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2Q11 Earnings: Industry Leaders Comcast and DirecTV Report Strong Growth

Providers Turn to Mobile and Online Video Services

After hearing the news that cable giant Comcast (Nasdaq:CMCSA) called satellite leader DirecTV (Nasdaq:DTV) a “serial false advertiser” and plans to sue the DBS provider over its Sunday NFL ticket advertising, I decided to review the 2Q11 earnings of the feuding companies together.

Both providers reported stronger than expected revenues and profits for 2Q11. DirecTV’s revenue was up 13% YoY, while its 2Q11 profit of $701m jumped 30%. Comcast on the other hand saw pro forma revenue grow 9% and profits rise 16% YoY. Despite solid earnings growth, both struggled to add and retain television subs, suggesting that discounted prices for FiOS and U-Verse may have adversely impacted both providers.

Comcast and other cablecos have been losing video subs to Dish and DirecTV for years, but in 2Q11 satellite gains in the U.S. dropped sharply. While DirecTV added nearly 500k subs in 2Q11, only 26k of the net adds were in the U.S., as Venezuela and Brazil accounted for the lion’s share of its growth. By comparison, it added 184k U.S. customers in 1Q11 and 100k in 2Q10. A growing churn rate is of increasing concern for DirecTV ceo Michael White.

“In response (to rising churn), we've significantly stepped up our efforts to closely manage churn in a more targeted fashion. For instance, we further refined our segmentation analysis to identify those customers that are most likely to churn as they get close to the end of their two-year contract, and matched them up with our best agents and best offers. We also increased our upgrade and retention spending for higher quality subscribers.”  

Essentially, DirecTV plans to spend more to retain customers, which will translate into compressed operating margins. Its margins from U.S. operations dropped in 2Q11 and look for that trend to continue as its retention efforts increase. 

DirecTV’s top line growth could also suffer over the next few periods, thanks to its free NFL Sunday ticket promotion which Comcast claims is laden with potential fees and penalties. DirecTV has historically charged a monthly fee for its NFL package, but decided to drop the fee for the 2011 season—expecting an influx of new subs in return. Subscriptions however remained relatively flat, and it will lose the NFL fees from existing customers.

While Latin America bolstered DirecTV’s 2Q11 results, Comcast benefited from a strong performance from its NBC Universal segment that it acquired in 1Q11. On a pro forma basis, revenue jumped 17.1% YoY for the division in 2Q11—as broadcast and filmed entertainment revenue rose around 20%. It was the same old story for its cable communications segments—television revenue was flat as video subs were down, high-speed Internet revenue was up 10% on improved broadband penetration, and its business services delivered impressive 45% YoY growth.

In order to retain and attract television customers, both Comcast and DirecTV are expanding their mobile and online video services. Comcast is much further along in the process, offering video on demand with XFINITY over the Internet and through its XFINITY mobile aps for smartphones and tablets. DirecTV however appears poised to ramp up its mobile video strategy, hinting of its interest in Hulu (partially owned by Comcast) on its 2Q11 earnings call. The main question however remains: how much incremental revenue can be earned through mobile and Internet video?

“I think suffice it to say, we have consistently said that we want to make sure that we can make DIRECTV available anytime and anywhere our customers want it. The Hulu software has some nice aspects to it, but you also have to kind of form a judgment about its business model and what you think that business model can generate,” said White.

Overall, 2Q11 on paper was a solid quarter for both Comcast and DirecTV, but the areas of their 2Q11 growth are not sustainable. DirecTV admitted its Latin America business was volatile and that 50% growth cannot be expected in the future, while Comcast said with regards to NBC Universal, “there'll be some hits and misses and more volatility.”

Where Comcast however can benefit from its diversified service offerings and its high margin and growing business segment, DirecTV is reliant on television subs for growth. Unable to offer its own triple plays, programming is where DirecTV has won customers in the past. Adding mobility to its programming appears to be what DirecTV believes will grow its business in the future.

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