Growth in residential broadband subscriptions will mainly be a market share game between cable, telco and satellite providers for the foreseeable future, as total high-speed internet penetration passes 90% in the U.S., according to Kagan, the media research unit of S&P Global Market Intelligence. 

Kagan estimates that total U.S. broadband subscriptions will reach 122 million at the end of 2022, as cable operators continue to expand their existing footprints through edge-out programs, telcos upgrade their plant with fiber builds, wireless carriers deploy 5G service, and the federal government offers incentives to bring broadband to rural markets through programs like the $42.5 billion Broadband Equity Access and Deployment (BEAD) project.

Cable broadband growth has been on a slower pace compared to the record growth during the pandemic, a combination of high penetration rates, stiffer competition and a slowdown in new housing starts.

Both Comcast and Charter reported broadband subscriber growth in Q1 that was half that of the prior year, and while most analysts expect operators and telcos to grow their high-speed data customer bases, none expect the pace to quicken anytime soon.

Kagan warns that growth will come at the expense of other players. In the research report, Kagan analysts Ian Olgeirson and John Fletcher write that “there simply are not enough subscribers to accommodate the growth ambitions of each segment.” 

As a result, Kagan expects cable, the hands-down dominant player in the broadband segment for the past decade, to begin to show signs of slippage, with market share dipping slightly to 61.9% through 2026. Telcos will see the biggest market share jump -- from 8% to 12.6% by 2026 -- mainly due to their aggressive fiber buildout, although that is somewhat muted by their legacy copper DSL offerings.

Although the next generation of satellite broadband offers some hope, unfavorable cost and speed comparisons should limit growth expectations, according to Kagan, who estimates their share of the market will remain steady at 1% through 2026. ■ 

Frontier Communications is expected to file for Chapter 11 bankruptcy protection within the next two weeks, part of a sweeping restructuring plan that would include swapping about $11.7 billion in debt for equity, as well as possibly selling off some assets.

According to a 10-K annual report filing with the Securities and Exchange Commission on March 31, Frontier said it has been in discussions with its bondholders since January. Frontier had been expected to file for Chapter 11 protection for months. Last month it said it would exercise its right to defer about $322 million in interest payment on its debt for 60 days, a move that many saw as a precursor to a prepackaged Chapter 11 filing. In its 10-K, the company said it would defer a $6.8 million interest payment due on April 1 as it continues to negotiate with bondholders over the restructuring.

Frontier still needs its bondholders to sign off on the plan, so there is no guarantee that the proposal will be approved. But the company did say in the documents that a Chapter 11 filing could commence "no later than April 14." 

Frontier outlined a presentation it gave to bondholders in SEC filings regarding that restructuring, blaming its past problems on a serious under investment in fiber infrastructure and an inability to capitalize on the fiber assets it had.

According to the filings, Frontier’s broadband service is available to about 14 million homes, but only 3 million of those residences are passed with fiber. According to the filing, most of Frontier's broadband customers have low-speed digital subscriber line service (DSL). About 30% of its customers have service with download speeds of 0-12 megabits per second; 35% have download speeds of 13-24 Mbps and only 6% have download speeds of 24 Mbps or higher. The company has managed to survive mainly because in many of its markets it is the only provider.

Frontier admits that it has not invested in fiber over the years. And it believes that if its restructuring plan is approved, it would have the necessary capital to build out its network. But even then it said it would only invest about $1.4 billion -- part of that possibly coming from the FCC’s Rural Digital Opportunity Fund -- through 2024.

Frontier’s biggest problem is its debt, currently at about $17.5 billion, accumulated through a series of now questionable acquisitions over the past few years, mainly its $10.5 billion purchase of Fios assets in California, Florida and Texas in 2016. Those obligations have prevented the company from investing adequately in its network and as subscribers continue to defect from its broadband services, its financials have faltered.

Revenue has been on a steady decline over the past few years -- $9.1 billions in 2017 to $8.1 billion in 2019 -- and is expected to fall further in 2020. Net losses have tripled in the same time frame, from $1.8 billion in 2017 to $5.9 billion in 2019.

By increasing its emphasis on fiber, Han and the rest of the Frontier team believe they can begin to reverse the company's history of declines, but it will take time. According to the SEC filings, Frontier doesn’t expected to turn a profit

Current Frontier stockholders would likely be left in the lurch in a Chapter 11 filing -- in most of those cases, current equity is valued at 0 and retired and replaced with shares in a new entity.

Frontier hired former Dish Network chief operating officer Bernie Han as its CEO in December, and he has been working hard to hammer out a deal with bondholders. According to the SEC filings, Frontier believes with its debt problems out of the way and a new focus on fiber, it can grow revenue and cash flow over time.

But it wouldn’t be immediate. According to the restructuring plan, Frontier revenue would decline over the next four years -- from about $7 billion in 2020 to about $5 billion in 2024 -- as it shifts from a legacy copper-based business to a fiber-centric operation. But by 2024, when fiber accounts for 47% of revenue (it’s at about 34% now), it will have a customer base that is more profitable. By Frontier’s estimates, fiber cash flow will grow at a 6.1% clip from 2019 to 2024, and at a 10.2% rate between 2024 and 2031. Cash flow at the legacy copper business is expected to decline from about $2.2 billion in 2019 to $900 million by 2031.

