by Craig Moffett of MoffettNathanson (edited by Alan J Weissberger)
Cable company’s 98% share of the wireless industry subscriber growth in Q1-2022 is a little known fact. And that does not include the free WiFi they offer to their customers, e.g. Xfinity WiFi and CableWiFi® (created through a collaboration of U.S. Cable and Internet Service Providers including Cox Communications, Optimum, Spectrum, and XFINITY. It allows each other’s eligible Internet customers free access to a collective network of more than 500,000 WiFi hotspots across the nation).
Until Q1-2022, Cable’s gains were almost exclusively from Comcast and Charter. Altice has now renegotiated its contract with T-Mobile, and they have moved to pricing that is even more aggressive than Comcast and Charter. [Interestingly, Altice’s contract allows Altice to name T-Mobile in their advertising as the underlying network, a contract term we’ve not seen before.]
Cox Communications, the nation’s third largest cable operator, is poised to join Cable’s ranks in offering wireless service, as well. The company won a Delaware Supreme Court decision in March, reversing a lower court decision that had previously upended their launch plans by finding they were bound to launch using T-Mobile’s instead of Verizon’s network, even if doing so was under less favorable contract terms. [They have not yet announced precise timing for their expected wireless relaunch.]
The pending addition of a wireless offering from Cox, and the more aggressive posture from Altice, will certainly compound the pressure Cable is putting on cellular telcos (e.g. Verizon, AT&T, T-Mobile, US Cellular, etc).
Cable’s 703K combined net additions were their best ever, and they have grown their subscriber base to 8.4M customers incredibly quickly. But those 8.4M subscribers still represent less than 3% market share of the U.S. market. They have a very long runway ahead.
Cable has achieved these gains without offering handset subsidies, something that seems inevitable sometime before the end of the year (Cable’s originally-BYOD subscribers will eventually demand new devices). Handset subsides from Cable, if and when they come, will only put more pressure on the cellular telco incumbents.
It is through this lens that one must view Verizon’s attempt to lead the industry to higher pricing [1.]. Subscriber growth is slowing. Cable’s share gains are accelerating. Cable has made clear that they do not plan to increase pricing. Nor does the industry price leader, T-Mobile. And Cable’s promotionality is likely to increase. That is a very tough backdrop against which to assume that price increases will “stick.”
Note 1. Verizon’s price increase, which will drop directly to the bottom line, will increase Verizon’s
service revenue and EBITDA by roughly $750M over the balance of the year, and by approximately $1.5B for next year, neither of which was contemplated in their previous guidance.
After accounting for 3G terminations, AT&T’s growth fell to just 360K net additions, leaving T-Mobile once again the industry’s fastest growing cellular telco. Not only is T-Mobile taking the industry’s largest share of gross additions – the best measure of customer choice – their churn rate is falling faster than any in the industry, as well, as they complete the transition of Sprint subscribers to their T-Mobile Magenta network. T-Mobile’s falling churn rate starves the industry gross add pool of what had been a critical source of “supply.”
The company is now most of the way through their migration of Sprint customers, and they have repeatedly suggested that churn on their Magenta network is the lowest in the industry, suggesting that churn should continue to fall, even if at a slightly slower pace going forward.
Only T-Mobile is growing ARPU at the moment, as more customers opt for higher value plans (Magenta Max). In contrast to the positive ARPU trend at T-Mobile, ARPU growth has been negative for eight straight quarters at AT&T (with the moderation in the rate of decline in Q1 largely attributable to the aforementioned extension of customer lives, which reduced amortization of historical promotional subsidies, and an easier comp against the same period last year).
ARPU growth at Verizon is not only negative, it is accelerating downward. For Verizon to post both negative subscriber growth and ARPU growth is a shock, and it points to the challenge facing the industry in getting ARPU increases to stick. Absent their wholesale contract with Cable, Verizon’s anemic 1.5% service revenue growth would be close to zero.
