The two biggest cable providers in the US, Comcast and Charter, are struggling with internet expansion.
Over the previous 10 years, as tens of millions of Americans dropped their cable TV service, the cable industry concentrated on the more lucrative sale of broadband internet.
As a result of both providers reporting residential broadband decreases in the second quarter, the number of American households paying Comcast and Charter for high-speed Internet is now declining for the first time. Comcast reported losing 10,000 residential subscribers and another 30,000 in July. Charter lost 42,000 customers.
The chief executives of Comcast, Brian Roberts, and Charter, Tom Rutledge, attributed the losses primarily to macroeconomic factors and higher-than-average gains during the epidemic. As the primary cause of decreasing connections, Comcast expressly cited fewer individuals moving.
“There’s been a dramatic slowdown in moves across our footprint,” remarked Roberts last month on the earnings conference call for Comcast. He observed that the company added roughly 50% more clients in the first year of the epidemic than it had in the previous year on average.
Investors in Comcast and Charter, which are currently trading near two-year lows, are extremely concerned about the abrupt halt to the broadband growth run. Comcast’s stock has lost around 25% of its value so far this year, while Charter has lost about 33%.
Additionally, Roberts noted in the results call that new competition was a factor in the broadband decline, even though pandemic and macroeconomic trends might abate over time.
The rise of the fixed wireless revolution
For many years, there was no competition for high-speed internet among cable companies in many parts of the nation.
Then, almost three years ago, T-Mobile introduced its fixed wireless service, a 5G high-speed internet option that competes with cable Internet. Over 40 million homes nationwide have access to T-Mobile high speed internet as of April. By the end of 2025, Verizon stated earlier this year, it expects to have between 4 million and 5 million fixed wireless users.
Roberts labelled fixed wireless “an inferior offering” in March. By the end of 2024, T-Mobile has guaranteed that at least half the nation would have access to speeds of 100 megabits per second. Broadband services using standard cable (and fibre) may often offer speeds that are about twice as fast. Furthermore, 5G airwave congestion limits fixed wifi. There is no such restriction with cable, which connects wires straight to the residence.
“We’ve seen lower price, lower speed offerings before. And in the long run, I don’t know how viable the technology holds up,” Rat the Morgan Stanley Technology, Media & Telecom Conference, Roberts said.
T-fixed Mobile’s wireless service has a fixed monthly cost of $50. According to New Street Research, the average monthly revenue per cable broadband user is currently over $70 and is expected to reach more than $75 by 2025.
T-Mobile has increased its market share in the wireless sector by lowering rates, and it now seems to be doing the same with cable. T-Mobile racked up a massive 560,000 new fixed wireless users in the second quarter, while Comcast and Charter saw a decline in broadband subscribers. More over half of T-new Mobile’s customers reportedly left cable.
“Demand continues to build from dissatisfied suburban cable customers to underserved customers in smaller markets and rural areas,” during the call to discuss the company’s profits, T-Mobile CEO Mike Sievert remarked. T-Mobile also mentioned that the average speed of its 5G network (187.33 Mpbs) beat Comcast and Charter broadband (184.08 and 183.74, respectively) in a July nationwide speed test conducted by Ookla.
Roberts argued that T-expansion Mobile’s growth is fueled by luring in new customers and denied that individuals are transferring from Comcast to any fixed provider.
“We are not seeing fixed wireless have any discernible impact on our churn,” Roberts said.
Chris Marangi, a portfolio manager at Gabelli Funds, said Comcast and Charter will still need to persuade investors there is another incentive to invest in cable if fixed wireless continues to eat into cable broadband growth.
“There’s not an obvious catalyst,” said Marangi. “You’re probably not going to get reinvigorated broadband growth in the next six months.”
Charter, Comcast, Verizon, and T-Mobile are owned by Gabelli Funds.
The fear of cable investment
The concern among cable stockholders goes beyond the possibility that Comcast and Charter are nearing the conclusion of a period of rapid broadband expansion. Additionally, new competition will result in reduced prices. Given the promotional pricing and stagnant growth, broadband may eventually resemble the cellphone industry, which has been plagued by price wars and thin profit margins for years.
