When we look at Comcast (
), we think about several things: how many video subscribers it
lost, how many broadband subscribers it gained, how much each
subscriber is paying, how well the company has bundled its pay-TV,
VoIP and broadband business as well as the performance of
NBCUniversal that it acquired last year.
However, we rarely think about how much Comcast makes by
charging advertisers for the ad slots within the media networks
that it packages and sells to its end customers. This lack of
attention can be justified by the fact that this business is a
by-product of Comcast's pay-TV business. However, given that it
still contributes roughly 10% to Comcast's value on its own, it is
worthwhile to explore this business. The contribution of this
business is as much as the premium that our price estimate
commands. If you can't ignore that premium, you can't ignore the
value of this business either.
See our complete analysis for Comcast
Typically, media networks are in command of a big portion of ad
slots and make a significant proportion of their money by charging
advertisers. However, the pay-TV companies also have control over
some of this ad inventory. Comcast's advertising revenues have
increased from roughly $1.5 billion in 2006 to close to $2 billion
in 2011. There was a significant dip in 2009 due to the economic
recession, but revenues bounced back sharply thereafter. This
business, together with franchise fees, constitutes roughly 10% to
Comcast's stock as per our estimates. However, franchise fees is a
zero profit business and thus all of this value can be solely
attributed to advertising.
The growth of advertising revenues is driven by the increase in
the number of subscribers as well as increase in ad pricing. While
the latter aspect has certainly helped, Comcast seems to be
struggling with the former. The company has been consistently
losing subscribers for the past few years and its share in the U.S.
pay-TV market dropped from 23.8% in 2008 to 21.4% in 2011. For
2012, Comcast's market share seems to be heading below 21%.
However, we expect the company to be able to get rid of subscriber
losses over the next couple of years due to its initiatives in
streaming, brand strengthening and by improving customer service.
As this happens, advertising revenues will also see some
If we look at Comcast's rivals such as Dish Network (
), DirecTV (
) and Time Warner Cable (
), we find that the U.S. advertising business contributes roughly
6% to 10% to their U.S. business value. Therefore, there is no
alarming difference in this comparison and all of them seem to be
operating at comparable efficiency levels as far as their
advertising businesses are concerned.
Our price estimate for Comcast stands at $41
, implying a premium of more than 10% to the market price.
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