D2C’s Ship Is Coming In

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Comcast chairman and CEO Brian Roberts said Thursday what every other cable observer has been thinking for months: the pay TV video business is moving quickly toward a direct-to-consumer, app-based model driven largely by broadband adoption. And any operator who doesn’t see that ship rapidly approaching is liable to get overrun. 

Cable operators have been laying the groundwork for an app-based model for years.   But the rapid decline of pay TV video customers, especially during the pandemic, has increased the urgency to replace the old ways of providing programming.

On its Q3 earnings call with analysts, Roberts said Comcast is taking a three-pronged approach to the business -- providing fast broadband service, providing the content consumers want through aggregation and using its scale and platforms to excel in the streaming business. 

Arguably, that strategy has been going on behind the scenes for awhile. In a research note, Bernstein media analyst Peter Supino said the Comcast results reinforce what he calls the “losing to win” strategy, where cable operators trade heavy video losses for broadband gains, higher margins and better returns. 

Roberts even so much as admitted it, adding that Comcast began shifting its focus to broadband years ago. Other operators have done the same --  how many times have you heard a CEO say “Connectivity” in the past year?  -- and broadband subscribers passed video subscribers for the first time in the industry way back in 2015.  But as the pandemic has helped accelerate pay TV’s video decline, the shift is becoming more prominent.    

Comcast’s Q3 results show progress in all three segments -- broadband subscriber growth was the best ever at 633,000 additions; content continues to be available on a variety of platforms including X1, Flex and Peacock. Peacock, which had its broad launch in July, already has 22 million signups, well ahead of expectations. 

On the conference call with analysts, Roberts said that Comcast has seen the market shift away from traditional video packaging, adding that he doesn’t see all consumers evolving to an app-based model, but the insinuation is that he, like the rest of the industry, expects the majority of the business to head that way.

“We’ve seen this ship coming,” Roberts said on the call. “ I think Dave [Watson, Comcast Cable CEO] and his team have done an outstanding job of having a connectivity platform and thinking of it that way so that we’re ready for that ship. I don't think it will be all or nothing.”

But then Roberts voiced what most analysts and observers have expected was the truth for years, but that some top cable executives have been reluctant to come right out and say: They don’t care where you get your content from, as long as it travels over their broadband.

“We want to get ourselves to a position of indifference,” Roberts said, adding that in this new model, the consumer drives the experience, not the distributor. 

Comcast Cable CEO Dave Watson articulated that the video business has been evolving rapidly and the cable company has been working hard to find new ways to get them what they want. 

“From our perspective, we have invested in a broad video platform capability that gives us a lot of options and can give customers a lot of choice,” Watson said. “We want to deliver to the customer what they want in a video experience. So we segmented the marketplace, we break it down, we’ve been doing that for some time and as Brian said we anticipated a lot of these changes." 

Watson went on to talk about how every segment is addressed -- for people who want everything -- all the channels, VOD and DVR capability, there’s X1; for streamers there is Flex; and for D2C aficionados there is Peacock. But he added that part of the strategy on the broadband side isn’t just to offer faster and faster speeds. 

“We’re surrounding broadband with a lot of video capability,” Watson said. “And with streaming and  Peacock we're giving them the best of aggregation, great streaming options. So we’re going to break down the marketplace, continue to compete and deliver to customers what they want. I think that will continue. We feel this is a sustained competitive difference that we have. We’ll go to where the customer wants to go. In terms of whether it’s a  more profitable outcome for us, then we’ll be indifferent;  if they want streaming capability with Flex, we’re going to be right there to deliver that.”

At Comcast’s Sky unit, the shift is even more pronounced. On the conference call, Sky group chief executive Jeremy Darroch used the satellite TV service provider’s relationship with Disney, where it switched a traditional programming contract for the Disney Plus app, as an example. 

“We took a very high fixed-cost, long-term contract and effectively turned it into an app, taking that cost out of our P&L and then getting a margin by selling Disney Plus through Sky,” Darroch said, adding that the savings can then be reinvested in content or other areas, like Sky Studios, which improves the customer relationship. “...When you get to the consumer side, there is virtually no change to that experience.” 

 Some have said that the thing that killed the a la carte movement was that the programmers never wanted to give up the massive payday they were getting by selling fat bundles of networks to distributors at high prices. But with streaming, those pay TV rolls are declining rapidly -- Kagan, a unit of S&P Global Market Intelligence, predicts that 31.5 million traditional pay TV customers will be lost by 2024 -- and affiliate fees are eroding just as fast. Operators, who have chafed for years at high programming fees would probably like nothing more than to be the conduit, aggregating the various content apps and selling them alongside broadband. And as  streaming options grow and video subscribers shrink, it looks as if D2Cs’ ship is finally coming in.