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Comcast: Party Like it’s 1999

Big surprise from Comcast (CMCSA) today in the capex department. Barrons has a nice summary of the results. Revenue, subscribers, operating cash flow all met the expectations of the frothing massess, except Capex projections for next year were $1B higher than anticipated. Yes, 20% higher. Updated w/Chart

People might not react as negatively except for the fact that CEO Brian Roberts constantly trumpets the installed plant advantage of cable over the Telcos.

If this is the case, why the sudden spike in Capex at Comcast? From the Financial Times:

Mr Roberts said he wanted to build on this “first-to-market advantage”. “We can capture market share now,” he said. “We’re going to invest capital to drive that growth.”

Somebody stop me before I start to party like it’s 1999.

I was negative on cable and positive on Telco in 2006 and I turned out to be 1/2 right. In 2007 I’m negative on both for the following reasons.

  1. Investor sentiment for both Telecom and Cable is high. These sectors were at the top of the performance heap for 2006 and are no longer un-loved.
  2. Telcos (VZ) (T ) are trading near the top of their historical trading range relative to dividend yield. Remind me: why else do you buy utilities?
  3. This is taking place as they face more competition (VoIP, non-carrier IPTV) than ever before.
  4. I think we are approaching a destructive pricing war as Cable and Telco compete for ARPU while simultaneously battling back new service delivery methods.

Cable wants Telco’s enterprise customers and their overpriced T-1 revenue stream. Telco needs to slow the loss of landlines, most likely by selling VoIP and bundling wireless. Cable wants to take Telco landlines. Telco wants to take Cable video subscribers. And we haven’t yet seen a war between them on broadband specs, which we will.

In short, where is the top line growth for these companies? Not only is this a zero-sum game, but the pie that is getting eaten away at the edge by disrupters.

Instead of subscribing to HBO, people download movies from iTunes or wherever. Instead of a landline, people use Vonage or just their mobile phone. Instead of using mobile minutes, people use services like JaJah (Check this service out). How many examples can you think of?

Comcast’s announcement shows us this zero-sum game is going to be more expensive than we or they thought. The upside is Comcast injected another $1B of upside revenue into their box suppliers today. This is good news for the equipment and component sectors.

Dear readers – any speculation on where the ONE BILLION DOLLARS will go?

Updated: CMCSA tested it’s long term support line yesterday. It has been trading in a narrow channel for nearly a year. If it breaks this support line on this news, expect many of the CNBC talking heads and Greenwich, CT Asset Shufflers to start changing their bullish Comcast tune.

CMCSA 1yr Chart

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