Broadband, long the segment of the cable business that has propped up declining video performance, is showing signs of slower growth, a byproduct of both its immense popularity and a fiber push by telco competitors that threatens to take back share.

Cable has long dominated broadband, accounting for well above 90% of overall growth for at least a decade and more than 100% of new subscribers since the first quarter of 2015, according to MoffettNathanson principal and senior analyst Craig Moffett. While that dominance didn’t decline dramatically in the most recent third quarter — 111% compared to 123% in Q3 2016 — it is starting to become more pronounced for large and small providers alike.

Related: Barclays Downgrades Cable Sector to ‘Neutral’

At Comcast, broadband additions slowed to 818,000 in the first nine months of the year, 17.2% behind last year’s pace of 988,000 adds. The same has held true for Charter Communications, with 908,000 broadband additions in the first nine months of 2017, down 17.9% from a year ago.

Broadband-centric MSO Cable One actually lost high-speed internet customers in its legacy systems in the last two quarters of this year — about 3,300 subscribers — and its broadband sub base is growing at a 1.7% annual rate, according to Moffett, considerably lower than the 2.9% growth rate of six months ago.

Overbuilder WideOpenWest, another provider that has concentrated on broadband, reported its first quarter of positive broadband subscribers in nine months in Q3, with 2,400 customers.

Double-Digit Decline in Adds
In the cable sector as a whole, broadband additions have declined 15.5% from 2.74 million in the first nine months of 2016 to 2.32 million in the first nine months of this year, Moffett noted in a recent report.

The stocks are beginning to reflect the sluggish broadband growth, too. WOW stock has fallen 44% in the past six months, followed by Comcast (down 11.8%), Cable One (down 4.5%) and Charter (down 3.8%). Altice USA, which went public in June, has dipped 44% since then, but much of that decline has been due to leverage concerns for its parent company, European telecom provider Altice N.V.

Overall, though, cable valuations are down. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said that trend is expected to continue. “Cable multiples are contracting over concerns about pay TV, slowing overall data market growth and competition,” Wlodarczak said. Add in WideOpenWest’s leverage (about 5 times cash flow) and the fact that it overbuilds some of the largest cable operators and telcos in the country, and the decline becomes less shocking.

And it doesn’t take much to spook the market. When Comcast said prior to releasing Q3 results in September that because of recent hurricanes and competitive factors it would lose 100,000 to 150,000 video customers in the period, shares fell as much as 7% to $38.60. The stock has not yet fully recovered — priced at $36.25 per share on Nov. 28 — even after results came in at the middle of the new guidance (a loss of 125,000 video customers). Part of the reason for that could be slower-than-expected broadband additions at 214,000 customers, behind the 330,000 additions in the prior year.

The shift started happening in the beginning of the year, when the two biggest telcos, AT&T and Verizon, reported net gains in broadband subscribers. It was the first time in almost two years that has occurred, other than a small increase in Q3 2016.

As AT&T continues to build out its fiber network, the gap is closing. In 2015, as part of the conditions around its purchase of DirecTV, it pledged to build out 12.5 million more homes with fiber by the end of 2019; now it says it will pass 14 million homes. Overall, AT&T said it expects to offer speeds of 50 Megabits per second or greater to 50 million homes by 2020. Those efforts have helped lift AT&T’s total broadband subscribers into positive territory for all three quarters this year. As Verizon’s losses decline, cable’s advantage should shrink.

Reversal of Fortune for Telcos
Cable is still expected to dominate, just not as much. Telsey Advisory Group analyst Thomas Eagan estimated telcos could end the year gaining 6.7% in broadband customers, compared with a loss of 8% in 2016. The shift is also cutting into trading multiples for the stocks. Wlodarczak noted that trading multiples have contracted between 0.5 times and 2 times in the first half of the year and will continue to fall.

Eagan also noted that Comcast’s trading multiple has dropped from about 8.2 times cash flow in the summer to 7 times after it released Q3 results. But despite the slowdown, he said, there is still plenty of growth ahead for cable broadband. “To me, it means they are underpenetrated and there is a lot of runway left,” Eagan said.

Pay TV subscriber rolls continued to dwindle in the seasonally weak second quarter, as losses from telco-TV service providers continued to weigh heavily on the sector.

Meanwhile, continued improvements by cable operators and declines at content providers suggest a widening gap between cord-cutters and cord-shavers.

The pay TV industry lost 757,000 basic video subscribers in the second quarter, an increase from the 683,000 it lost in the same period last year, according to MoffettNathanson principal and senior analyst Craig Moffett. Including estimates from Dish Network’s Sling TV over-the-top service, the sector lost 708,000 subscribers in 2016 and 613,000 customers in 2015.

