How Comcast Corporation Faces Rising Content Costs From Both Sides of the Table

Comcast On Demand Heropurple

IMAGE SOURCE: COMCAST

Cable giant Comcast (NASDAQ:CMCSA) is one of the biggest content buyers in the country, but at the same time, its NBCUniversal division is on the other side of the table selling its content. The management team has seen costs increase for both the cable division and its television networks as the rights to certain programming -- particularly sports -- climb in price.

Comcast CFO Mike Cavanagh spoke with J.P. Morgan analyst Phil Cusick at an investor conference last month. He talked about how Comcast is managing its content costs as both a buyer and seller of programming.

"Financial discipline" at the networks

You wouldn't guess it based on the growing number of sports rights contracts at NBC, but Cavanagh said managing costs at the network requires "a lot of financial discipline".

Many have criticized NBC's aggressive bid on the rights to the Olympics -- it agreed to pay an average of $1.275 billion for each of the next six Olympic Games starting in 2022. The cost of its current contract that runs through 2020 averages just $880 million. Keep in mind there are production costs on top of those contracts. Cavanagh says NBCUniversal already passed $1 billion in advertising sales for the Rio Olympics and that the company made money in London.

On top of the Olympics, NBC also has some other expensive sports rights. Its contract with the NFL for Sunday Night Football is a relative steal, coming in at an average of $117 million over nine seasons through 2022. The network just agreed to pay almost twice that amount for the rights to just five Thursday Night Football games -- one-fourth the number of games in the SNFcontract.

NBC also has a six-year, $1 billion contract with the English Premier League; a 10-year, $2 billion deal with the NHL; and several other agreements with organizations, including NASCAR, the PGA, and the French Open.

The rising cost of sports programming rights is the result of the growth in time-delayed viewing. Sports are one of the few remaining programs that viewers are compelled to watch live, and as a result, they will sit through the advertisements. Costs at ESPN, Disney's (NYSE:DIS) biggest cable network, have risen tremendously in recent years as well. Its upcoming deal with the NBA will have the network paying $1.4 billion per year, almost a billion dollars more per year than it previously paid the league.

Those cost increases are especially concerning to Disney investors as ESPN is losing subscribers. The network lost 7 million subscribers from the end of 2013 to the end of 2015, and Nielsen data indicates that the network has lost another 1.5 million since February.

NBC is less concerned with subscriptions, but Cavanagh did mention that a big part of the strategy behind NBC's sports rights is to drive an increase in retransmission fees -- the fees cable companies pay to include broadcast networks in their bundles. Cable companies might be able to exclude ESPN from some bundles, but it'd be much harder to ditch NBC.

Comcast asking for more content rights

As content rights get bigger price tags, those costs get passed onto the pay-TV providers. Comcast's programming costs have risen an average of 7.8% over the past three years as networks require higher affiliate fees.http://www.cmcsa.com/secfiling.cfm?filingID=1193125-16-452423 http://www.cmcsa.com/secfiling.cfm?filingID=1193125-14-47522 This year, Cavanagh expects programming costs to rise a whopping 10%.

But Cavanagh thinks Comcast can get its money's worth for that 10% price increase. The company is demanding access to full seasons for on-demand viewing. Its X1 platform is designed to take advantage of full-season stacks with its search functionality across live and on-demand programming.

Additionally, Comcast uses its X1 boxes to collect viewer data, giving it a good idea of how much certain programming is actually worth. Even so, Comcast has been unable to increase its average revenue per customer at the same pace as its programming costs have increased.

The good news is that Comcast is starting to add video subscribers once again. It added 53,000 net subscribers in the first quarter, marking the first time in 10 years that Comcast has added subscribers over the trailing 12 months.

Content costs for both Comcast and NBC are trending upward, and corresponding revenue has failed to keep pace. Even as NBC is able to command higher retransmission and affiliate fees from cable companies for its networks due to those high-value sports rights, it's still barely breaking even on the Olympics contract that is set to ramp up over the next 16 years. The cable division, meanwhile, isn't increasing its revenue enough to make up for the higher price of programming even if it's helping differentiate its product.

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