Verizon’s price increase comes at a time when industry unit growth is slowing, and at a time when Cable’s market share gains are accelerating both at the gross addition and net addition level. Without broad industry buy-in, and with subscribers looking harder to come by, we find it unlikely that Verizon’s price increases – even if AT&T does initially follow – will “stick.”
If wireless industry growth continues to decelerate, and Cable’s growth rate remains high, Cable’s share of growth will remain elevated, and the wireless industry will increasingly resemble a zero sum game for the Big Three incumbents, where one player’s gain (T-Mobile’s) will necessarily be another’s (Verizon’s and AT&T’s) loss. Huge losses at Dish Network’s Boost unit, and losses at U.S. Cellular, have helped soften the blow, but they are only so big. The pressure of falling industry growth and falling market share unavoidably falls on the cellular telco incumbents.
Wireless Q1 2022: The Elephant in the Room, MoffettNathanson report to clients
Altice USA recently disclosed a plan to overbuild its hybrid fiber-coaxial (HFC) network to blanket 6.5 million locations with fiber by 2025. The NYC based cableco/MSO operates the Optimum and Suddenlink brands, which it plans to rebrand under the Altice USA name.
During a New Street Research investor conference, Altice USA EVP of corporate finance and development Nick Brown said the decision to make that move was a “no brainer” for the company, but acknowledged that it’s in a slightly different position than fellow cable giants Comcast and Charter Communications. Brown stated Altice USA’s own experience and that of its sister companies in Europe gave it better insight into what the transition to fiber would look like in terms of costs and returns, leaving it unafraid to take the leap. But it also already faces “a lot of fiber-based competition relative to others,” especially from Verizon Fios in its legacy Cablevision footprint in the eastern part of the country.
Altice has already upgraded its head ends and backbone rings with fiber. Since DOCSIS would require it to push fiber deeper and deeper into the network anyway, Brown said it made sense to go all-in to pull forward the benefits full fiber has to offer. “The FTTH end-to-end glass network that we’re deploying here in the U.S. for us is pretty much the end state, the logical end state, of a coax upgrade anyway,” Brown argued.
Brown said the move to fiber will allow Altice USA to save in the “low hundreds of millions” of dollars in operating expenses and “materially” reduce its capital expenditures over time. It’s also expected to help Altice more effectively compete by allowing it to offer a better product, reduce churn and improve network reliability. He also pointed out it’ll make future network upgrades easier. Today, it has around half a million active components in its coax network, nearly all of which need to be touched for a DOCSIS upgrade. But with fiber “the equivalent is about 1,000 to 2,000 pieces of equipment that you would need to upgrade to go to next generations of fiber technology as we’re doing this year as we’re moving to XGS-PON,” he said, noting its current fiber footprint of more than 1 million locations was originally built with GPON technology.
“I think it’s just a lot more scalable, a lot more future-proof in our mind, and a lot more cost effective to move to future broadband technologies,” Brown concluded.
To determine which operators might have been most negatively affected by low population growth (and therefore likely low household growth) from July 2020 to July 2021, and which might have been net beneficiaries of the fastest growth, analysts at MoffettNathanson aggregated the population by county in each cable operator’s footprint using FCC Form 477 data as of Q4 2020. Using those totals, we calculated a weighted average population growth for each operator’s total footprint based on the county-level annual estimates published by the Census Bureau. The weighted-average population growth implies a meaningful headwind to Altice USA (at -0.4% growth), and a significant tailwind to Cable One (at 0.7% growth).
Craig concluded: “Again, there’s a lot more at work in broadband subscriber growth rates than just population (new household formation) growth or starting penetration. Different operators have different demographics. They face different overlaps with fiber, and some will face more FWA than others. They have different pricing strategies.”
