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NBCU pins DTC future to declining pay TV audience

Comcast video broadband voice subscribers

In Q1 2019, Comcast’s video business continued to follow the broad decline in traditional pay TV services. Notwithstanding the trend, NBCU is pinning its DTC success on that declining pay TV audience.

Comcast’s traditional pay TV business

The video business continued to decline, with subscribers falling 1.7% in Q1 2019 over the same quarter last year. The company now has 21.9 million video customers (20.9 million residential and 1 million business.) The last time the company showed growth in video subscribers was two years ago, in Q1 2017.

comcast video subscriber losses

The company has made the strategic decision to focus on retaining higher-paying customers and letting the rest leave when they see fit. Last quarter the strategy didn’t seem to be working. Average video revenue per unit (ARPU), which should increase with lower-paying customers leaving, fell. This quarter ARPU showed a healthy increase of 1.5% to $85.8.

NBCU direct-to-consumer service

Comcast still views video through the lens of traditional pay TV. While other broadcasters, like CBS, have jumped into DTC delivery with gusto, Comcast continues to take a more cautious approach. Steve Burke, CEO of NBCU, pointed to NBC’s advertising prowess as a real strength of the company. His strategy is to build the DTC service on advertising alone:

“Comcast cable and Sky have over 50 million billing relationships with customers is a real strength. So, our approach, which we think is very interesting and different, is to take thousands of hours of great programming and make it available free to the vast majority of people who live in the United States or the UK eventually. We think that’s a way to get real scale quickly and we think that’s a way to achieve profitability more quickly than we would otherwise.”

When NBCU releases its DTC service “in about a year,” Comcast clearly intends to make it will be available to everyone with a traditional pay TV subscription (about 73% of US homes) for free. It will likely be given prominence in the Xfinity TV interface. However, it is unclear how much support Comcast will get from other operators in the promotion of the service. Whether the service can grow scale enough to deliver the advertising revenue Mr. Burke is hoping is also unclear.

One clear thing is that the pay TV audience continues to decline. DirecTV lost 544,000 subscribers in Q1 2019, up from 187,000 in the same quarter last year. In the long run, NBCU may be forced to go DTC to all internet users if it is to maximize its advertising revenue potential.

The Hulu relationship

Mr. Burke did not elaborate on whether NBCU would hold back content from other services to support the DTC service release. Specifically, he did not say whether NBCU would continue to distribute content through Hulu, in which it has a minority 30% stake.

Brian Roberts, CEO of Comcast, was the only executive to make any comment on Hulu:

“Hulu’s relationship with NBC, that is very much in everybody’s interest to maintain.”

However, it is far from clear if it is in Comcast’s best interests to continue to support Hulu. Disney has big plans for the service, including taking it to international markets. These plans are not strategically aligned with NBCU at all. As well, Disney is likely to use the service to support Disney+ and ESPN+, both of which undermine Comcast’s traditional pay TV business. It could be that the best option for Comcast is to sell its stake in Hulu to Disney as soon as possible.

[Update: 4/26 Comcast is reportedly in talks to sell its share in Hulu to Disney.]

Why it matters

Comcast’s pay TV business continues to decline, be it at a slower pace than the rest of market.

NBCU will make its DTC service available to all pay TV customers for free.

Comcast continues to give lip-service to Hulu even though the service is no longer aligned with its strategic goals.

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