A Quick Look At Comcast’s Advertising Business

When we look at Comcast (NASDAQ:CMCSA), 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.
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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. ^[1] 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 support.

If we look at Comcast’s rivals such as Dish Network (NASDAQ:DISH), DirecTV (NASDAQ:DTV) and Time Warner Cable (NYSE:TWC), 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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1. Comcast’s SEC Filings [↩]