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Operators Put Their Foot(print) Down

Cable operators, cognizant that the broadband wave the industry has been riding for more than a decade could eventually come to a halt, have quietly been building out their service footprints, expanding the pool of potential high-speed internet customers and ensuring a lengthy growth runway for their most profitable service.

In the second quarter, both Charter Communications and Comcast reported record broadband subscriber growth despite the ongoing pandemic. Charter led the way with the addition of 850,000 broadband customers (588,000, when certain COVID-19 related programs are excluded). Comcast added 323,000 subscribers for its best Q2 growth in 13 years. Even with the COVID-19 programs excluded — mainly the Federal Communications Commission’s Keep Americans Connected Pledge and Charter’s own Remote Education Offer — broadband growth was an all-time high for Charter.

While the popularity of the broadband product could be due to Americans being confined to their homes for most of the day as the pandemic rages on, both Charter and Comcast believe that there is ample runway ahead for the service. And they aren’t the only ones.

Charter Gets Aggressive

Charter has been most aggressive at expanding its broadband homes passed over the past few years, growing that footprint by 2.1% in Q2, according to MoffettNathanson principal and senior media analyst Craig Moffett. Others are doing the same.

Altice USA, which added a record 53,000 broadband customers in Q2, and Charter will both participate in the upcoming Rural Digital Opportunities Fund auctions, which provide funding for expansion into rural markets. Altice USA CEO Dexter Goei told analysts during its earnings conference call on July 30 that penetration rates can be as high as 40% once it enters a new area with broadband.

“On average, we reach about 40% penetration within 12 months of a new build, a remarkable result that gives us a lot of optimism and comfort in our strategy,” Goei said. He added that in 2019, Altice USA’s Suddenlink unit, which serves rural and secondary markets in the Midwest and Southwest, accelerated network edge-outs with 130,000 new build homes.

Goei said Altice’s footprint expansion plans go beyond just edge-outs, as the company completed the purchase of Service Electric Cable TV of New Jersey in July and continues to look for new purchase opportunities.

Comcast is sitting out this round of the auction, but on its Q2 conference call with analysts July 30, Comcast Cable president and CEO Dave Watson said the MSO has added more than 2 million passings to its footprint, through edge-outs and other extensions.

“We continue to pursue the edge expansion to new areas,” Watson said.

In a research note, Cowen media analyst Gregory Williams was encouraged by Comcast’s Q2 broadband gains, adding that the company was optimistic that momentum would follow into the third quarter.

“To that end, with just ~50% market penetration, we are bullish on the runway for telco share-stealing and some market expansion,” Williams wrote.

Comcast also has expanded through acquisition. In July, it purchased tiny Southern Vermont Cable Co. with about 2,450 subscribers in several towns in that part of the state, including Putney and Dover, for an undisclosed sum.

Expanding the footprint also appears to be paying off. Charter, according to its financial statements, has grown estimated passings to 52.7 million in Q2 2020 from 51.6 million in Q2 2019. Total customer relationship penetration in those passings rose to 57.8% in Q2 2020 from 55.5% in Q2 2019.

At Comcast, total homes passed exceeded 59 million in Q2, up from more than 58 million in the prior year. Altice USA increased its footprint to 8.8 million homes in Q2, up from 8.75 million in the same period in 2019.

“By expanding their footprint into unserved and underserved markets, they are dramatically de-risking future broadband subscriber growth,” Moffett noted, pointing to Altice USA’s claim of 40% penetration in those new lines in the first year.

“In most DCF (discounted cash flow) models of broadband expansion, 40% penetration is (conservatively) used as a terminal penetration rate,” Moffett continued. “With low competition (if it is hard to cost justify a first broadband line, it is impossible to cost justify a second) and intense pent-up demand, terminal penetration rates of 80% are not unreasonable.”

Broadband Driving Revenue

Broadband subscribers first surpassed video customers about five years ago. But in the second quarter, Charter’s broadband revenue began to outpace video sales for the first time.

That was largely fueled by the acceleration of single-play broadband service and the decline of double- and triple-play buys. In Q2, for example, Charter’s single-play customers grew 3.7% to 12.55 million, while its double-play subscribers grew 4.2% to 9 million and its triple-play customers fell 1% to 6.9 million. The trend was even more dramatic at Comcast, which saw single-product customers rise 5% to 11.3 million, two-product subscribers fall 1.2% to 8.7 million and three or more product customers dip 2% to 9.7 million.

On Charter’s Q2 earnings call, chief financial officer Christopher Winfrey noted that while footprint expansion didn’t have a huge impact on the quarter, it is more of a long-term play.

“It’s not a material driver to our overall net adds inside of the quarter, and it hasn’t been — but as it builds up over time, it’s obviously a cumulative effect as you start to penetrate those vintages of construction,” Winfrey said. “[I]f you do enough of it over a prolonged period of time, it snowballs.”