Comcast announced Sept. 18 that it was providing Xfinity Flex, the company’s streaming box, to subscribers of Xfinity Internet for free. It worked sending ROKU stock down by more than 14% on the news.
But will it last? I don’t think so. Here’s why.
The company’s press release has a nice picture that shows Xfinity Flex’s user interface. YouTube, Netflix (NASDAQ:NFLX), Hulu, Amazon (NASDAQ:AMZN) Prime Video and HBO, part of AT&T’s (NYSE:T) WarnerMedia subsidiary, all appear as choices on its platform.
It wants you to think that Xfinity Flex is as agnostic a platform as Roku’s, but that’s simply not true.
The fact that Comcast owns NBCUniversal, which is rolling out its own streaming service in April 2020, suggests that the cable operator has a conflict of interest. Once it launches this service, you can bet its own streaming service will be front and center on Xfinity Flex.
I have to admit, it’s a brilliant strategy.
Bribe existing customers to stay with Comcast by giving them one free set-top box equipped with 4K HDR, voice remote, and a digital interface. More importantly, anyone who is considering buying a Roku streaming player or a Smart TV equipped with the Roku operating system will think twice about their choice when they can get one for free by switching to Comcast.
By doing this, Comcast is killing two birds with one stone.
It’s ensuring that its own customers don’t venture to the Roku platform, they remain a paying internet customer, and it provides NBCUniversal’s streaming service with a bigger potential user base for when it launches in 2020.
What investors ought to consider is whether this will truly put a crimp in Roku’s growth?
My colleague, Josh Enomoto, recently discussed some of the reasons why Comcast’s move to offer free set-top boxes won’t derail the streaming disruptor, so I won’t rehash them.
I will say he’s absolutely right. Comcast is merely moving around the deckchairs on the Titanic to make it look like it’s got a strategy to fight Roku. But does it really?
We know that as more people “cut the cord” and move exclusively to streaming services, cable companies such as Comcast are freaking out. For people such as myself, the only reason I haven’t cut the cord is that I haven’t been able to secure a sports-related streaming service that will let me watch my beloved Toronto Maple Leafs.
Oh, sure, I can pay to watch any NHL game I want for an entire season, but that costs a pretty penny, and while I love the Maple Leafs, I do have a life outside watching hockey. The other alternative is to find an illegal service, but as a writer, I think it’s important we respect the sanctity of ownership.
The beauty of Roku is that it’s agnostic about who wins and loses on its platform.
“Consider ROKU’s rivals. You have Amazon which is disrupting everything from groceries to healthcare. Then, you have Comcast which is trying to salvage the behemoth business model with expensive deals and acquisitions,” Enomoto wrote Sept. 27.
“Roku stock? This is a very simple and streamlined investment. Exclusively focusing on the consumer experience, I can depend on them to respond to this segment’s needs quickly and efficiently.”
Josh just made my point.
Most, if not all of these streaming services have an angle. Roku doesn’t and that’s what I believe will continue to make it an appealing choice for many consumers.
The Bottom Line on Comcast Stock
I’ve been a fan of ROKU since November 2017. Since then it’s up 159% despite losing a third of its value over the last month. Long-term, it’s one of the few money losers (GAAP basis) that I believe is worth owning.
The people Comcast convinces to remain with Comcast or lures over from another competitor by using a free set-top box as bait will ultimately find out that what the company loses in cable revenue it will gain back in the form of higher internet-only revenue.
Comcast had 25.6 million high-speed Internet customers at the end of the second quarter. I’m not sure how many of them are internet only. However, its 10-Q says it has 9.5 million customers who have one product so I’ll go with that number.
In the second quarter, it had 182,000 net additions, down from 226,000 net additions in Q2 2018. Its business is slowing.
But let’s assume it will add one million internet-only customers in fiscal 2019 and all of them get a free set-top box. It loses $60 million in set-top box revenue ($5 per month per box) but adds so much more in high-speed internet revenue.
That’s a great short-term revenue generator until internet rates start ratcheting higher. And they will move higher.
It’s at that point the Comcast subscribers will realize they’ve been had.
Roku might lose the battle but it will win the war.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.