Comcast Confronts Bundle of Trouble

The big cable company is punished for its slow progress on the subscriber front.
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Comcast's

(CMCSA) - Get Report

shrinking core business and increased spending rang an uncomfortably familiar bell with investors.

The Philly cable giant delivered in-line

third-quarter results, but thanks to a surprising jump in spending on set-top boxes and phone network upgrades, the company cut its 2005 cash flow growth projection to 30% from the 40% previously targeted.

Comcast raised its 2005 capital spending budget to $3.5 billion, up from the $3.25 billion previously projected. That spending jump came as a shock to Wall Street, considering the company said in August that it expected to spend less in the second half of the year.

Investors were also unimpressed by another quarter of customer losses and woeful gains in so-called growth markets like digital phone service. In the third quarter, Comcast lost 46,000 customers, a 0.4% drop, taking the total to 21.4 million basic cable subscribers. Analysts were expecting a slight gain.

Meanwhile, net new phone subscriber additions were a paltry 12,000. Analysts were looking for at least twice as many new customers in the quarter. For the year to date, Comcast has added 19,000 voice-over-the-Net phone customers.

Despite the weak performance, Comcast stuck with its forecast for 250,000 VoIP customers this year and 1 million by the end of 2006.

But some observers are starting to doubt Comcast's executional excellence.

"These guys are having way too much trouble landing voice subscribers," says a hedge fund manager who currently has no positions in the stock.

Investors have tuned in to something that is slightly wrong with the Comcast picture. As telcos like

Verizon

(VZ) - Get Report

and

SBC

(SBC)

spend billions to get out from under a dying phone business, Comcast is spending a fortune to get in.

To be sure, both the phone and cable players are pursuing the same objective: namely that the best service bundle wins.

On the broadband front, Comcast turned in a strong report card, blowing by most estimates without resorting to price cuts to keep apace with the telcos' digital subscriber line or DSL services. For the third quarter, Comcast added 437,000 cable modem subscribers giving it about a 20% penetration rate, or about one-out-of-five homes in its markets.

But the industry is changing rapidly as broadband connections open an entirely new market for low-cost operators like

Skype

,

Vonage

,

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

to offer customers free calling and cheap videos.

This new threat has helped place a gloomy outlook over the big phone and cable sectors.

Comcast shares, which have fallen 15% since mid-August, were down $1.63 to $27.17 in midday trading Thursday.