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How Rising Programming Costs Are Affecting Comcast

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Comcast’s programming costs

Comcast’s (CMCSA) programming costs are on the rise, mainly due to programming contract renewals that began in 2H16 and are likely to continue in 1Q17.

Cable companies such as Comcast (CMCSA) have high content costs. These costs are similar to the fixed costs incurred by media networks such as The Walt Disney Company (DIS) and Viacom (VIAB). However, as distributors, cable companies have additional infrastructure investments. Content costs account for much of a cable company’s operating costs.

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Comcast stated at the Deutsche Bank Media, Internet and Telecom Conference earlier this month that it expects its programming costs to moderate to “mid- to high-single-digit levels” over time. The company also pointed out that one of the main reasons for the rising programming costs has been the rise in expenditure on sports broadcasting rights and retransmission fees.

However, the rise in programming costs hasn’t affected Comcast Cable’s margins because of Comcast Cable’s other high-margin businesses including high-speed Internet and business services. The company said it has also managed its non-operating expenses effectively.

At the Wells Fargo Securities 2016 Technology, Media & Telecom Conference, the company pointed out that as it integrates more services such as Netflix (NFLX) on its X1 set-top box, it reduces its dependency on any one content provider. It added that it was getting a better understanding of the price it pays for its content and the value its customers get by subscribing to its pay-TV service. The company could use this insight when negotiating programming contracts with content providers.

Comcast’s programming expenses in fiscal 4Q16

In fiscal 4Q16, Comcast’s programming expenses rose 12.2% year-over-year, driven by the renewal of programming contracts, higher retransmission consent fees, and rising costs for sports programming. Comcast’s non-programming costs rose year-over-year to 4.8% in fiscal 4Q16. The higher costs were mainly a result of the rollout of Comcast’s X1 set-top box. In its fiscal 4Q16 earnings call, the company stated that in fiscal 2017, it expects its non-programming expenses to be lower due to decreased expenses for improving customer experience.

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