Brian Roberts, CEO of Comcast (left), and Tom Rutledge, CEO of Charter Communications
Drew Ungerer | Getty Images
Comcast and Charter, the two largest U.S. cable companies, are struggling with broadband growth.
As tens of millions of Americans have canceled their cable TV subscriptions over the past decade, the cable industry has focused on the more profitable business of selling broadband Internet.
Now, the number of U.S. households paying Comcast and Charter for high-speed Internet is falling for the first time, with both companies reporting declines in public broadband access in the second quarter. Comcast lost 10,000 residential customers and saw a decline of another 30,000 in July. The charter fell by 42 thousand.
Comcast CEO Brian Roberts and his Charter counterpart Tom Rutledge blamed macroeconomic trends and stronger-than-usual gains during the pandemic as the main reasons for the losses. Comcast specifically pointed to fewer people moving as the primary reason for the fewer connections.
“There’s been a dramatic slowdown in movement across our footprint,” Roberts said during Comcast’s earnings conference call last month. In the first year of the pandemic, he noted, the company added nearly 50% more customers than its previous average annual growth.
The sudden halt to the broadband growth streak is a major concern for investors in Comcast and Charter, which are trading near two-year lows. Comcast shares are down about 25% year-to-date, while Charter shares are down about 33%.
And while the pandemic and macroeconomic trends may ease over time, Roberts also acknowledged another reason for broadband’s decline in earnings: new competition.
The growth of fixed wireless
For decades, cable companies have enjoyed little competition in many regions of the country for high-speed Internet.
Then about three years ago, T-Mobile released its fixed wireless product, a high-speed 5G broadband that functions as an alternative to cable broadband. As of April, T-Mobile’s high-speed Internet is available to more than 40 million households nationwide. Earlier this year, Verizon said it plans to have 4 million to 5 million fixed wireless customers by the end of 2025.
In March, Roberts dismissed fixed wireless as an “inferior product.” T-Mobile has promised that by the end of 2024, half of the country will get a speed of at least 100 megabits per second. Standard cable (and fiber optic) broadband typically delivers speeds about twice that. Moreover, fixed wireless is held back by 5G airwaves congestion. Cable that runs wires directly to the house has no such limitation.
“In the past, we have seen offers at a lower price and speed. And in the long term, I don’t know how viable this technology will be,” Roberts said at the Morgan Stanley Technology, Media & Telecom Conference.
T-Mobile charges a flat monthly fee of $50 for fixed wireless service. New Street Research estimates that average monthly cable broadband revenue is nearly $70 and is likely to rise to more than $75 by 2025.
Just as T-Mobile has grown in the wireless industry by offering lower prices, it looks like it’s doing the same with cable. T-Mobile added a whopping 560,000 new fixed wireless customers in the second quarter as Comcast and Charter lost broadband subscribers. T-Mobile reported that more than half of its new customers switched from cable TV.
“Demand continues to grow from disaffected suburban cable customers to underserved customers in smaller markets and rural areas,” T-Mobile CEO Mike Siewert said during the company’s earnings conference call. T-Mobile also noted that Ookla’s nationwide speed test results in July showed that its 5G network (187.33 Mpbs) beat Comcast and Charter (184.08 and 183.74, respectively) in average speed.
Roberts disputed that customers are abandoning Comcast for landline service, arguing that T-Mobile’s growth is based on new customers.
“We don’t see fixed wireless having a noticeable impact on our churn,” Roberts said during Comcast’s July 28 earnings conference call.
Still, if fixed wireless continues to eat up cable broadband growth, Comcast and Charter will have to convince investors there’s another reason to put their money into cable, said Chris Marangi, a portfolio manager at Gabelli Funds.
“There is no clear catalyst,” Marangi said. “You probably won’t get a boost in broadband growth in the next six months.”
Gabelli’s funds own Charter, Comcast, Verizon and T-Mobile.
