Comcast and Charter may need new focus as broadband growth stalls amid competition

Comcast and Charter may need new focus as broadband growth stalls amid competition

Brian Roberts, CEO of Comcast (left), and Tom Rutledge, CEO of Charter Communications

Drew Angerer | fake images

Comcast and Charter, the two largest cable companies in the US, 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 of selling broadband Internet.

Now, the number of US households paying Comcast and Charter for high-speed Internet is falling for the first time, with both companies reporting drops in residential broadband in the second quarter. Comcast lost 10,000 residential customers and noted down another 30,000 in July. Charter fell 42,000.

Comcast CEO Brian Roberts and his 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 lower connections.

“There has been a dramatic slowdown in movements across our footprint,” Roberts said during Comcast’s 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 to broadband’s growth streak is a big concern for investors in Comcast and Charter, which are trading near two-year lows. Comcast shares are down 25% year to date, while Charter is down 33%.

And while pandemic and macroeconomic trends may abate over time, Roberts also acknowledged on the earnings call another reason for broadband’s decline: new competition.

The rise of wireless fixed telephony

For decades, cable companies 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 wired broadband. As of April, T-Mobile high-speed Internet is available to more than 40 million households across the country. Verizon said earlier this year that it plans to have 4 million to 5 million fixed wireless customers by the end of 2025.

In March, Roberts dismissed fixed wireless technology as “an inferior product.” T-Mobile has promised that half the country will get speeds of at least 100 megabits per second by the end of 2024. Standard cable (and fiber) broadband can typically deliver speeds about twice as fast. Also, the fixed wireless connection is limited by congestion on the 5G radio waves. Cable, which carries wires directly into the home, doesn’t have that limitation.

“We’ve seen lower price, lower speed offerings before. And in the long run, I don’t know how viable the technology is,” Roberts said at the Morgan Stanley Technology, Media and Telecom Conference.

T-Mobile charges a flat monthly fee of $50 for its fixed wireless service. New Street Research estimated that the average monthly cable broadband revenue per usage is nearly $70 and will likely rise to more than $75 by 2025.

Just as T-Mobile grew the wireless industry by offering lower prices, it appears to be doing the same with cable. In the second quarter, T-Mobile added 560,000 new fixed wireless customers as Comcast and Charter lost broadband subscribers. T-Mobile said that more than half of its new customers switched from cable.

“Demand continues to rise, from dissatisfied 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 results from Ookla’s national speed test in July showed that its 5G network (187.33 Mpbs) outperformed Comcast and Charter’s broadband (184.08 and 183.74, respectively) in average speed terms.

Roberts questioned why customers are leaving Comcast for any fixed service, saying T-Mobile’s growth is based on new customers.

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

Still, if fixed wireless continues to hurt wired broadband growth, Comcast and Charter will need to convince investors there’s another reason to put their money in cable, said Chris Marangi, portfolio manager at Gabelli Funds. .

“There is no obvious catalyst,” Marangi said. “Broadband growth probably won’t revive in the next six months.”

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

The fear of investing in cable

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

It’s too early to tell whether fixed wireless will take market share from cable companies in the coming years or whether congestion issues are forcing wireless providers to limit the number of users, said Craig Moffett, a telecommunications analyst at Moffett Nathanson. Moffett noted that fixed wireless uses much 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 just a temporary opportunity,” Moffett said.

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

“Right now, it seems to work. They’re accepting cable customers,” Piecyk said. “We will see if this is sustainable in two or three quarters.”

Cable’s technological advantages may change investor sentiment toward Comcast and Charter if fixed wireless growth slows.

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

Wired goes wireless

As television declines and broadband growth slows, the next chapter for cable will be wireless, Moffett predicted.

Wireless has become the new growth story for cable, as Comcast and Charter have used a shared network agreement with Verizon to power 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 wireless quarterly sales grew 40% from the prior year period; Two years ago, the company didn’t even break out wireless revenue because the business was so new.

Comcast and Charter have to share wireless services with Verizon under the construction of their network agreement, pushing margins down. A well-run mobile virtual network operator only has margins of about 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 Financial Officer Chris Winfrey said during the company’s second-quarter earnings conference call that wireless cable’s potential is underestimated.

Given wireless companies’ push into broadband, coupled with cable companies’ move into mobile, some think it’s inevitable that the two industries will merge.

“It just doesn’t make any sense not to do it, just from the operating synergies, from the capital allocation synergies, from the brand synergies standpoint,” Altice CEO Dexter Goei told CNBC last year. . Altice is the fourth largest cable provider in the US 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 between Comcast or Charter with T-Mobile, Verizon and AT&T is unrealistic given the US regulatory stance on market power, Moffett said. Still, different presidential administrations may have varying views on what is acceptable. For example, Sprint and T-Mobile were able to merge under the Trump administration after years of being told by government officials not to even bother trying.

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

If a wireless-cable merger isn’t on 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 in talks with potential buyers, according to people familiar with the matter. A transaction could boost publicly traded cable stocks by resetting the companies’ valuation multiple higher, Gabelli’s Marangi said.

Charter or Comcast could also buy a non-cable asset to bring renewed investor enthusiasm to their companies.

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

However, it is also possible that investors see an external acquisition as a distraction rather than a new opportunity. Shareholders are likely to resist deals for media assets, such as Comcast’s earlier acquisitions of Sky and NBCUniversal, Moffett said.

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

WATCH: Comcast reports flat broadband subscribers

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