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.