cable networks and 3.5% for MVPD systems; plus a 16% CAGR for advertising on the online operations of broadcast and cable/satellite/telco companies

Comcast IP video delivery expertise is not what brought Apple to the table as they have historically proven their video expertise with innovative technology. Comcast will not abandon their strategic RDK initiative and begin purchasing Apple-TV STB for its existing customers. A Pay-TV joint venture similar to the iPhone mobile subsidized model is also unlikely, thus negating the possibility for any combinatorial magic and necessitating tough negotiations over who ultimately owns the customer and bills the subscribers.

The new Apple TV will come with Live Linear Programming and TV Apps tricked out in a new user interface, Siri enabled TV guide and improved “Apple Experience”. The Comcast deal with Apple will improve investor confidence demonstrating that Comcast can adapt its value chain in a Pay-TV market full of digital disruption, segmented value and minimal new homes/subscriber growth for the near term. They also might eventually benefit from Apple’s QNX in Car development program if they can get past the term sheet. Comcast will also gain public relations points with regulators as they lobby for TWC acquisition. Most importantly, Comcast gets to focus its Xfinity roll out on high margin subscribers while Apple gets to deliver a long anticipated “New Product Category”.

Four questions remain.

  1. Will Comcast abandon its basic programming tier or create a fourth tier?
  2. Will Apple abandon Original Programming,  Ale-Cart, or Ad free TV?
  3. Will the FCC/FTC challenge an Apple/Comcast deal?
  4. Will the FCC sign off on DCAS or provide Apple a Separable Security (CableCard) waiver?
The BIG Picture

FCC Report on Cable Industry Prices
Senate Hearing on Comcast TWC Acquisition