While cable operators grapple with the slowdown of broadband subscriber additions expected in the third quarter and beyond, Bernstein media analyst Peter Supino said that telcos, long the butt of jokes about the sluggish speeds and poor service inherent in their core digital subscriber line service, have streamlined operations and are positioning themselves to take back significant market share.
In a research note, Supino pointed to AT&T’s spinoff of DirecTV, Frontier Communications’ emergence from bankruptcy, Lumen’s (formerly Century Communications’) sale of about 7 million passings to Apollo Global Management and T-Mobile’s successful integration of Sprint, and how those moves have freed up their respective balance sheets to invest in fiber-to-the-home networks and technology to bring faster, more reliable broadband to residential customers. Tack on investment in C-band spectrum by AT&T, Verizon, and T-Mobile to extend fixed wireless broadband to harder to reach areas, and the outlook for telco service looks a lot better than it has in the past.
“During 2021, each of AT&T, Verizon, Frontier, Lumen, and T-Mobile, in different ways, became a more viable contender for residential broadband subscribers,” Supino wrote, adding that he expects telco fiber-to-the-home (FTTH) broadband passings to rise 50% from 51.1 million in 2021 to 77.1 million homes by 2025.
AT&T is expected to lead the pack, with 1.8 million FTTH passings by 2025, up from 411,000 this year, according to Supino. Total FTTH penetration from the four telcos is expected rise from -0.7% in 2021 to 3.1% by 2025, the analyst wrote.
Cable companies have dominated the broadband business for more than a decade, accounting for the lion’s share of additions by offering higher speeds and better quality compared to telcos’ inferior DSL service. But as cable operators have warned that the record-setting growth pace of the past few years will slow down in the third quarter, AT&T and others have committed to building out their fiber networks and lowering prices to capture share.
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Last month, Comcast said broadband customer additions would be slower than expected in the third quarter. On Sept. 23, Altice USA CEO Dexter Goei warned that his cable company expected to lose between 15,000 and 20,000 broadband customers in Q3, and could possibly end the year with flat net additions.
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That sent cable stocks into a tailspin, with Altice USA losing about 28% of its share value in two weeks. Other stocks like Comcast, Charter and Cable One, were down less dramatically, but the shift caused a few analysts to rethink their outlooks on the stocks.
Altice USA fell another 3% on Oct. 12 (it closed at $17.63 down 49 cents each) after Deutsche Bank analyst Bryan Kraft lowered his rating on the stock to “Hold” from “Buy,” and reduced his price target to $22 per share from $40 each.
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That downgrade came a day after Raymond James analyst Frank Louthan downgraded the cable sector, saying operators could lose as many as 11 million broadband customers in the next four years. In his note, Louthan wrote that telcos could make “a significant change to the communications landscape that is set to shift the balance of power that has favored the cable companies for the past 20 years,” according to Bloomberg.
Barclays Group media analyst Kannan Venkateshwar believes that telcos have more short-term visibility than cable due to new device launches, tailwinds from the EBB program and successes bundling streaming and wireline broadband offerings.
“We also believe that the industry in some ways is seeing more stable promotional activity than last year because of the structure of promotions,” Venkateshwar wrote. “In addition, T-Mobile’s focus on higher end pricing plans and ARPA growth should also provide some stability to the competitive environment near-term. Telecom companies also appear to be getting better at bundling wireline and wireless as organization structures are better aligned.”
