Cable companies big gains in wireless threaten incumbent cellular telcos

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.

References:

Wireless Q1 2022: The Elephant in the Room, MoffettNathanson report to clients

 

MoffettNathanson: Robust broadband and FWA growth, but are we witnessing a fiber bubble?

According to a new comprehensive, market research report from MoffettNathanson (written by our colleague Craig Moffett), Q4 2021 broadband growth, at +3.3%, “remains relatively robust,” and above pre-pandemic levels of about +2.8%.

Meanwhile, the U.S. fixed wireless access (FWA market) captured ~ 38% share of broadband industry net adds in the fourth quarter of 2021.  Approximately half of Verizon’s FWA customers are coming from commercial accounts, T-Mobile has indicated that about half its FWA customers are coming from former cable Internet subscribers.  FWA’s strong Q4 showing left cable’s flow share at just 66%, about the same as cable’s share of installed US broadband households. “In other words, Cable likely neither gained nor lost share during the quarter, and instead merely treaded water,” Moffett noted.  FWA “has gone from low-level background noise to suddenly a major force, with Verizon and T-Mobile alone capturing more than 300K FWA subscribers in the fourth quarter,” Craig noted.  However, he isn’t sure that wireless network operators will allocate enough total bandwidth capacity for FWA to fully scale.

In 2020, a year that witnessed a surge in broadband subs as millions worked and schooled from home, the growth rate spiked to 5%. Here’s a snapshot of the broadband subscriber metrics per sector for Q4 2021:

Table 1:

Sector Q4 2021 Gain/Loss Q4 2020 Gain/Loss Year-on-Year Growth % Total
Cable +464,000 +899,000 +3.8% 79.43 million
Telco -26,000 +21,000 -0.4% 33.51 million
FWA* +302,000 +81,000 +463.9% 869,000
Satellite -35,000 -35,000 -6.6% 1.66 million
Total Wireline +437,000 +920,000 +2.8% 112.95 million
Total Broadband +704,000 +966,000 +3.3% 115.48 million
* Verizon and T-Mobile only
(Source: MoffettNathanson)

U.S. broadband ended 2021 with a penetration of 84%  among all occupied households. According to US Census Bureau data, new household formation, a vital growth driver for broadband, added just 104,000 to the occupied housing stock in Q4 2021, versus +427,000 in the year-ago period. Moffett said the “inescapable conclusion” is that growth rates will continue to slow, and that over time virtually all growth will have to stem from new household formation.

Factoring in competition and other elements impacting the broadband market, MoffettNathanson also adjusted its subscriber forecasts for several cable operators and telcos out to 2026. Here’s how those adjustments, which do not include any potential incremental growth from participation in government subsidy programs, look like for 2022:

  • Comcast: Adding 948,000 subs, versus prior forecast of +1.25 million
  • Charter: Adding 958,000 subs, versus prior forecast of +1.22 million
  • Cable One: Adding 39,000, versus prior forecast of +48,000
  • Verizon: Adding 241,000, versus prior forecast of +302,000
  • AT&T: Adding 136,000, versus prior forecast of +60,000

Are we witnessing a fiber bubble?

“The market’s embrace of long-dated fiber projects rests on four critical assumptions. First, that the cost-per-home to deploy fiber will remain low. Second, that fiber’s eventual penetration rates will be high. Third, that these penetration gains can be achieved even at relatively high ARPUs. And fourth, that the capital to fund these projects remains cheap and plentiful.

None of these assumptions are clear cut. For example, there is an obvious risk that all the jostling for fiber deployment labor and equipment will push labor and construction costs higher. More pointedly, we think there is a sorely underappreciated risk that the pool of attractive deployment geographies – sufficiently dense communities, preferably with aerial infrastructure – will be exhausted long before promised buildouts have been completed.

Revenue assumptions, too, demand scrutiny. Cable operators are increasingly relying on bundled discounts of broadband-plus-wireless to protect their market share. What if the strategy works, even a little bit? And curiously, the market’s infatuation with fiber overbuilds comes at a time when cable investors are growing increasingly cautious about the impact of fixed wireless. Won’t fixed wireless dent the prospects of new overbuilds just as much (or more) as those of the incumbents.”

Moffet estimates that about 30% of the U.S. population has been overbuilt by fiber over the past 20 years, and that the number is poised to rise as high as 60% over the next five years. But the big question is whether there’s enough labor and equipment to support this magnitude of expansion.  “Our skepticism about the prospects for all of the fiber plans currently on the drawing board is not born of doubt that there is enough labor to build it all so much as it is that the cost of building will be driven higher by excess demand,” Moffett explained. “There are already widespread reports of labor shortages and attendant higher labor costs,” he added.

“The outlook for broadband growth for all the companies in our coverage, particularly the cable operators, is more uncertain than at any time in memory. IMarket share trends are also more uncertain that they have been in the past. Cable continues to take share from the telcos, but fixed wireless, as a new entrant, is now taking share from all players. Share shifts between the TelCos and cable operators are suppressed by low move rates, likely due in part to supply chain disruptions in the housing market. This is likely dampening cable growth rates. In at least some markets, returns will likely be well below the cost of capital,” Moffett forecasts.

References:

U.S. Broadband: Are We Witnessing a Fiber Bubble?  MoffetNathanson research note (clients and accredited journalists)

https://www.lightreading.com/cable-tech/fwa-nabbed-38-of-broadband-share-in-q4-as-possible-fiber-bubble-forms/d/d-id/775819?