Several analysts believe the increased availability of Giga bit/sec FTTP (fiber to the premise) service offerings (with flat rates) could force cablecos to rethink their pricing strategy. For example, Jonathan Chaplin of New Street Research stated in a note to clients that cable’s promotional pricing is generally competitive with fiber offers. The problem, however, is that cable service ends up costing consumers significantly more than fiber based broadband access once those introductory rates disappear. “We have hypothesized for a couple of years that 1) Cable’s pricing strategy contributes to high churn and low NPS scores and 2) that it is unsustainable. We don’t think Cable has to cut price to remain competitive; we suspect they do have to fix the pricing model.”
Recon Analytics founder Roger Entner agreed, telling Fierce Telecom his research has shown price is the number one reason people join or leave a service provider. While consumers find promotional pricing very attractive, they’re generally unhappy when their promotions end. “So, for the cable companies, it’s both a gross addition driver and a churn driver as well,” he explained. While cable’s pricing strategy worked well when there was no competition to offer similar broadband speeds or features, that is now changing as fiber is becoming more broadly available, Entner said.
Indeed, fiber based telcos are already seizing on the opportunity to lure customers in with the promise of more simplistic pricing. For instance, AT&T used its recent launch of multi-gig fiber broadband plans as an opportunity to introduce new “straightforward” pricing which promises a flat rate with equipment and other fees included.
Speaking on an episode of Entner’s podcast, AT&T’s EVP and GM of Broadband Rick Welday stated there is “significant” demand in the market for simple pricing. “It’s obvious that consumers are done with this intro pricing where you see a fun, attractive, low rate advertised on television, you go sign up with that ISP and then 12 months later your rate jacks up considerably. Frankly, this is the model that cable has chosen. It seems to align with their video business and annual increases in carriage fees,” he said. Welday argued AT&T’s new cost model is a “game changer in terms of an ISP really obsessing over how to be transparent and upfront with the market.”
Chaplin said a shift by cable to the flat pricing model fiber players use might “weigh on gross adds initially.” However, he predicted net additions would ultimately “land in a similar place” over the course of a couple years while reduced churn would yield “lower costs and higher margins.”
Despite the potential benefits, Entner said he doesn’t expect cable to change its approach right away. “The system is still working and so you have a lot of inertia in the system. Only when cable is actually losing customers will this change,” he concluded.
In addition, cablecos are planning FTTP deployments in the near future. I’ve heard that directly from an anonymous Comcast executive who told me to look out for their upcoming 10G bit/sec service.
We previously reported that a Cable One joint venture (JV) with three private equity firms is seeking to speed its expansion of fiber based Internet access to underserved markets. Clearwave Fiber is a newly formed joint venture that holds Clearwave Communications and certain fiber assets of Hargray Communications. Cravath is representing Cable One in connection with the transaction. With the formation of the JV, Clearwave Fiber intends to invest heavily in bringing Fiber-to-the-Premise (“FTTP”) service to residential and business customers across its existing footprint and near-adjacent areas.
Meanwhile, CableLabs has developed technologies that fall under the platform’s key tenets including capacity, security and speed. Increasing the number of bits per second that are delivered to subscribers can improve download and upload speed, a primary objective for the 10G platform. As data demands increase, many operators are considering increasing capacity on the existing optical access network.
To help operators better meet that demand, CableLabs recently published its first set of specifications for a new device, called the Coherent Termination Device, that enables operators to take advantage of coherent optics technologies in fiber-limited access networks.
A newly published Broadband Access and Home Networking 1stQ2021 report by Dell’Oro Group stated that the total global revenue for the Broadband Access equipment market increased to $3.3B in 1st Quarter, up 18 percent year-over-year (YoY). The growth was driven by strong fiber infrastructure investments such as PON (Passive Optical Network) OLT (Optical Line Terminal) ports, particularly 10 Gbps PON technologies.
XGS-PON revenue jumped 500% year-on-year to about $200 million, reflecting several quarters of steady growth as fiber players up their game in anticipation of competition from cable operators deploying DOCSIS 4.0.
- Total broadband access equipment revenue was down 6 percent from the record revenue of 4Q 2020.
