AT&T is on a mission to build out its national fiber-to-the-home footprint and wants to forsake copper DSL, but it will have to wait on that endeavor in California. 

At a meeting last week, the California Public Utilities Commission (CPUC) voted to deny AT&T’s request to be released from its duties as the state’s “carrier of last resort” (COLR), and urged the company to upgrade copper facilities to fiber instead of trying to shut down the outdated parts of its network.

The agency said that because of AT&T’s status as the COLR, it must continue to provide basic telephone services, typically via landline, to anyone who requests it in its specified areas. 

“As the designated COLR, AT&T plays a pivotal role in providing reliable telephone service to communities across the state,” CPUC said in an announcement released last week. 

“Despite AT&T’s contention that providers of voice alternatives to landline service — such as VoIP or mobile wireless services — can fill the gap, the CPUC found AT&T did not meet the requirements for COLR withdrawal. Specifically, AT&T failed to demonstrate the availability of replacement providers willing and able to serve as COLR, nor did AT&T prove that alternative providers met the COLR definition."

Dallas-based telecom AT&T has long been trying to retire its expensive and lightly-used copper telephone wires (which power some of its landlines in rural areas) so it can allocate more funding to building fiber broadband connections.

AT&T CEO John Stankey wrote in a social media post in May that the company shouldn’t be expected to operate in areas where there is little business. 

“It’s time to do what capitalism is best suited to do,” Stankey wrote. “Deploy capital and resources to their highest and best use for customers, communities, and society at large.”

For its part, CPUC contends that AT&T is free to abandon copper DSL — it just needs to provide a low-cost, reliable connectivity option to California consumers. 

“AT&T’s public arguments paint the picture that the Commission’s COLR Rules require AT&T to retain outdated copper-based landline facilities that are expensive to maintain, or that AT&T needs Commission approval in order to be able to retire copper facilities and instead, invest in more modern technologies such as VoIP, wireless, and fiber,” CPUC wrote. “These arguments are not accurate.”

Still, AT&T is prohibited from revisiting the matter with the CPUC for at least one year — meaning it’s stuck with its COLR duties until at least next June.

“The law and facts of this case are such that AT&T’s Application must be dismissed with prejudice,” CPUC said. “The Commission’s COLR Rules require the presence of another COLR, either one already in place or one willing to replace AT&T. No other COLR serves AT&T’s service territory, and no potential COLR volunteered to replace AT&T.”

According the CPUC, it received more than 5,000 public comments from across eight  forums held about AT&T’s request to terminate its copper landlines.

CPUC said that its decision reflects its dedication to maintain service standards and address the residents who depend on telephone landline services.

“The COLR rules safeguard telephone service by ensuring Californians have access to at least one telephone company that offers reliable service, access to 911, customer protections, and affordable service through the state's Lifeline program,” CPUC president Alice Reynolds added. “We subsidize the COLRs through our high-cost fund programs to offset the cost of providing service in these remote areas.”

Despite its refusal, the committee did say it would open another inquiry to address COLR obligations, given changes in the marketplace.

The slowdown in cable broadband subscriber growth has been well-documented — spiking during the pandemic and dropping off as workers and students returned to offices and schools — but there has always been the hope that while increases won’t ever return to pre-pandemic levels, they might at least get close. Now, some analysts aren’t quite so sure. 

Cable operators added 3 million broadband subscribers in 2019 and 4.6 million in 2020, according to LightShed Partners analysts Walter Piecyk and Joe Galone. Those increases began to slow to 2.7 million additions in 2021, and are expected to dip even further in the next five years. While the pace of the decline varies by analyst — Piecyk and Galone predict cable broadband additions will fall to 1.6 million in 2022 and to 637,000 by 2026, while others predict the erosion will be less dramatic — most believe that a return to past growth rates is unlikely.

The result has been a precipitous drop in trading multiples for cable and telecom stocks alike. Cable has been hit hard: trading multiples on former high flyers like Comcast and Charter Communications have fallen from 9 times and 11.2 times cash flow 12 months ago to 7.3 times and 8.3 times, respectively. Cable One, which sported a trading multiple of nearly 14 times cash flow a year ago, now trades at around 10.6 times. 

As a result, stock prices have fallen. As of May 5, Comcast shares are down 19% on the year, Charter has dipped 30%, Altice USA is down 37% and Cable One has fallen 38%. 

“The concern, of course, is that slowing broadband net additions are a sign of a longer-term decline, and that a lower terminal growth assumption is therefore warranted,” MoffettNathanson senior analyst Craig Moffett wrote in a recent research note.  

For Piecyk and Galone, the biggest factors in the continued slowing of cable broadband growth are fiber competition and the disappearance of digital subscriber line or very-high-speed DSL customers. For years, operators have feasted on DSL/VDSL customers who switched to faster, more reliable cable broadband service. But that success has depleted the DSL/VDSL ranks significantly. LightShed estimated that DSL/VDSL broadband market share, once 22.7% in 2017, fell to 13% in 2021 and will further decline to just 1.7% by 2026.