Fear of cable investment
The fear among cable shareholders isn’t just that Comcast and Charter could be at the end of an era when it comes to broadband growth. It’s also that new competition will drive down prices. A combination of promotional pricing and stalled growth could eventually turn broadband into something more like a wireless business that has been hampered for years by price wars and low profit margins.
It’s too early to tell whether fixed wireless will take market share away from cable companies in the coming years or whether congestion problems will force wireless providers to limit the number of users, said Craig Moffett, a telecom analyst at MoffettNathanson. Moffett noted that fixed wireless uses a lot more data than mobile wireless, but generates about 20% more revenue at current prices.
“Time will tell if this transition to fixed wireless is only a temporary possibility,” Moffett said.
It’s possible that fixed wireless is just having a “moment” and customers will eventually abandon the service as too unreliable or not fast enough, said Walt Pieczyk, an analyst at LightShed Partners.
“Now it seems to be working. They are taking away cable TV customers,” Petsyk said. “We’ll see if it’s sustainable in two or three quarters.”
Cable’s technology advantage could turn investor sentiment toward Comcast and Charter if fixed-wireless growth slows.
“While the narrative of slowing connections in the face of increasing competition doesn’t bode well for sentiment, we think cable’s dominance across much of the territory will lead to sharp growth,” JP Morgan analyst Philip Kuzik wrote in a note to clients. .
The cable goes wireless
Moffett predicted that as television declines and broadband growth slows, the next chapter for cable will be wireless.
Wireless has become the new cable TV growth story as Comcast and Charter have used a shared network agreement with Verizon to expand their own mobile services. Comcast’s wireless revenue grew 30% year-over-year in the second quarter and more than 80% from two years ago. Charter’s quarterly wireless sales grew 40% year-over-year; two years ago, the company didn’t even generate revenue from wireless because the business was so new.
Comcast and Charter have to share their wireless network with Verizon under their network agreement, which cuts into margins. A well-run mobile virtual network operator still has margins around 10%, Moffett said. But that could grow over time, he said.
“Wireless may not be a better business than broadband, but it’s a much bigger business,” Moffett said.
Charter Chief Operating Officer Chris Winfrey said during the company’s second-quarter earnings conference call that the potential of cable wireless is underappreciated.
Given wireless companies’ push for broadband and cable companies’ shift to mobile services, some believe a merger of the two industries is inevitable.
“It just doesn’t make any sense not to, purely from an operating synergy standpoint, a capital allocation synergy standpoint, a branding synergy standpoint, and a branding synergy standpoint,” Altice CEO Dexter Goey told CNBC last year. Altice is the fourth largest US cable provider behind Comcast, Charter and Cox.
The more services customers receive from one provider, the less likely they are to leave, Goi said.
Mergers and acquisitions as a last resort
A merger of Comcast or Charter with T-Mobile, Verizon and AT&T is not realistic, given the U.S. regulatory stance on market power, Moffett said. However, different presidential administrations may have different views on what is acceptable. For example, Sprint and T-Mobile were able to merge under the Trump administration after government officials told them not to even try for years.
“Never say never, right?” – said Goi. “Strategic transactions where you have different services, I don’t see why that shouldn’t be something that should be allowed by the antitrust department.”
If a wireless cable merger isn’t in the works, there are other potential ways deals could rekindle investor interest.
Regional cable operator WideOpenWest and Suddenlink, an asset owned by Altice USA, are in talks with potential buyers, according to people familiar with the matter. Gabelli’s Maranji said the deal could increase the number of publicly traded cable stocks by lowering the companies’ valuation multiple.
Charter or Comcast could also buy non-cable assets to re-attract investors to their companies.
“This is Management 101; when companies start to grow, they turn to mergers and acquisitions,” said Petsyk of LightShed Partners.
It is also possible that investors will view external acquisitions as a distraction rather than a new opportunity. Shareholders are likely to resist deals involving media assets, such as Comcast’s past acquisitions of Sky and NBCUniversal, Moffett said.
Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.
WATCH: Comcast reports flat broadband subscribers
Comcast and Charter may need renewed attention as broadband growth stalls
Source link Comcast and Charter may need renewed attention as broadband growth stalls