The largest U.S. cable operator showed surprising resilience in a number of key business areas during the 3rd quarter 2008 as consolidated revenues increased 10% to US$8.5 billion in the period, and 11% YTD to $25.5 billion. Comcast gained more subscribers for its cable broadband service - 382K customers - than both AT&T and Verizon Communications combined, which together only saw an increase of 277K new high-speed data customers. Gartner expects Comcast to keep its momentum going for net new high speed data customer gains with the addition of ultra-high-speed services at 50 Mbps, due to launch in 10 markets this year and footprint wide in 2009.

With cable speed tiers besting DSL in most markets, Comcast confirmed that approximately 66% of new cable modem customers are the result of customer defections from DSL services. But bundled pricing and promotional offers to stay competitive are eating into revenues: Average revenue per subscriber (ARPU) for cable modem customers was $41.74, down due to the effects of multi-service bundling, new lower speed tiers of service and new promotional offers. Comcast continues to gain traction with its broadband service, with 14.7 million customers and a penetration level of 30% of homes passed within its footprint.

In its telephony business, Comcast continued to gain very healthy 483K net new customers in the quarter, for a total of more than 6.1 million Comcast Digital Voice subs; revenues for its phone business grew 44%, to more than $690 million. Net adds for the quarter were down 29% year over year however, from 681K in 3Q07. As with high speed data, ARPU per voice subscriber was down 5%, due to the effects of bundling and promotional offers. Phone service has been an engine of growth for the cable operator and penetration stood at 13% of its homes passed footprint.

But the cable company continued to show weakness in its most mature business - video. Its main cable video services revenues increased 4% in the quarter and YTD, however it lost 147K basic cable subs in 3Q2008 and 342K year-to-date. Comcast executives indicated that they are seeing more competition from AT&T than from Verizon FiOS TV so far in their footprint, which is interesting. The bright spot in the video business for Comcast is the increase in net digital subscriber additions, up by 417K in the quarter, which puts digital penetration levels at almost 70% for the cable service provider. But as recent data indicate, two top U.S. telcos alone gained 465K total new video customers: AT&T with 232K and Verizon with 233K net new video additions. Comcast said that most of the churn was coming from single service video customers - those not bundled up with other services. Speaking of bundled offerings, approximately 22% of Comcast customers now subscribe to a three-service bundle, up from 15% year over year.

Capital Expenditures tell an interesting story: for the quarter, CapEx was $1.268 billion, down $160 million year-over-year; YTD CapEx was $3.877 billion, down almost $750 million year/year. Comcast said this was attributable to a number of factors, including better procurement, which has helped lower the cost per unit for the technology they are buying, as well as lower overall unit purchases. As the company has fewer net new connections due to slower overall growth in their various businesses, this translates directly to lower capital expenditures for technicians and truck rolls to homes for new service activation, the need for CSR support to handle incoming support calls, fewer set-top box and voice eMTA devices, etc., as well as less construction spending to extend their network into new housing developments. On the 3Q financial earnings conference call on Wednesday, Steve Burke, Comcast COO, said CapEx was down 16% quarter over quarter, but that Comcast would still continue to invest in their network transition to all-digital and to roll out ultra high-speed broadband (DOCSIS 3.0) technology to 20% of their footprint by year-end.

But the declining economic conditions in the U.S. are causing both service provider and vendor players in this space to issue warnings on their expectations for slower growth both in this quarter and into the first quarter of 2009. No one seems to have much clarity of vision past these two quarters and few are willing to comment further than to say they see slower growth into 2009 and that service growth (or decline) will depend on the duration and severity of the economic downturn.

Comcast's lower uptake of video services comes not only from growing competition from telcos, but also from the deteriorating economic environment and weakness in consumer spending. The company expects declining marginal increases in new customer adds in all service areas, and this will also directly affect demand for CPE devices, especially eMTAs that enable VoIP phone service, cable modems for high speed data services and digital set-top boxes with advanced features for DVR and HD. Said COO Steve Burke: "It's not that people who have our services are leaving, it's that there is less propensity to upgrade, less propensity to move and take our services when someone moves into town."

Gartner will issue updates to its reports on broadband access and other service provider infrastructure spending forecasts on a regional basis next month, which will reflect our assessment of these changing dynamics in the marketplace.