Comcast and Charter may need new attention as broadband growth stalls

Brian Roberts, CEO of Comcast (L) and Tom Rutledge, chief executive of Charter Communications

Drew Angerer | Getty Images

Comcast and Charter, the two largest US cable companies, have a broadband growth problem.

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 than selling broadband Internet.

Now, the number of US households paying Comcast and Charters for high-speed Internet is declining for the first time, with both companies reporting a decline in residential broadband in the second quarter. Comcast lost 10,000 residential customers and noted it was down another 30,000 in July. The card lost 42,000.

Comcast CEO Brian Roberts and Charter counterpart Tom Rutledge blamed macroeconomic trends and stronger than normal earnings during the pandemic as the main reasons for the losses. Comcast specifically pointed to fewer people moving as the main reason for the inferior connections.

“There has been a dramatic slowdown in movements across our footprint,” Roberts said during a Comcast earnings conference call last month. In the first year of the pandemic, he noted that the company added nearly 50% more customers than its previous average annual growth.

The abrupt end of 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 is down about 33%.

And while the pandemic and macroeconomic trends may subside over time, Roberts also recognized another reason for the decline in broadband in earnings demand: new competition.

The rise 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 launched its fixed wireless product, a high-speed 5G broadband product that works as an alternative to cable broadband. As of April, T-Mobile high-speed internet is available to over 40 million households across the country. Verizon said earlier this year that it expects to have between 4 and 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 half of the country will reach speeds of at least 100 megabits per second by the end of 2024. Standard cable (and fiber) broadband can typically deliver speeds twice as fast. Additionally, fixed wireless is limited by congestion from 5G radio waves. The cable, which runs the cables directly to the house, has no such limitation.

“We’ve already seen offers at lower prices and lower speeds. And in the long run, I don’t know how good the technology is,” Roberts told the Morgan Stanley Technology, Media & Telecom Conference.

T-Mobile charges a flat monthly fee of $ 50 for its fixed wireless service. New Street Research estimates that the average monthly income from cable broadband usage is nearly $ 70 and is likely to rise to over $ 75 by 2025.

Just as T-Mobile has grown into the wireless industry by offering lower prices, it seems to do the same with the cable. In the second quarter, T-Mobile added a whopping 560,000 new fixed wireless customers as Comcast and Charter lost broadband subscribers. T-Mobile said more than half of its new customers have switched from cable.

“Demand continues to grow from unsatisfied suburban cable customers to underserved customers in smaller markets and rural areas,” T-Mobile CEO Mike Sievert said during the company’s earnings conference call. T-Mobile also noted that Ookla’s national speed test results in July, which showed its 5G network (187.33 Mpbs) outperformed Comcast and Charter broadband (184.08 and 183.74, respectively. ) in terms of average speed.

Roberts disputed that customers are abandoning Comcast for any fixed service, arguing that T-Mobile’s growth is based on new customers.

“We don’t see fixed wireless having any discernible impact on our abandonment,” Roberts said during Comcast’s earnings conference call on July 28.

However, if fixed wireless continues to dent the growth of cable broadband, Comcast and Charter will have to convince investors that there is another reason to invest their money in cable, said Chris Marangi, portfolio manager at Gabelli Funds.

“There is no obvious catalyst,” said Marangi. “You probably won’t get reinvigorated broadband growth in the next six months.”

Gabelli Own Funds Charter, Comcast, Verizon and T-Mobile.

The fear of cable investments

The fear among cable shareholders isn’t just that Comcast and Charter may be at the end of an era of broadband growth. It is also that the new competition will lead to lower prices. The combination of promotional pricing and stalled growth could end up turning broadband into something that looks more like the wireless business, which has been hampered for years by price wars and low profit margins.

It’s too early to say whether fixed wireless will steal market share from cable companies in the coming years or whether congestion problems force wireless service providers to limit user numbers, said Craig Moffett, a telecommunications analyst at MoffettNathanson. Moffett noted that fixed wireless uses far more data than mobile wireless, but only generates about 20% more revenue based on current prices.

“Time will tell if this migration to fixed wireless is only a temporary opportunity,” Moffett said.

It’s possible that fixed wireless is simply having “a moment” and customers will decline service over time as being too unreliable or lacking in speed, said Walt Piecyk, analyst at LightShed Partners.

“Right now, it looks like it’s working. They’re taking cable customers,” Piecyk said. “We’ll see if this is sustainable in two or three quarters.”

Cable’s technology advantages could bring back investor sentiment towards Comcast and Charter if fixed wireless growth slows.

“While the narrative of slowing connections before increased competition does not bode well for sentiment, we believe the cable network advantage in most of its footprint will drive secondary growth,” wrote the JP analyst. Morgan Philip Cusick in a note to customers.

The cable goes wireless

With TV declining and broadband growth slowing, the next chapter for cable will be wireless, Moffett predicted.

Wireless has become the new growth story of cable, as Comcast and Charter used a shared networking agreement with Verizon to enhance their 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% over the prior year period; two years ago, the company didn’t even make wireless revenue because the business was so new.

Comcast and Charter must share wireless with Verizon under the constructs of their network agreement, pushing the margins lower. A well-managed mobile virtual network operator still has margins of around 10%, Moffett said. But that could grow over time, he told her.

“Wireless may not be a better business than broadband, but it’s a much bigger business,” Moffett said.

The Card’s Chief Financial Officer, Chris Winfrey, said during the company’s second quarter earnings conference call that the potential of the wireless cable is underestimated.

Given the push of wireless companies to broadband, coupled with the shift of cable companies to mobile service, some think it is inevitable that the two sectors will merge.

“It just doesn’t make any sense not to, just from an operational synergy, from a capital allocation synergy, from a brand synergy perspective,” Altice CEO Dexter Goei told CNBC last year. Altice is the fourth largest US cable service provider behind Comcast, Charter and Cox.

The more services customers have from the same provider, the less likely they are to leave, Goei said.

M&A as a last resort

A merger of Comcast or Charter with T-Mobile, Verizon and AT&T is unrealistic given the US 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 years of government officials saying they didn’t even bother trying.

“Never say never, right?” Goei said. “Strategic transactions where you have different services, I don’t understand why it shouldn’t be something that should be allowed by the antitrust division.”

If a wireless cable merger isn’t in the cards, there are other potential ways the deals could renew investor interest.

Regional cable operator WideOpenWest and Suddenlink, an asset owned by Altice USA, are both in talks with potential buyers, according to people familiar with the matter. A transaction could lift publicly traded cable stocks by restoring the companies’ valuation multiple to the top, said Gabelli’s Marangi.

Charter or Comcast could also buy a non-cable asset to bring renewed enthusiasm to investors in their businesses.

“It’s Management 101; when companies go ex-growth, they look to mergers and acquisitions,” said Piecyk of LightShed Partners.

However, it is also possible that investors will view an external acquisition as a distraction rather than a new opportunity. Shareholders would likely resist media resource deals, such as Comcast’s past acquisitions of Sky and NBCUniversal, Moffett said.

Clarifications: Comcast is the parent company of NBCUniversal, which owns CNBC.

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