“DSL has been a share donor to its ISP competitors for more than a decade, losing 10 percentage points of market share over that period,” Piecyk and Galone wrote, adding that even at its current 13% penetration rate, there’s not much “low-hanging fruit on which cable operators can feast.”

Adding to the pressure is the rise in fiber-network construction and fixed-wireless access (FWA) offerings from telcos and other ISPs.  

In their report, Piecyk and Galone reminded investors that telcos have announced plans to build fiber to an additional 30 million homes over the next five years, and that smaller telcos and even cable operators have put forth their own fiber initiatives. How those ultimately play out is anyone’s guess, but it is safe to say that there will be significantly more homes passed by fiber in the next few years than the current 40 million. 

That should worry some cable operators because fiber-to-the-home offerings generally attract a big chunk of the market, with an adoption rate of about 30% over the past three years, according to LightShed. Cable operators have claimed those gains will be hard to continue as cable deploys lower-cost, speed-boosting upgrades to their networks, but Piecyk and Galone said fiber builds should attract 15% of market share in the first year and 40% by year four. 

“We believe consumer dissatisfaction with the cable company runs a bit deeper,” the analysts wrote. “Consumers are smarter than many acknowledge and might not be easily mollified by a boost to their upload speeds in the months preceding a new fiber offering by a competitor.”

Fixed Wireless Worries

Moffett predicted the broadband slowdown will continue, but he’s more optimistic cable operators will be able to successfully beat back the fixed wireless threat. The analyst sees fixed wireless as more of a rural play — and that wireless additions will offset high-speed data sluggishness.  

“Like everyone else, we’ve been worried about broadband net adds, and we still are,” Moffett wrote in a recent report, adding that he doesn’t think overall growth will go negative and sees positive signs from wireless. “Wireless is neatly taking the baton from broadband as cable’s next growth driver, just as broadband did from video so many years ago.”

Moffett said he expects broadband growth to fall by nearly half in 2022 at Comcast (to 749,000 additions from 1.3 million in 2021); and by 43% at Charter (from 1.2 million in 2021 to 828,000 in 2022). At Altice USA, which lost 3,000 broadband customers in 2021, Moffett sees more of the same — he predicts it will lose about 8,000 residential broadband customers in 2022. 

But for this analyst, 2022 is pretty much the growth bottom for the top three operators, as he anticipates a gradual uptick in broadband additions over the next four years. Moffett predicted Comcast will add 756,000 broadband subscribers in 2023, 772,000 in 2024, 789,000 in 2025 and 806,000 in 2026 for a compound annual growth rate of 1.8%. That’s about half its 3.7% CAGR in the pandemic years of 2019 and 2020, but not far off its 2.3% CAGR between 2016 and 2017. 

Moffett is more encouraged by wireless subscriber growth, which reached record levels for Comcast in Q1 and near-record levels for Charter in the same period. 

Comcast is expected to add about 1.3 million wireless customers in 2022, up about 14% from the prior year, and consistently add 1.25 million news per year for the following three years, according to Moffett. At Charter, wireless additions should reach 1.2 million in 2022, leveling off to 778,000 by 2026, the analyst wrote.    

As for telcos like T-Mobile and Verizon, Piecyk and Galone estimate they will add about 9.3 million fixed wireless broadband customers by 2026 — impressive growth, but slower than the guidance the companies themselves have given. T-Mobile has predicted fixed wireless broadband growth of 5 million access lines, with Verizon’s guidance for 4 million to 5 million additional fixed wireless broadband customers by 2025. 

“Our wireless home broadband estimates may be tamer than consensus or the guidance of the companies themselves, but they are still a contributing factor to our expectation that cable broadband growth will slow,” Piecyk and Galone wrote. “Cable’s unfettered feast on DSL subs is coming to an end, and wireless offers a legitimate alternative to a disgruntled subset of cable’s subscriber base. If wireless operators can deliver on their own guidance, cable operators might face a contraction in their sub base rather than simply a deceleration of growth as reflected in our models.” 

Fixing to Grow the Pie

Many have feared fixed wireless access would take share from cable operators, but Moffett isn’t convinced it will have the impact some predict. For one, he noted that much of T-Mobile’s fixed wireless access (FWA) growth
has come in rural areas where there wasn’t an incumbent broadband provider. And much of Verizon’s FWA additions have come from B2B customers, and have been particularly strong in new segments like food trucks, construction trailers and mobile COVID-19 testing sites.   

“For FWA in particular, it is obvious that some of the growth at T-Mobile and Verizon is coming from cable,” Moffett wrote. “But it is equally clear that much of it is not.”

