Analyzing the Cable
Industry
Date Added: October 20th,
2004
By Charles Worthman
Last
article, I laid out how to analyze a company according to Michael
Porter's widely used framework for evaluating industries. In this
article I will analyze the cable business of Comcast, which Warren
Buffet just bought a stake in, to see how it stakes up to the test
(Note that we are just talking about the core cable operations and
not the rest of the businesses the company is in. If we actually analyzed
the entire company in order to buy we would have to look at all their
operations, as well as the price).
1. Threat of entry
The company has high fixed
costs to enter their business. It takes billions of dollars to build
a network such as theirs and many more billions to maintain that network.
The company does have some competitors but it doesn't seem as if a
smaller firm will have much chance of coming in to take market share
away from Comcast in the near future.
Grade: A+
2. Bargaining power of suppliers
Since Comcast is one of the only outlets for providers of content
(such as HBO MTV etc.), they have a strong bargaining position with
their suppliers (which are the stations themselves). They have even
more power with the suppliers of their equipment since they are such
a large player in their industry. Recently, satellite has diminished
some of the company's power with content providers as the recent war
at rival Cablevision over Yankees games has shown.
Grade: B
3. Bargaining power
of buyers
Comcast has continually been
able to raise prices, a sure sign of their power with consumers.
If you want cable, this is one of the only games in town. Recently,
it has become even harder for consumers to switch as cable has started
to offer you phone service, cable service and internet service rolled
into one. Most people would rather pay up rather then go through
the pain of switching all those things at once.
Grade: A-
4. Availability of substitutes
Up until a few years ago,
this was relatively nil. In recent years consumers have had the
choice of cable or satellite. This war has been a bitter one and
both products eventually will probably end up being about the same.
Yet it looks like satellite or cable will be the only choice for
years to come leaving us with only 2 choices, which is much better
than most industries.
Grade: B-
5. Competitive rivalry
While there is some rivalry
with satellite that has resulted in price cutting, it hasn't been
too excessive and prices are continuing to rise even with the war.
There are fears that either satellite or cable will wipe the other
out or engage in massive price cutting but it doesn't seem to be
happening; both products have their appeal and those who wanted
one or other have probably already made that choice. Unless something
major happens or one starts to aggressively cut prices it doesn't
look like the rivalry will be too unhealthy.
Grade: B
Conclusion:
It would seem that while Comcast (the company) might be a good bet
because of their recent moves into other industries, the core cable
business is just a tad above average in terms of profitability.
You would probably need to watch and see how destructive the cable/satellite
war actually turns out to be before the industry looks really attractive.
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