Comcast: Cable Modem Rentals Contribute More Than Olympics(Forbes)

Last week, I explained how Comcast’s (NASDAQ:CMCSA) and (NASDAQ:CMCSK) broadband customers who buy their own cable modem are earning 11% per month on their investment. I estimated that as much as 25% of Comcast’s net income might be vulnerable to the risk of their broadband customers buying their own cable modems instead of renting them. The key question is, what percentage of Comcast’s broadband customers currently rent vs own their cable modems? Since then, I’ve heard from over 2 dozen Forbes readers and the picture has gotten clearer.

Among the responses were several from Comcast sales reps and technicians. Based on their feedback, I feel comfortable estimating that the percentage of Comcast’s broadband customers who rent their cable modems is somewhere north of 90%. The technicians also pointed out that customers who subscribe to Comcast’s telephone service need a different modem than theArris/Motorola Sb6121 which only provides broadband service.

If you subscribe to Comcast’s telephone service, you need a cable modem that has the requisite phone jacks. 

The reason I’m leaving the set top box rentals out of this analysis is that customers cannot buy their own set top box. Since Comcast’s video customers cannot avoid renting this equipment, this revenue is not at risk in the same way that the revenue from renting cable modems is.

After crunching the numbers it looks like renting cable modems contributes between $275 million and $300 million per quarter to Comcast’s bottom line.

Comcast says that the Sochi Olympics generated $257 million of revenue in Q1 2014. Make no mistake about it, cable modem rentals are an important revenue stream for Comcast. It provides more revenue than the Sochi Olympics and it happens each and every quarter.

Cable modem rentals generates between $275 million and $300 million in revenue each quarter for Comcast. (Photo Credit: bigstockphoto)

Importance To Comcast

I’m going to estimate that Comcast is paying on average about $40 for the cable modems they rent out at $8 per month. If you spend $40 and receive back $96 ($8 per month) each year for 3 years, after which the modem is worth nothing, your annual rate of return on investment is 234%.

If the payments of $96 per year for 3 years where packaged into a bond, and the bond were priced to yield 10% a year, the bond would sell for $239. In short, every time Comcast rents out a cable modem it increases its market value by $199 ($239 – $40).

In their latest earnings announcement Comcast said they had 21.3 million broadband customers and 11.0 million voice customers. This means, there are somewhere between 21.3 million and 32.3 million customers who need a cable modem. Based on our estimate that 90% are renting, there are between 19 million and 29 million renters.

Putting it all together, the business of renting cable modems is worth between $3.8 billion and $5.8 billion to Comcast’s shareholders. It’s a lot of money, but Comcast’s market cap is north of $140 billion so the risk to Comcast stockholders of people buying their own cable modems en-masse is not as big as I thought it might be.

Why Do People Rent?

Usually, a business that is this profitable has to have some gigantic barriers to entry in order to keep customers locked in. Mobile phone companies lock you in with 2 year contracts. Pharmaceutical companies use their patents to prevent competition. In this case, however, there is nothing preventing people from buying their own modems.

Of the Forbes readers who rent their modems, the most common explanation for why they continue to rent was something like this one: “I rent all my equipment from Comcast whenever possible. This is because if there is ever a problem with the equipment, it’s their problem, not mine. The average Comcast customer wouldn’t even know where to go to buy a cable modem, let alone how to install, troubleshoot or maintain one. Plus I’m not sure Comcast Customer Care would even help a customer with any issues on a modem Comcast doesn’t own.”

In the large picture saving $8 a month is not a big deal for a lot of people especially if it means that when you have a problem, you are on your own. Another way to look at it is to consider how much of your time it is going to take to figure out which modem to buy, install it, and deal with any problems that come up. Is it worth $8 a month to avoid that?

I can see that for busy people, it is not worth the effort to do the research if you are only going to replace your own cable modem. I value my time as well. That’s why, my family is planning to give away cable modems for Christmas this year. My daughter, who is 10, is going to help me. Right now, her job is to make a list of our friends and family and find out which ones are renting cable modems. A lot of my aunts and uncles grew up in the aftermath of the great depression and are now on fixed incomes. I think a modem that reduces their cable bill by $8 a month will make a perfect Christmas gift, and being able to give them this gift was well worth my time.

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