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Comcast and Charter may need new focus as broadband growth stalls


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

Drew Angerer | beautiful pictures

Comcast and RegulationsAmerica’s two largest cable companies, have broadband growth problems.

As tens of millions of Americans canceled their cable TV subscriptions over the past decade, the cable industry focused on a more profitable business than 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 a decline in residential broadband for the second quarter. Comcast lost 10,000 residential customers and note that it fell another 30,000 in July. Regulations down 42,000.

Comcast CEO Brian Roberts and Charter counterpart Tom Rutledge blamed macroeconomic trends and stronger-than-normal gains during the pandemic as the main reasons for the damage. Comcast specifically points out that fewer people are moving as the main reason for lower connectivity.

“There has been a significant slowdown in moves through our footprint,” Roberts said during Comcast’s earnings conference call last month. During the first year of the pandemic, he noted that the company gained nearly 50% more customers than the previous average annual growth.

The abrupt end of a streak of broadband growth is a big concern for investors in Comcast and Charter, which are trading near two-year lows. So far, Comcast stock is down about 25%, while Charter is down about 33%.

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

The rise of fixed wireless

For decades, cable companies had 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 . high-speed broadband product function as an alternative to cable broadband. Since April, T-Mobile High Speed ​​Internet available for more than 40 million households nationwide. Verizon said earlier this year it plans to have between 4 million and 5 million fixed wireless devices customers by the end of 2025.

In March, Roberts denied wireless fixed is “a poor quality product.” T Mobile promised half of the country to be at least 100 megabits per second by the end of 2024. Standard cable (and fiber) broadband can often provide twice as fast. Moreover, fixed wireless is limited by congestion on 5G waves. Cable, running the wire directly to the house, has no such restriction.

Roberts said at Morgan Stanley Technology, Media & Telecom Conference.

T-Mobile charges a flat $50 monthly fee for its fixed wireless service. New street research estimates The average monthly revenue of broadband cable per use is close to $70 and is likely to grow to over $75 by 2025.

Just as T-Mobile thrived in the wireless industry by offering lower prices, it seems 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 subscriptions. T-Mobile said more than a half Its new customers have switched from cable.

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

Roberts countered that customers were abandoning Comcast for any fixed service, and asserted T-Mobile’s growth was based on new customers.

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

However, if fixed wireless continues to take hold of cable’s broadband growth, Comcast and Charter will need to convince investors there’s another reason to put money in cable, said Chris Marangi, a manager portfolio at Gabelli Funds, said.

“There is no clear catalyst,” says Marangi. “You probably won’t get broadband growth restored for the next six months.”

Separate charter of Gabelli Funds, Comcast, Verizon and T-Mobile.

The fear of investing in cable

The fear among cable shareholders is not just that Comcast and Charter may be at the end of an era but of broadband growth. It is also new competition that will lead to lower prices. The combination of promotional pricing and stalled growth could turn broadband into something of what looks like the wireless business, already plagued by price wars and low profit margins in the region. many years.

Craig Moffett, a telecoms analyst at MoffettNathanson, said it was too early to tell if fixed wireless would take market share away from cable companies in the coming years or if congestion problems forced carriers Wireless service providers must limit the number of users. Moffett notes that fixed wireless uses more data than mobile wireless, but only generates about 20 percent more revenue based on current prices.

“Time will tell if the transition to fixed wireless is just a temporary opportunity,” Moffett said.

Walt Piecyk, an analyst at LightShed Partners, said it’s possible that fixed wireless simply takes “a bit of time” and customers will decline service over time because it’s too unreliable or lacks speed. degree.

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

Cable’s technological advantage could bring investor sentiment back to Comcast and Charter if fixed wireless growth slows down.

JP Morgan analyst Philip Cusick wrote in a note to clients: “While the narrative of slowing connectivity in the face of increasing competition does not bode well for sentiment, we believe the network advantage of cable over most of its area will drive secondary growth.”

Cable to wireless

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

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

Comcast and Charter had to share the wireless network with Verizon under the structure of their network agreement, pushing profits lower. A mobile virtual network operator that is doing well still only has a profit margin of about 10%, Moffett said. But that could evolve over time, he said.

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

Chartered Executive Officer Chris Winfrey said on the company’s second-quarter earnings conference call that the potential of wireless cables is underestimated.

With wireless companies’ push into broadband, along with the shift of cable companies to mobile service, some think it’s inevitable the two industries will merge.

“It doesn’t make sense otherwise, it’s purely from operational synergies, capital allocation synergies, from a branding synergies point of view,” Altice CEO Dexter Goei told CNBC last year. Altice is the fourth largest US cable provider after Comcast, Charter and Cox.

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

M&A is a last resort

Comcast or Charter merger with T-Mobile, Verizon and AT&T It is unrealistic, Moffett said, to take the U.S. regulatory stance on market power. However, different presidential administrations may have different views on what is acceptable. Example: Sprint and T-Mobile could merge under the Trump administration after years of being told by government officials not to try.

“Never say never true?” Goei said. “Strategic deals where you have different services, I don’t see why that’s not something that should be allowed by the antitrust department.”

If a wireless cable merger isn’t on the cards, there are other potential ways to trade that could renew investor interest.

Area cable operator WideOpenWest and Sudden link, a property owned by Altice USA, both are in talks with potential buyers, according to people familiar with the matter. One trade could lift publicly traded cable stocks, said Gabelli’s Marangi, by resetting the valuation ratios of the companies higher.

Charter or Comcast may also purchase a non-cable asset to bring new excitement to investors for their company.

“It’s Management 101; when companies grow massively, they look to M&A,” says LightShed Partners’ Piecyk.

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

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

WATCH: Comcast reports flat broadband subscribers



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