Barclays: Expect slower growth for cable companies Comcast and Charter; AT&T to benefit
Investors should expect slower growth ahead for cable companies Comcast and Charter Communications, according to Barclays. Analyst Kannan Venkateshwar downgraded shares of Comcast to equal weight, and shares of Spectrum parent company Charter to underweight, pointing to dwindling subscriber numbers.Barclay’s noted dwindling subscriber numbers for the two companies.
A key source of concern among cable investors is the presence of emerging competition in the market for internet services, as wireless companies push forward with fiber and fixed-wireless-access offerings. While Comcast’s and Charter’s management teams made some acknowledgment of the competitive landscape on their earnings calls, they maintained that the biggest factor driving recent performance was that people have been moving homes in smaller numbers than before.
Venkateshwar didn’t seem sold on the cable companies’ explanations. “While cable has gained share vs DSL over time and therefore lower moves would impact growth rates, it is mathematically impossible to get to negative growth as seen last quarter, purely on account of lower move activity,” he wrote. “In addition, the decline in move activity is not new and has been going on for years and tends to worsen during recessions.”
He added that even if move rates were to improve, “there are new elements that are likely to reduce cable’s share of gross adds” — namely the emerging competitive dynamics.
“Charter’s management almost seems in denial of competition in talking down its impact, but if TMUS does grow fixed wireless access (FWA) to the full extent of its guidance range (~500k+/quarter), TMUS alone would be bigger than Altice by the end of next year,” Venkateshwar continued. “It is tough to see this not impacting cable structurally when cable net adds overall have been ~3mm in normal years and TMUS and VZ alone could add 2-2.5mm FWA subs a year.”
Venkateshwar isn’t sure that FWA represents “a viable solution for telecom operators long term” given capacity requirements, but said that for the moment, T-Mobile US Inc.and Verizon Communications Inc. have “low marginal costs due to excess spectrum.”
“Consequently, even if FWA proves unviable long term, it could still be a significant headwind for cable over the next 2-3 years,” he wrote.
Additionally, with the help of government funding, more people could move from DSL over to fiber, which would benefit AT&T which has been laser focused on growing its fiber footprint.
Venkateshwar acknowledged that one criticism of his analysis may be that he isn’t giving the cable companies enough credit for growing their own footprints, but he doesn’t see much correlation between footprint expansion and broadband growth rates for Comcast, Charter, and Altice USA Inc. when looking at the past five years. Accordingly, he expects the companies could get even less marginal benefit in a world with growing competition.
“Overall, these factors imply that the largest cable companies, Comcast and Charter, are likely past peak growth and the debate therefore boils down to the degree of downside to broadband net adds going forward,” he wrote. Venkateshwar said that his analyst suggests “cable providers could be at flat growth next year and potentially negative thereafter unless their pace of footprint expansion and marginal penetration of this expanded base accelerates.”
He noted that the companies have been growing wireless subscribers, though he has questions about the long-term economic potential of their wireless involvement. As it stands, Charter and Comcast have a mobile virtual network operator (MVNO) arrangement with Verizon that allows the companies to leverage Verizon’s network.
This strategy makes sense to test out the market and launch a service, but to anchor long-term strategic pivot of the scale that cable companies are attempting on someone else’s network is not viable in our view,” he wrote. “If cable companies continue to face challenges in broadband, which we think is likely, they may have little choice but to invest in more extensive wireless infrastructure in some form to extract the benefit of scale in wireless.”
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AT&T is planning a major expansion of its fiber network. The company currently delivers fiber internet to customers in 21 states, most of which are in the South and Midwest.
AT&T fiber is currently unavailable in Arizona, but the company intends to launch service for 100,000 homes in Mesa by next year.
Corning Inc. invented optical fiber in 1970 and is now a major provider of cable across the world.
The Corning-AT&T relationship is mutually essential; The two companies develop products and processes together, and AT&T relies on Corning for cable.
“They supply not 100 percent, but nearly all of our fiber,” Stankey said in an interview. “They provide 100 percent of our fiber for last mile distribution. This is the latest example of cooperation around a new way of assembling fiber units and deploying it into the field that is faster, lower costs, higher reliability, less disruption in the neighborhood.”
Stankey said fiber optic internet is far more reliable than cable internet and it provides better upload bandwidth, which is important for video conferencing or sharing other large files. AT&T’s hope is that deploying residential and consumer fiber will in turn help bolster its business and consumer wireless units as well.
Corning’s optical communications segment is its largest, generating about 30% of the company’s $14 billion in revenue during 2021. CEO Weeks said he only expects the segment to continue growing.
“We’re seeing double-digit growth for as far as we can see going forward,” he said.
https://www.bizjournals.com/phoenix/news/2022/08/31/corning-att-fiber-infastructure-plant.html