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XFINITY Instant TV Boasts Lofty Gross Margins

Analyzing Comcast Corp.'s XFINITY Instant TV points to gross margins significantly outpacing virtual service provider competitors. There is also the potential for non-negligible accretive cash flows. The specter of cannibalization looms, but the in-footprint, managed-network formula targeting existing non-video customers suggests limited downside for the streaming service, at least in the near term.

Based on a compilation of 2017 licensing fee estimates by Kagan, a media research group within S&P Global Market Intelligence, Comcast's base XFINITY Instant TV package would boast a gross margin of more than 50% before any other video-related costs such as marketing, customer service, regulatory fees and additional operational expenses associated with the delivery of the product to the end consumer.

Comcast Xfinity Instant TV profitability analysis

The base package includes all of the nation's major broadcast networks, whose content routinely tops consumer must-have charts. It retails for $18, a highly competitive entry price point coming in below the monthly cost of entry-level packages for DISH Network Corp.'s Sling TV and AT&T Inc.'s DIRECTV Now. Add-on packs are available, including "Kids & Family," "Entertainment," and "Sports & News" packages as well as "Premium" and "Spanish Language" options. Replicating the above content-cost analysis also points to healthy margins for the add-on packs, including a whopping 60% for the "Deportes" bundle.

'Comcast's base XFINITY Instant TV package would boast a gross margin of more than 50% before any other video-related costs.'
By zooming in on its non-multichannel (essentially the broadband-only) subscribers, Comcast is betting on a segment that is seen as digitally savvy, likely very much interested in professional video content, but with video-consumption preferences that reach outside of the legacy multichannel ecosystem. We assume that the vast majority of "broadband-only homes" fill their video needs via streaming options.

We estimate Comcast had 4.9 million non-video residential subscribers at the end of the second quarter, providing the company with a sizable market for its new product. 

More than a revolution, the trend toward broadband-delivered skinny bundles suggests a recalibration of the forces at play in the existing TV ecosystem, with distributors and programmers acknowledging the change in viewer preferences and meeting in the middle by tightening offerings and preserving a lucrative distribution model that has stood the test of time.

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Through stripped-down, highly focused bundles, distributors are in a position to offer attractive prices to bring consumers into the multichannel fold. This also works in the interest of programmers, for which revenues generated through licensing fees are paramount. For a broadcast station owner that charges a fee per subscriber for instance, the mode of delivery hardly matters if it translates into a larger (or at a minimum stable) pool of customers.

Legacy multichannel + VSP subscribers, Q1'15 through Q2'17

The VSP model does pose the problem of significantly lower average revenue per user per month for distributors. In a context of markedly lower (and falling) margins and eroding subscriber bases, however, it appears sensible. For cable operators, lower video revenues can be offset by the high-speed data segment, notably through the higher-priced tiers toward which customers gravitate naturally as their broadband needs, often driven by their online-video consumption, increase.

Overall, the limited VSP bundle paradigm weeds out the weakest, least popular programming, insulating only highly sought content, a segment dominated by the major broadcast networks and Hollywood powerhouses like Walt Disney Co. and Time Warner Inc. The model conjures up a future in which already powerful programmers and distributors become even more powerful and where vertical M&A supplants horizontal transactions.

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Aug 29, 2017