- Total cable access concentrator revenue (a category that includes DOCSIS infrastructure elements such as converged cable access platform cores and chassis, virtual CCAP licensing and DAA nodes and modules) increased 15 percent YoY to $243 M.
- Though DOCSIS license purchases were down, new hardware purchases in the form of CCAP chassis, line cards, and DAA nodes and modules helped push revenue higher.
- CommScope led the cable access concentrator market with about 40% of revenues in Q1 2021, followed by Cisco (16%), Harmonic (16%) and Casa Systems (15%).
- 80% of DOCSIS modems shipped in Q1 2021 were of the DOCSIS 3.1 variety.
- Revenue from purchases of remote-PHY and remote MAC-PHY equipment were up 66% from Q4 2020, which can be interpreted as a sign that cable operators are resuming long-term projects that were put on hold during the height of the pandemic last year.
- Total DSL Access Concentrator revenue was down 30 percent YoY, driven by slower port shipments worldwide as more operators shift their spending to fiber.
- Total PON ONT (Optical Network Terminal which is CPE) revenue was down quarter over quarter, but unit shipments remained above 30M globally for the second straight quarter.
The Dell’Oro Group Broadband Access and Home Networking Quarterly Report provides a complete overview of the Broadband Access market with tables covering manufacturers’ revenue, average selling prices, and port/unit shipments for Cable, DSL, and PON equipment. Covered equipment includes Converged Cable Access Platforms (CCAP) and Distributed Access Architectures (DAA); Digital Subscriber Line Access Multiplexers ([DSLAMs] by technology ADSL/ADSL2+, G.SHDSL, VDSL, VDSL Profile 35b, and G.FAST); PON Optical Line Terminals (OLTs), Cable, DSL, and PON CPE (Customer Premises Equipment); and SOHO WLAN Equipment, including Mesh Routers. For more information about the report, please contact [email protected]
Long term, MoffetNathanson analysts forecast cable operators (MSOs) having a 50% broadband share in the markets where they compete with FTTH—significantly less than cable’s 85% market share against VDSL and 95% market share against DSL.
Comcast added a record 633,000 residential and business broadband Internet customers in the Q3-2020, but lost another 273,000 video customers. Cable Communications total customer relationship net additions of 556,000, were the best quarterly result ever for the company.
Xfinity Mobile, Comcast’s mobile service via Verizon MVNO agreement, added 187,000 wireless subscriber in Q3-2020. That was down from additions of 204,000 lines in the year-ago quarter. There were 2.58 million mobile subs at the end of the quarter.
“We are nearly eight months into this pandemic – and despite many harsh realities, I couldn’t be more pleased and proud of how our team has worked together across the company to find safe and creative solutions to successfully operate in this environment. We are executing at the highest level; and perhaps, most importantly, accelerating innovation, which will drive long-term future growth. This third quarter, we delivered the best broadband results in our company’s history. Driven by our industry-leading platform and strategic focus on broadband, aggregation and streaming, we added a record 633,000 high-speed internet customers and 556,000 total net new customer relationships. At the same time, we’re growing our entertainment platforms with the addition of Flex, which has a significant positive impact on broadband churn and customer lifetime value. Our integrated strategy is also driving results in streaming with nearly 22 million sign-ups for Peacock to date, and we are exceeding our expectations on all engagement metrics in only a few months. And Sky continues to add customer relationships at higher prices while reducing churn to all-time lows in our core UK business. Going forward, and as we emerge from the pandemic, we believe we are extremely well positioned to provide seamless and integrated experiences for our customers and to deliver superior long-term growth and returns for our shareholders,” said Brian L. Roberts, Chairman and Chief Executive Officer of Comcast Corporation.