According to Craig Moffett, a telecom analyst at MoffettNathanson, it’s still too early to predict if fixed wireless will displace cable companies as a market leader in the years to come or whether congestion problems would force cellular providers to limit the number of users. According to Moffett, fixed wireless uses much more data than mobile wireless but only makes around 20% more money at the moment’s prices.
“Time will tell if this migration to fixed wireless is just a temporary opportunity,” Moffett said.
According to Walt Piecyk, an analyst at LightShed Partners, fixed wifi may only be having “a moment” and users will eventually reject the service as being too unstable or slow.
“Right now, it looks like it works. They’re taking cable customers,” said Piecyk. “We’ll see if this is sustainable two or three quarters from now.”
If fixed wireless growth slows, investors’ mood may shift back toward Comcast and Charter thanks to cable’s technological advantages.
“While the narrative of slowing connects ahead of increasing competition does not bode well for sentiment, we believe cable’s network advantage across the majority of its footprint will drive sub growth,” in a note to clients, JP Morgan analyst Philip Cusick wrote.
Wireless overtakes cable
Moffett projected that wireless would be the next chapter for cable as TV viewing declined and broadband expansion slowed.
Due to Comcast and Charter’s utilisation of a shared network deal with Verizon to expand their own mobile services, wireless has emerged as cable’s new growth story. In the second quarter, Comcast’s wireless revenue increased 30 percent year over year and more than 80 percent from two years prior. In comparison to the same quarter last year, Charter’s cellular revenues increased by 40%. Two years ago, the company didn’t even break out wireless revenue because the industry was so young.
Due to the terms of their network arrangement, Comcast and Charter are required to share wireless with Verizon, which reduces their profit margins. According to Moffett, a well-run mobile virtual network operator still only has margins of roughly 10%. But, he added, that might increase over time.
“Wireless may not be a better business than broadband, but it is a much bigger business,” Moffett said.
The potential of cable wireless is underrated, according to Charter Chief Operating Officer Chris Winfrey, who made the statement during the company’s conference call to discuss second-quarter earnings.
Some believe that the two industries will inevitably combine given the push by cellular carriers into broadband and the advance by cable companies into mobile service.
“It just doesn’t make any sense not to, purely from an operational synergies, from a capital-allocation synergies, from a branding-synergies standpoint,” Dexter Goei, CEO of Altice, stated to CNBC last year. After Comcast, Charter, and Cox, Altice is the fourth-largest cable company in the United States.
According to Goei, customers are less inclined to switch providers the more services they use from one supplier.
Last resort: Mergers & Acquisitions
Given the American regulatory approach to market power, a combination between Comcast or Charter and T-Mobile, Verizon, or AT&T is unfeasible, according to Moffett. However, various presidential administrations may have different ideas about what is appropriate. For instance, under the Trump administration, Sprint and T-Mobile were permitted to merge after years of being instructed by government officials not to even try.
“Never say never, right?” Goei said. “Strategic transactions where you have different services, I don’t understand why that should not be something that should be allowed by the antitrust division.”
There are other possible ways that agreements could pique investor interest if a wireless-cable merger is not in the cards.
According to persons with knowledge of the situation, regional cable operator WideOpenWest and Suddenlink, an asset owned by Altice USA, are both in discussions with prospective buyers. According to Gabelli’s Marangi, a deal may boost publicly traded cable stocks by raising the businesses’ value multiples.
Additionally, Charter or Comcast might invest in a non-cable asset to rekindle investor interest in their businesses.
“It’s Management 101; when companies go ex-growth, they look to M&A,” Piecyk from LightShed Partners remarked.
However, it’s also feasible that investors might see a third-party acquisition as a distraction rather than a new chance. According to Moffett, investors would probably oppose transactions for media assets like Comcast’s previous purchases of Sky and NBCUniversal.
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