Cable continued to temper its customer declines: It shed 242,000 video customers in the period, nearly half the 404,000 it lost in the prior year. But telco-TV losses increased exponentially at 526,000 for the quarter, compared to a gain of 5,000 in the prior year.

Satellite-TV providers continued on their roller coaster ride, adding 12,000 in the period compared to a loss of 284,000 in the prior year. Exactly where those customers are going is a little murkier. There has generally been a straight line from multichannel video programming distributor (MVPD) losses to cord-cutting, but that path has become a little less clear over the past several quarters.

The Walt Disney Co. has shed more than 4 million subscribers over the past year, while content companies such as Discovery Communications and Time Warner Inc. have estimated subscriber losses of about 2%. Those figures are based on Nielsen data that doesn’t take into account over-the-top distributors (which could number about 800,000 subscribers via Moffett’s estimates) and skinny bundles from traditional and non-traditional sources.

“[H]ere’s what we do know. Cable is doing well. The telcos are doing badly. And satellite is mixed,” Moffett wrote in a note to clients.

BTIG media analyst Rich Greenfield, who has for years warned that OTT services are a real threat to the traditional MVPD subscriber base, sees the Q2 results as more evidence that the traditional pay TV model is eroding.

Though he doesn’t expect a wholesale collapse anytime soon, Greenfield wrote in a blog post that he sees the pay TV model getting slowly chipped away.

“Just a few years ago, the industry was adding video subs at a 1-2% rate; now the industry is losing 2% through cutting/shaving, not to mention the growing pressure from cord-nevers,” he wrote. Data suggests annual losses of 3, 4 or even 5% could become reality in the next few years, he added.

“It may not happen, but it certainly feels like the big TV bundle is becoming less and less important to consumers, given a poor price/value equation,” he wrote.

Moffett said telco TV’s erosion is due partly to the “perfect storm” of a strike at Verizon Communications, Frontier Communications’s initial problems in transitioning former Fios TV markets it bought earlier this year and AT&T’s conversion of U-verse TV subscribers to DirecTV.

Even considering those developments, telco TV’s reversal of fortune is extraordinary. Moffett noted that telco TV subscriptions have gone from a 6.1% increase to a 9.1% decline in just one year.

Cable operators continued to build on the momentum of past quarters. Comcast improved its video losses in Q2 to just 4,000 (compared to a loss of 69,000 in the prior year — its best second quarter in more than a decade), while Charter Communications lost 152,000 video customers in the period, better than the 170,000 it shed in Q2 2015. Cablevision, now part of Altice USA, lost just 2,000 subscribers for its best Q2 in four years.

“Can cable’s relative position get any better?” Morgan Stanley media analyst Ben Swinburne asked in a note to clients. He pointed to Charter’s improvements, adding that more are expected.

“[W]e think Charter’s best market share days remain ahead of it,” Swinburne wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said he believes cable’s momentum will continue at the expense of the telcos. “In the end, cable simply has a better mousetrap, which will become even more apparent in ’17 when cable inexpensively upgrades its network for DOCSIS 3.1 and its 1 [Gigabit-per-second]-plus potential download speeds,” he wrote in a note to clients.

The FCC items proposing defining some linear over-the-top (OTT) video providers as MVPDs and extending online public file obligations to cable, satellite and radio are still in the works and at press time an FCC source said both would probably not get voted on this week.

Both items already have enough votes for approval--the three Democratic commissioners (including the chairman)-- so the Republicans were on a Dec. 10 must-vote deadline for the items, which had been circulated by the chairman for a vote weeks ago.

But the deadline can be extended, and the source said the political file item would likely get an extension until Dec. 17. The commissioners were still working through edits on the MPVD item offered up by the Republicans, which will not likely be released until next week.

The political file item is in  response to a petition filed by campaign finance reform groups seeking that extended online filing.

Currently, only TV stations are required to post their political files online to an FCC database, but the FCC In August asked whether that requirement should be extended, seeking input on a petition to that effect filed by the Campaign Legal Center, Common Cause and the Sunlight Foundation.

The over-the-top  item would define an OTT that delivers a linear stream of programming as an MVPD. That means those OVDs would have access to content through the FCC's program access rules, but also have to negotiate retransmission consent with broadcasters. It would not apply to TV Everywhere, which is in essence an authentication regime for an online mirror of traditional service, in which access rules already appear. But it does ask questions about how it should treat TV Everywhere.

The idea behind the NPRM is to give over-the top providers offering an online service that mimics a linear cable offering the same FCC-enforced access to vertically integrated programming.

An FCC source confirmed the item had been voted by the Dems, with the Republicans still making edits that were being considered by the other offices at press time.

It is possible that the item could be 5-0 if the edits are accepted.

In addition to starting the process of defining OTT's in terms of competition to traditional video, the item responds to a complaint by OTT provider SkyAngel about access to content.

Exactly which OTTs should be defined as MVPDS and what other obligations or rights would apply beyond that access--PEG channels, exclusivity--are all teed up in many questions for the commenters, and ultimately the FCC, to answer.

A source who has seen the item describes it as the beginning of a process of answering some tough questions that will help determine the future of online video.