The reality is that FWA’s impact is probably somewhere in the middle. Moffett estimated that total broadband subscriber growth was 2.3% in Q1 without considering T-Mobile and  Verizon FWA, and up 3.2% when they were added. 

“FWA is unquestionably having some competitive impact,” Moffett wrote. “But much of its growth is best viewed as expanding the market, either into new categories and/or new geographies.” ▪️

Competitive local-exchange carriers (CLECs), one of the main purveyors of broadband service in rural America, are learning the hard way that, in the cutthroat business that is high-speed internet, speed rules.

The CLEC industry is anxiously awaiting the pending bankruptcy filing by Frontier Communications, expected sometime next month. And Sanford Bernstein telco analyst Nick Del Deo has slapped a “sell” rating on one of the larger CLECs in the business, CenturyLink Communications. In a research note, Del Deo said as much as half of the CLEC business is tied to old technology — voice and copper-based digital subscriber line high-speed data service — that customers in secondary markets are increasingly shunning.

In downgrading CenturyLink to “sell” from “neutral,” Del Deo said the change was more a trading play than a fundamentals play. But there are still potential pitfalls ahead, he said.

CenturyLink lost about 36,000 broadband customers in Q4, and its 2020 outlook called for overall adjusted EBITDA to increase slightly, from $9.07 billion in 2019 to between $9 billion and $9.2 billion in 2020. On the plus side, the company has built out fiber to about 2 million homes and expects that to grow.

“The downside isn’t as juicy as it was, but it’s still quite meaningful and the risk-reward remains favorable,” Del Deo wrote, adding that Q4 2019 results and 2020 guidance didn’t play out as he had hoped. “There was nothing terrible in the report, but neither was there any reason to alter our negative longer-term forecasts.”

To bring home that point, Del Deo kept his 12-month price target on CenturyLink stock at $10, a 25% discount to its closing price of $13.34 on Feb. 18, the day he issued his downgrade.

CenturyLink stock closed at $13.33 on Feb. 19. CenturyLink’s broadband challenges are similar to those of its peers. In markets where it has fiber and is offering speeds of 100 Megabits per second or faster, growth is strong. In markets where its top speeds are 20 Mbps or slower, losses mount.

Nowhere was that more evident than in the fourth quarter. CenturyLink, which ended Q4 with 4.7 million broadband subscribers, lost about 36,000 high-speed internet customers in the period. Breaking out those losses, CenturyLink reported that it shed 73,000 customers that had speeds of 20 Mbps or less, and added 37,000 subs with service at 20 Mbps or higher. Of those additions, CenturyLink added 53,000 customers with service speeds of 100 Mbps or greater, and lost 16,000 customers with speeds between 20 Mbps and 99 Mbps.

Frontier’s Fios Hangover

At Frontier, the declines can mostly be traced back to its 2015 purchase of Fios properties from Verizon Communications for about $10.5 billion. That deal was supposed to be a game-changer for Frontier by doubling its footprint. Instead, it has proved to be an albatross, marred by system outages after a difficult transition period.

Those troubles, along with mounting debt and poor customer service, in part led to last year’s departure of Frontier CEO Daniel McCarthy. He was replaced by former Dish Network chief operating officer Bernie Han, who has reportedly been in talks with Frontier’s creditors to restructure $17.5 billion in debt. Hence the expectation of a prepackaged bankruptcy filing before the next $365 million payment comes due on March 15.

Frontier would be the second major CLEC to file for bankruptcy protection in the past year. In February 2019, satellite TV and broadband service reseller Windstream filed for Chapter 11 protection after it lost a $312 million legal judgment brought by a capital management firm that claimed the spinoff of network assets to a real estate investment trust violated bondholder agreements.

In the meantime, Frontier’s stock has cratered to about 60 cents per share from $3.50 about a year ago.

Telco broadband subscribers as a whole were down about 2% last year, Leichtman Research Group president Bruce Leichtman said, while cable grew by about 5%.

“They [CLECs] are not growing, while cable is growing,” Leichtman said.

He said cable’s growth has been helped by two factors: a superior, faster broadband product and bundling high-speed internet with a competitive video product.

“That has been a significant advantage for cable,” Leichtman said. Cable has dominated the broadband market for a decade.

Cable operators have accounted for 26.8 million of the 27.8 million broadband customer additions between Q1 2010 and Q3 2019, Leichtman estimated.

Leichtman doesn’t count the CLECs out, though. He said that besides debt-burdened Frontier and CenturyLink, the sector has performed well.

There is still opportunity in rural markets, Leichtman said, and broadband service is still a good business, especially from providers like Cincinnati Bell and Consolidated Communications that have invested in fiber.

“Broadband is a fairly profitable business,” Leichtman said. “If you can stay whole, there’s profitability in that.”