Comcast and Charter may need new direction as broadband growth stalls

Brian Roberts, CEO of Comcast (L), and Tom Rutledge, Managing Director of Charter Communications

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Comcast and charterthe 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 most profitable business of selling broadband Internet.

Today, the number of US households paying Comcast and Charter for high-speed Internet fell for the first time, with both companies reporting declines in residential broadband in the second quarter. Comcast lost 10,000 residential customers and noted that it was down another 30,000 in July. charter dropped by 42,000.

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

“There’s been a dramatic slowdown in movement across our footprint,” Roberts said on 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 abrupt end 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 is down about 33%.

And while pandemic and macro trends may subside over time, Roberts also acknowledged in the earnings call another reason for declining broadband: new competition.

The rise of fixed wireless

For decades, cable companies have enjoyed having little competition in many parts of the country for high-speed Internet..

Then, about three years ago, T-Mobile launched its fixed wireless product, a 5G broadband product which works as an alternative to cable broadband. Starting in April, T-Mobile’s high-speed Internet is available for more than 40 million households Across the country. Verizon said earlier this year that it plans to have between 4 million and 5 million fixed wireless customers by the end of 2025.

In March, Roberts fired fixed wireless as “an inferior product”. T-Mobile promised half the country would get speeds of at least 100 megabits per second by the end of 2024. Broadband cable (and fiber) standard can typically deliver speeds about twice as fast. In addition, fixed wireless is limited by the congestion of 5G waves. The cable, which runs the wires directly to the house, has no such limitation.

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

T-Mobile charges a fixed monthly fee of $50 for its fixed wireless service. New street search valued the average monthly cable broadband revenue per usage is nearly $70 and will likely reach over $75 by 2025.

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

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

Roberts took issue with customers dropping Comcast for any landline service, saying T-Mobile’s growth is based on new customers.

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

Still, if fixed wireless continues to eat away at cable broadband growth, Comcast and Charter will have 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. “You probably won’t get reinvigorated broadband growth over 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 are 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 stalled growth could end up turning broadband into something more like the wireless business, which has been stymied by price wars and low profit margins for years. .

It’s too early to tell whether fixed wireless will steal market share from cable companies in the coming years or whether congestion issues are forcing wireless service providers to limit the number of users, said analyst Craig Moffett. in telecommunications at MoffettNathanson. Moffett noted that fixed wireless uses significantly more data than mobile wireless, but only generates about 20% more revenue based on current rates.

“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 will dismiss the service over time as too unreliable or lacking in speed, said Walt Piecyk, an analyst at LightShed Partners.

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

Cable’s technological advantages could shift investor sentiment toward Comcast and Charter if fixed wireless growth wanes.

“While the story of slowing connections ahead of increased competition doesn’t bode well for sentiment, we believe the cable network’s advantage over the majority of its footprint will spur undergrowth,” wrote JP Morgan analyst Philip Cusick in a note to clients.

Cable 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 used a shared network agreement with Verizon to boost 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 wireless quarterly sales increased 40% over the prior year period; two years ago, the company didn’t even have wireless revenue because the business was so new.

Comcast and Charter have to share wireless with Verizon as part of their network agreement, which squeezes margins. A well-run mobile virtual network operator still only has margins of around 10%, Moffett said. But that could increase over time, he said.

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

Charter Finance Director Chris Winfrey said on the company’s second-quarter earnings conference call that the potential of wired wireless is underestimated.

Given the push of wireless companies into broadband, as well as the move of cable companies into mobile service, some believe it is inevitable that the two industries will merge.

“It just doesn’t make sense not to, just from operational synergies, capital allocation synergies, from a brand synergies perspective,” said Dexter Goei, CEO of Altice. told CNBC last year. Altice is the fourth largest US cable company 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 U.S. regulatory stance on market power, Moffett said. Yet 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 try.

“Never say never, right?” said Goei. “Strategic transactions where you have different departments, I don’t understand why that shouldn’t be something that should be cleared 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 WideOpenWest cable operator and sudden link, an asset owned by Altice USA, are both in talks with potential buyers, according to people familiar with the matter. A transaction could boost publicly traded cable shares by resetting the company’s valuation multiple to the upside, Gabelli’s Marangi said.

Charter or Comcast could also buy an uncabled asset to rekindle investor enthusiasm for their ventures.

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

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

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

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