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Happy Cable Customers Could Be Driving Broadband Slowdown

A person filling out a customer satisfaction survey
(Image credit: Witthaya Prasongsin via Getty Images)

Sports Illustrated used to have a tongue-in-cheek feature in the magazine that offered some absurd factoid about the sports world under the headline This Week’s Sign That the Apocalypse is Upon Us, like how in 2016 if you were in Cleveland and asked your iPhone, “Which Way is Sadness?” Siri directed you to FirstEnergy Stadium, home of that city’s often-maligned NFL franchise, the Browns. But they had nothing on Wells Fargo media analyst Steven Cahall’s Nov. 1 report that stated this: The reason for the current slowdown in broadband subscriber growth could be that cable customers are too happy with their service provider.

Now I am not doubting the Wells Fargo report at all — it makes perfect sense. It’s just that in 30 years of covering this industry — 23 at Multichannel News — I never thought I would see the day that growth would slow because customers like their cable company too much. 

Broadband growth definitely slowed in Q3, with Comcast reporting 300,000 high-speed internet additions — in line with estimates — and Charter Communications adding about 265,000 customers, well below analysts’ predictions. While most expected broadband additions to taper off as the pandemic waned, for some the slowdown is happening faster than expected.   

Analysts have been trying to wrap their heads around the cause of the slowdown for days, after both Comcast and Charter reported that broadband subscriber additions slowed in Q3. For Comcast, the slowdown was almost exactly as expected: 300,000 additions, compared to estimates it would add between 295,000 and 305,000 high-speed internet customers. Charter was a bit of a surprise by coming in lower than expectations. Some estimates were for as high as 350,000 additional broadband customers in the period.

What has puzzled some analysts is this: Everyone expected growth to be lower than it was in pandemic-fueled 2020 because people are beginning to go back to work and school and  maybe don’t need as robust an internet connection at home. High penetration rates for broadband service — about 85% by some estimates — also was expected to be a factor for the simple reason that having fewer consumers without service probably means that fewer new customers will sign on. At the same time, cable companies are saying they see a lot of runway for growth ahead, and predict they will end 2021 with around the same growth rates as 2019.

But given the Q3 data for Comcast and Charter, that probably means Q4 growth will be even slower than Q3. Comcast added 1.4 million broadband customers in 2019, and to meet that goal will have to add about 292,000 high-speed internet customers Q4. Charter has said that now it may be a better idea to compare this year to 2018, when it added about 1.3 million internet customers, meaning in Q4 it will likely add about 251,000 broadband customers. 

In a research report last Friday, MoffettNathanson principal and senior analyst Craig Moffett wrote that much-slower Q3 growth is probably due to a series of factors, including 0% new housing growth and fewer moves.

“Broadband growth will inevitably slow as full penetration is achieved,” Moffett wrote. “And, yes, fiber expansion will mean more of Cable’s footprint will be overlapped by a competing service. That, too, will dampen broadband growth. But all that has been in everyone’s numbers for a very, very long time.”

Back to Campus, Back to Home Buying

But in a research note Monday, Cahall wrote that he believes there is more to the story. 

According to Cahall, new home sales are up 18% so far in 2021 compared to 2019 and up 7% in Q3 2021 vs. Q3 2019, while rental market reports show that segment is returning to pre-pandemic levels, as first-half 2021 applications were up 13% vs. the same period in 2020 and students are returning to college campuses.

“So what's happening?” Cahall asked. “Well, we think that customer churn is low because broadband customers are pretty happy, many having upgraded during the pandemic.”

In addition, Cahall wrote that while consumers are still moving, gross additions and deactiviations may be less because those customers might be staying with their current cable provider. But that elation is a two-way street.

“Cable's subs are happier, but the competition’s subs are happier too,” Cahall wrote, adding that low-income programs like the Emergency Broadband Benefit program may be contributing less. 

At the same time, telco high-speed internet additions are improving. Cahall wrote that in 2019, AT&T, Verizon Communications and Lumen Technologies lost about 417,000 broadband customers. This year he believes those three companies will add 240,000 high-speed internet customers or more. At the same time, cable broadband growth is rising at a less accelerated rate.

Cahall is not alone in his estimates that telco fiber builds could vault that sector ahead in the broadband wars. In October, Bernstein media analyst Peter Supino wrote that he believed telcos like AT&T, T-Mobile and Verizon could chip away at cable’s broadband lead. 

Cahall estimated Comcast’s and Charter’s combined broadband subscriber additions will drop from 2.81 million in 2019 to 2.66 million in 2021 (down by about 150,000), while 2022 combined growth will be more than 400,000 subscribers lower than 2019 figures. 

“Whether its fiber or lack of low-hanging fruit from DSL, we think Telco trends hurt Cable growth + valuation, and portend badly for potential ARPU implications,” Cahall wrote.

In his note, Cahall predicted that cable residential broadband growth would rise by about 2.1% annually between 2021 and 2025, from 76.2 million customers to 81.5 million customers, while telco broadband subscribers would climb at a 15.8% annual clip from 15.99 million in 2021 to 29.45 million by 2025. At the same time, legacy DSL subscribers would fall at about a 14% rate, from 16.4 million in 2021 to 8.7 million in 2025, according to Cahall.   

“Whether the recent headwinds are move churn or Telco something else, we think the overhang on sentiment is real and will persist,” Cahall wrote, adding that no matter how you slice it competition is coming in 2022. That competition will likely take the form of fiber rollouts by AT&T, Lumen and T-Mobile, which said recently it expects 500,000 5G broadband customers by the end of 2021. Verizon, which has given guidance for over $1 billion in fixed wireless revenue by 2024, which could translate into between 1 million and 2 million broadband customers.

“While it’s tough to know where, we think the fact that these 5G rollouts are guidance mean the Telcos have high conviction in some share gains,” Cahall continued.