Cable Communications revenue increased 2.9% to $15.0 billion in the third quarter of 2020, driven by increases in high-speed internet, business services, wireless and advertising revenue, partially offset by decreases in video, voice and other revenue. These results were negatively impacted by accrued customer regional sports network (RSN) fee adjustments related to canceled sporting events as a result of COVID-19. Excluding these adjustments5, Cable Communications revenue increased 3.9%. High-speed internet revenue increased 10.1%, due to an increase in the number of residential high-speed internet customers and an increase in average rates.
Comcast defined three “core tenets” that will drive its strategy focused on broadband Internet, content aggregation and scaling up its tech platforms for video streaming.
Xfinity Flex, Comcast’s free streaming video/smart home product for broadband-only customers, has helped the company retain its broadband base. Flex, which has about 1 million active users, has cut churn rates by 15% to 20% among new broadband customers that engage with the platform. Flex has also helped to offset Comcast’s pay-TV subscriber losses for the past two quarters.
“The goal of our common tech stack is to build once and deploy as many times in as many markets and in as many ways as possible on our network or through wholesale distribution,” Brian Roberts, Comcast’s chairman and CEO, said on the company’s earnings call. He noted that the approach generates “good margins” for the company.
Indeed, cable profit margins of 42.7% were up 290 bps YoY, continuing a steady uptrend and beating analyst consensus of 41.7% by 100 bps. Absent wireless, margins would have been 44.3%, the highest ever and fully 300 bps above the levels a year ago.
Meanwhile, Capital Expenditures (CAPEX) decreased 4.9% to $2.4 billion in the third quarter of 2020. Cable Communications’ capital expenditures decreased 2.5% to $1.8 billion. NBCUniversal’s capital expenditures decreased 29.3% to $357 million. Sky’s capital expenditures increased 127.3% to $237 million. For the nine months ended September 30, 2020, capital expenditures decreased 7.6% to $6.3 billion compared to 2019.
“We’re committed to accelerating the wireless business,” Dave Watson, CEO of Comcast Cable, said on today’s earnings call. Comcast may build out its own cellular infrastructure, at least on a targeted basis, which would effectively complement its MVNO arrangement with Verizon. Notably, Comcast was one of several cable operators that bid for and won CBRS spectrum, which it could use to offload mobile traffic in high-traffic areas. “We have the ability to evolve this [mobile] offering over time to where we choose to include our own wireless network with cellular infrastructure to generate even greater profitability in the most highly trafficked mobile areas,” Roberts said.
Craig Moffett, principal of MoffettNathanson asks: Where are all the broadband subscribers coming from?
Verizon, AT&T, and now Comcast have all beaten expectations, and blown away historical growth rates. But it could also be asked of wireless, where, again, Verizon, AT&T, and now Comcast have all grown (Comcast a bit more slowly than expected, but it was solid growth nonetheless). It could even be asked of video, where, yes, Verizon, AT&T, and now Comcast have all lost fewer subscribers than expected. We, and the market, will be grappling with these questions for the next three months or longer. Let’s start by acknowledging the obvious: Comcast’s subscriber metrics in Q3 were absolutely stellar, whatever the explanation.
A new report by the Dell’Oro Group found that total global revenue for wireline Broadband Access equipment (=Cable, DSL, and PON equipment) dropped to $2.5 B, down 15 percent year-over-year (YoY) from 1Q 2019. The first quarter activity, which is seasonally slow to begin with, was hurt by supply chain disruptions throughout Asia-Pacific as a result of the COVID-19 pandemic.
“The first half of 2020 will give way to a sustained rebound in broadband equipment spending in the second half of the year,” said Jeff Heynen, Senior Research Director, Broadband Access and Home Networking. “The need to expand residential broadband speeds and availability will ultimately win out over the current macroeconomic slowdown,” explained Heynen.
Following are additional highlights from the 1Q 2020 Broadband Access Quarterly Report:
- Total cable access concentrator revenue decreased 22 percent YoY to $211 M, driven by a slowdown in CCAP license purchases in North America.
