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

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

Drew Angerer | Getty Images

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

When tens of millions of Americans canceled their cable television subscriptions in the past decade, the cable industry turned to more profitable broadband Internet sales.

Now the number of US households paying Comcast and Charter for high-speed internet is falling for the first time, with both companies reporting a decline in residential broadband in the second quarter. Comcast lost 10,000 residential customers, noting that it dropped another 30,000 in July. Charter fell 42,000.

Comcast CEO Brian Roberts and Charter counterpart Tom Rutledge blamed macroeconomic trends and stronger-than-normal profits during the pandemic as primary 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 the movements in 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 annual average growth.

The abrupt end to the streak of broadband growth is a major concern for investors in Comcast and Charter, which are trading at two-year lows. Comcast shares are down about 25% so far, while Charter is down about 33%.

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

The rise of wired wireless

For decades, cable companies have enjoyed the fact that there was little competition for high-speed internet in many regions of the country.

About three years ago, T-Mobile launched its fixed wireless product, a 5G high-speed broadband product that acts as an alternative to cable broadband. Since April, T-Mobile has made high-speed internet available to more than 40 million households across the country. Verizon said earlier this year it plans to have between 4 million and 5 million fixed wireless customers by the end of 2025.

In March, Roberts dismissed fixed wireless connections 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 optic) broadband can typically deliver speeds that are about twice as fast. In addition, fixed wireless connection is limited by congestion on 5G airwaves. Cable, which leads wires directly to the house, has no such limitation.

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“We’ve seen offers with lower prices and slower speeds before. And in the long run, I don’t know how viable the technology will hold up,” Roberts said at the Morgan Stanley Technology, Media & Telecom Conference.

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

Just as T-Mobile grew in the wireless industry by offering lower prices, it seems to be doing the same with 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 are switching from cable.

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

Roberts disputed that customers are dumping Comcast for a fixed service, claiming that T-Mobile’s growth is based on new customers.

“We don’t see wired wireless connections having an observable impact on our churn,” Roberts said during Comcast’s July 28 earnings conference.

But if wired 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,” said Marangi. “You probably won’t get revived broadband growth for the next six months.”

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

The fear of cable investments

The fear among cable shareholders isn’t just that Comcast and Charter are at the end of an era of broadband growth. It is also that new competition will lead to lower prices. The combination of promotional pricing and stagnant growth could eventually turn broadband into something more akin to the wireless business, which has been thwarted for years by price wars and low profit margins.

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It’s too early to say whether wired wireless will take market share from cable companies in the coming years or whether congestion issues will force wireless carriers to limit the number of users, said Craig Moffett, a telecom analyst at MoffettNathanson. Moffett noted that wired wireless consumes much more data than mobile wireless, but only generates about 20% more revenue based on current pricing.

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

It’s possible that wired wireless is just having “a moment,” and over time customers will dismiss the service as too unreliable or underspeed, said Walt Piecyk, an analyst at LightShed Partners.

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

Cable’s technological advantages could drive investor sentiment back toward Comcast and Charter as fixed wireless network growth slows.

“While the story of slowing connections ahead of increasing competition doesn’t bode well for sentiment, we believe cable’s network advantage will drive sub-growth across most of its footprint,” JP Morgan analyst Philip Cusick wrote in a note. customers.

Cable goes to wireless

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

Wireless has become cable’s new growth story as Comcast and Charter have used a shared network agreement with Verizon to boost their own mobile services. Comcast’s second-quarter revenue grew 30% year-over-year and more than 80% from two years ago. Charter’s quarterly wireless revenue grew 40% year-over-year; two years ago, the company didn’t even break out of wireless revenue because the company was so new.

Comcast and Charter must share wireless with Verizon as part of their network agreement, reducing margins. A well-run mobile virtual network operator still only has margins of about 10%, Moffett said. But that could grow over time, he said.

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“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 conference call that the potential of wireless cable is being underestimated.

Given the push of wireless companies towards broadband, along with cable companies’ move towards mobile services, some think it is inevitable that the two industries will merge.

“It just doesn’t make sense not to do that, purely from operational synergies, from capital allocation synergies, from a branding synergies standpoint,” Altice CEO Dexter Goei told UKTN last year. Altice is the fourth largest cable provider in the US, after Comcast, Charter and Cox.

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

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 different 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.

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

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

Regional cable operator WideOpenWest and Suddenlink, owned by Altice USA, are both in talks with potential buyers, acquaintances said. A transaction could boost publicly traded cable stocks by pushing the companies’ valuation multiple higher, Gabelli’s Marangi said.

Charter or Comcast could also buy a non-cable asset to re-energize their companies for investors.

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

However, investors may also view an outside acquisition as a distraction rather than a new opportunity. Shareholders would likely oppose deals on media assets, such as Comcast’s previous acquisitions of Sky and NBCUniversal, Moffett said.

Revelation: Comcast is the parent company of NBCUniversal, which owns UKTN.

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