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Is DISH, DirecTV Or Comcast Better On Fundamentals?

Fundamentally the answer is DISH Network (DISH) or (even better) DirecTV (DTV). Financially, probably Comcast (CMCSA).

Here’s why.

Based purely on the numbers there is little separation. Comcast has better margins, but those of DISH are on an upward trajectory. After missing last quarter DISH hit it out this last quarter, helped by streaming revenue through its Blockbuster unit which is beginning to look like one of the steals of the decade.

In the past DISH stock has always trailed rival DirecTV. But over the last year it has actually performed better, rising in value almost 30% while DTV stood still. DISH added 22,000 subscribers last quarter. DISH also has the possibility of greater profit if its dreams of getting into high speed wireless broadband ever become a reality. But it currently has just a fraction of DTV’s growth, which is twice its size and growing steadily at more than 10% a year.

This competition masks the fundamental strength of both direct satellite providers. They can compete and still win, while cable companies like Comcast struggle despite a virtual monopoly in many markets. And despite the fact that cable companies can offer Internet broadband, something the satellite companies tried to do, unsuccessfully, a decade ago.

The difference is basic. Upgrading a satellite service is as simple (and expensive) as putting up a new satellite. It’s a one-time cost, but everyone gets the upgrade at once. Cable, by contrast, has an enormous fixed cost, and upgrading any market takes both time and money.

The best analogy is to computing, and the difference between selling PCs or Software as a Service (SaaS). Upgrading PC software means installing new software on each PC, and even on a network that’s a big, expensive chore. Upgrading SaaS means merely upgrading the central site – everyone gets the new version at the same time. This advantage is fundamental, not something Comcast can ever change.

Consider what happens when your dish or cable service breaks. With the dish it’s always the fault of your local equipment, and trucks only roll when there’s profit to be made. On the other hand I see Comcast work crews on poles every time there’s a heavy wind, and when my cable or Internet service goes out it costs them money.

Rather than keep playing that game, of course, Comcast has changed the game, buying the big half of NBC Universal from GE and taking it to its balance sheet last year. At first glance this seems hardly worth it – revenues up $18 billion but net income up barely $2 billion.

But Comcast has fundamentally changed its business model, from a retail model to something more akin to News Corp. (NWS). NWS shareholders don’t need to care about Fox’ politics or its newspapers, because when its movie and TV studios “sell” product to broadcasters, they’re taking it in profit on both ends. That’s what Comcast now has, vertical integration, the kind of marketing power movie studios had in their golden age. They sell their old stuff to themselves and profit on both ends.

Comcast’s future direction is clear. Buy the rest of NBC Universal and double its fun. (The growth DISH is seeing from Blockbuster actually boosts Comcast’s bottom line, through NBC Universal.) That of DISH and DTV is also clear. Improve the technology when they can and keep spinning profits from their duopoly.

Right now investors are valuing Comcast’s profits much more highly than those of the satellite companies. Over the next year I expect DISH to outperform both DTV and CMCSA. Mike Stallings notes that Warren Buffett likes DTV. But if you’ve got a long-term time horizon, five years or more, I find CMCSA a more reliable bet, because its content will make money from everybody.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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