- Total DOCSIS 3.1 CPE shipments remained strong and increased to 5.8 M, representing 67 percent of total Cable CPE shipments. It’s forecast to reach 70 percent of shipments by the end of 2020.
- Total PON ONT (passive optical network/optical network terminal) unit shipments decreased 15 percent YoY, as new installations were limited by the pandemic.
Heynen also expects cable access revenues to rebound a bit in the second quarter as cable operators boost upstream capacity by purchasing additional channel capacity on traditional CCAPs and move ahead with mid-split and high-split projects that expand the amount of spectrum dedicated for the cable network upstream.
Cable remote PHY deployments remain slow today but could pick up as operators begin to touch amplifiers and other parts of the network for future expansions of the cable network upstream. In those cases, “you’re almost required to upgrade to remote PHY at some point,” explains Heynen.
Q1 didn’t produce a major swing in cable access market share among CommScope/Arris, Casa Systems and Cisco Systems. Harmonic, meanwhile, has already warned that some cable network virtualization projects have been pushed out a bit as cable operators reassessed their near-term network-facing priorities during the pandemic.
Regarding the fiber-to-the-premises (FTTP) market, Dell’Oro found that total PON ONT (optical network terminal) unit shipments dropped 15% year-over-year as new installations were hindered by the pandemic. However, OLT (optical line terminal) ports were relatively flat over that period, indicating that there is sustained investment being placed in FTTP infrastructure in regions such as Europe, says Heynen.
Heynen expects that activity centered on the Rural Digital Opportunity Fund (RDOF) could provide some lift to the FTTP sector in the US next year.
The Dell’Oro Group Broadband Access and Home Networking Quarterly Report provides a complete overview of the Broadband Access market with tables covering manufacturers’ revenue, average selling prices, and port/unit shipments for Cable, DSL, and PON equipment. Covered equipment includes Converged Cable Access Platforms (CCAP) and Distributed Access Architectures (DAA); Digital Subscriber Line Access Multiplexers ([DSLAMs] by technology ADSL/ADSL2+, G.SHDSL, VDSL, VDSL Profile 35b, and G.FAST); PON Optical Line Terminals (OLTs), Cable, DSL, and PON CPE (Customer Premises Equipment); and SOHO WLAN Equipment, including Mesh Routers. For more information about the report, please contact [email protected].
Dell’Oro Group is a market research firm that specializes in strategic competitive analysis in the telecommunications, networks, and data center IT markets. Our firm provides in-depth quantitative data and qualitative analysis to facilitate critical, fact-based business decisions. For more information, contact Dell’Oro Group at +1.650.622.9400 or visit www.delloro.com.
Source: S&P Global
Addendum: Cable network undergoing a ‘radical transformation’
Belal Hamzeh, CTO and SVP at CableLabs, told a Light Reading virtual audience that the evolution of the network and a rethinking of HFC are necessary to prepare the cable industry to support a wave of new requirements for a broader set of high-capacity, low-latency applications. These next-gen applications will span everything from augmented and virtual reality and remote healthcare to mobile backhaul and edge computing and others that are still being thought of.
“The requirements of the network are becoming quite diverse,” he said. “For us to efficiently and effectively handle that, we have to look at entirely new perspectives … Rather than looking at the platform as a connectivity platform, we need to start looking at the platform as a connectivity and compute platform.”
Virtualization, Hamzeh added, is a “huge enabler for this transformation.” To address that critical piece, CableLabs has teamed with partners, including Altran, on an open source project nicknamed “Adrenaline” that aims to provide a centrally managed distributed and heterogeneous computing platform that supports the deployment of workloads across the operator’s infrastructure.
“It’s a cable-first initiative, but this is also a general purpose platform,” said Shamik Mishra, VP of research and innovation at Altran, a company that’s primarily focused on engineering and R&D services for multiple industries, including the telecom sector.
“We’re not trying to constrain what use cases there are [for Adrenaline],” added Randy Levensalor, principal architect with CableLabs’s future infrastructure group in the office of the CTO.