Cable’s Broadband Slowdown: Saturation or Share Loss?

Analysts have been waiting for the other broadband shoe to drop for months after most cable companies missed broadband subscriber growth targets in Q1, and they got it Thursday after Comcast, the largest cable operator in the land, reported zero broadband additions for Q2, a bit earlier than expected. Now, as cable pundits consider dropping their growth estimates for cable’s cash cow yet again, the big question for at least one analyst is whether the drop-off is due to saturation or share loss.

Just what caused the largest cable operator in the country to have precisely 0 broadband customer growth will matter for the rest of the industry because cable can rebound from saturation, but share loss is another thing entirely.

Also: Broadband Slowdown Forces Some Analysts To Go Negative on Cable Sector  

In a research note Thursday, MoffettNathanson senior analyst Craig Moffett wrote that at the moment it appears that the overall broadband slowdown is a combination of encroaching saturation and sluggish new household formation instead of share loss. And, in his note, he stressed that the former is much better than the latter. 

“If the problem is saturation, then we should be slowing towards zero (or, more precisely, towards the rate of new household formation),” Moffett wrote. “If the problem is share loss, well, then let your imagination run wild. There’s no floor. And if the problem is saturation, then pricing power isn’t jeopardized. If the problem is share loss, broadband ARPU is at risk.”

Also: Most Eyes Should Be on Comcast Q2 Broadband Performance 

Comcast managed to grow broadband ARPU in Q2 by about 3.6%, not great but respectable, given that it lost 10,000 residential and gained 10,000 business high-speed data customers in the period. ▪️

The Waiting Is the Hardest Part

Most analysts have been waiting for this day ever since Comcast reported 262,000 broadband additions in Q1 -- a number that beat most estimates but was fueled by a large portion of customers on free plans that converted to paying plans. Absent those customers, Comcast would have added about 175,000 broadband customers in that period, well behind some estimates of 180,000 to 225,000 additions.  

Prior to Thursday, most analysts were expecting broadband additions to fall off considerably, a factor of seasonality -- Q2 is when students and snow birds cancel service for the summer -- and other macroeconomic trends. But many analysts expected losses to come from other cable operators -- consensus was for Comcast to add about 84,000 high-speed internet customers in the quarter -- not the largest one. Now, some are changing their minds.

Also: Has Cable Broadband Hit the Wall? 

“We expected Charter to post negative growth in consumer broadband in 2Q22 but had expected a slightly better result at Comcast largely because Comcast has more levers to pull with respect to its product set (Flex, Peacock, TV etc.) but despite all this, Comcast performance may not really be that different from Charter after all,” wrote Barclays Group media analyst Kannan Venkateshwar in a note to clients Thursday, adding that Comcast “seems to be seeing negative growth thus far in 3Q as well, although it expects some seasonal improvement in August and September.”

That will likely cause analysts across the board to shift their estimates for overall cable broadband subscriber growth downward. Charter is scheduled to report Q2 earnings tomorrow (July 29), so depending on those numbers, predictions may have to be rejiggered again. 

Also: Cable Broadband Slowdown to Continue in Q1 and Beyond, Analysts Say 

Movin’ On Up [Not]

Comcast tried to downplay the lack of broadband growth on a call with analysts, stressing that it has added about 800,000 high-speed internet customers in the last 12 months and 3 million in the last two years. But that included the pandemic, when most Americans needed high-speed connections to work, school and play from home and many were receiving government subsidies for service. As those requirements were lifted, some decided they didn’t need cable broadband, or perhaps found a lower cost alternative. 

Comcast’s flat growth comes a day after T-Mobile said it added 565,000 fixed wireless access customers in Q2, soundly beating even the most optimistic analyst estimates. Fixed Wireless Access (FWA) has been feared to be a major threat to cable wireline broadband,  but Comcast execs said FWA wasn’t a factor in Q2 results.

Comcast chairman and CEO Brian Roberts said during a conference call with analysts that although fixed wireless is a new competitor targeted mainly at price-conscious consumers, it has had “no discernible impact” on churn, but its early growth appeared to be another contributor to lower overall connect activity. Instead, Roberts blamed the flat growth on three factors -- a slowdown in housing moves (Q2 was 12% below 2019), the reversal of some pandemic trends -- the surge in lower income households getting broadband has waned -- and competition. 

Roberts vowed to turn around the broadband product, adding that Comcast is confident it can return to residential growth and is expanding its footprint, accelerating edge-outs, “playing offense when it comes to government subsidies,” aggressively competing for market share and increasing the value of the broadband product by bundling it with mobile service and its Flex offering. 

Also: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead  

“We are in a unique environment with some headwinds,” Roberts said of the cable business. “But move activity should return to some level of normalcy, mobile substitution will eventually  stabilize and we believe fixed wireless has inherent performance and capacity limitations that sharply limit the number of people on a network using a given amount of spectrum, which should provide a natural cap on their overall industry penetration.”   

Other Than That… 

Despite the less than expected broadband performance, the rest of Comcast’s businesses appear to be doing well. Theme Parks cash flow nearly tripled in the period, its highest quarterly cash flow growth in that segment ever, movie studio revenue was up 33% driven by strong theatrical releases, wireless subscriber additions at 317,000 was the best Q2 ever for that segment. Even Sky, Comcast’s European satellite unit, saw cash flow rise 54% in the period. But for investors, that didn’t seem to make a difference.

“With full acknowledgement that the broadband debate isn’t just the most important debate right now, but in fact is the only debate right now, it is worth noting that everything else in Comcast’s report was very strong,” Moffett wrote, adding that the overall takeaway is “almost certainly going to be negative.

“Broadband subscriber growth is all that matters,” he continued. “And even if our ‘saturation rather than share loss’ thesis is correct, there is a risk that by the time the evidence of causality becomes a little clearer, competitive share losses to fiber actually will have begun to accelerate… even if the growth rate of FWA has by then abated.”

Moffett noted that although housing moves is a common excuse for the slowdown, Comcast was less dismissive of fixed wireless than it has been in the past, and seems to be committed to growing the footprint. 

“None of this is likely to shift sentiment, which, in the face of slower broadband growth, remains rather dour indeed,” Moffett wrote. ■