Barclays Group media analyst Kannan Venkateshwar downgraded his ratings on Comcast and Charter Monday in the wake of disappointing Q2 broadband performance, adding that the rapid growth of fixed wireless service from telcos may end up being more of a threat than cable operators think.

Barclays lowered the rating on Comcast to “Equal Weight” from “Overweight” and on Charter to “Underweight” from “Equal Weight,” citing their poor Q2 performance. In addition to non-existent broadband growth in Q2, video subscriber losses at both companies rose significantly during the period -- to 521,000 and 266,000 respectively -- reigniting fears of accelerated cord-cutting for traditional cable. While mobile subscriber growth for both Comcast and Charter exceeded analysts’ consensus estimates for the period, Venkateshwar split from his peers, doubting that wireless will be able to take up the slack. 

Broadband Forecasts Lowered Again

Venkateshwar noted that he now expects Comcast to add about 300,000 broadband customers this year, down from 1.4 million in 2021, and Charter to add about 200,000, down from 1.2 million additions in 2021. He said the debate has shifted to whether or not cable broadband subscribers will actually decline in 2023 and beyond.

The broadband slowdown has weighed on cable stocks for months. So far this year, Comcast stock is down 24%, Charter down 34%, Altice USA fell 35% and Cable One is down 22%. The sector probably will fall even further after Altice USA reports Q2 results on August 3. 

Most analysts have reduced their forecasts for cable broadband subscriber growth again in light of the Q2 results, with Wells Fargo Securities media analyst Steven Cahall cutting his estimates for Comcast and Charter nearly in half. 

Prior to the Q2 results, Cahall had estimated Comcast would add 688,000 broadband customers in 2022 and another 630,000 in 2023. Now, his estimates call for 298,000 residential additions in 2022 and 300,000 in 2023. For Charter, Cahall had estimated residential broadband growth of 499,000 in 2022 and 549,000 additions in 2023. Those predictions have been revised to 152,000 customer additions in 2022 and 295,000 in 2023. 

Fixed Wireless Threat 

The analysts pointed to the potential threat of fixed wireless -- T-Mobile USA added 560,000 fixed wireless subscribers in Q2, far exceeding consensus expectations -- and Comcast’s and Charter’s seeming indifference to that competition. In conference calls with analysts to discuss Q2 results, both Comcast chairman and CEO Brian Roberts and Charter chairman and CEO Tom Rutledge said they believe fixed wireless isn’t much of a threat. 

Roberts called the fixed wireless access Q2 performance a fluke, as excess capacity created a “temporary opportunity targeted at value-oriented customers.” And while he said FWA isn’t having any “discernible impact” on churn, he did acknowledge it was a factor in Comcast’s flat Q2 performance. Not exactly an admission of a threat, but close, even though he added that performance and capacity restraints will likely limit FWA’s overall penetration.

On the call, Rutledge appeared to dismiss the long-term impact of fixed wireless while admitting that it is “an issue affecting growth at the moment.”  

Rutledge said fixed wireless access’s impact is small when compared to Charter’s overall footprint. He said activity levels were the major driver for subscriber losses. And he said that there are other economic factors at play, including low housing occupancy and new construction because of supply chain issues.

“And so we're pretty optimistic, relatively speaking, that as the post-pandemic market activity levels return and normalize, that our share of broadband growth will rise,” Rutledge said on the call. 

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

But Venkateshwar warned that fixed wireless could become a factor very quickly, adding that if T-Mobile meets its guidance of 500,000-plus additions each quarter, it will be larger than Altice USA (the fourth largest cable operator in the country) by the end of next year.

Also: Broadband Slowdown Hasn’t Hit Bottom Yet, Analyst Says 

“It is tough to see this not impacting cable structurally when cable [broadband] net adds overall have been [about] 3 million in normal years and T-Mobile and Verizon alone could add 2 million to 2.5 million FWA subs a year,” Venkateshwar wrote. “This is even before the existing DSL base converts to fiber driven by government funding and AT&T’s fiber expansion, which we estimate will result in an additional 20% of cable footprint having fiber overlap.” 

Blame Game

Cable operators have mainly blamed the broadband growth slowdown on lower household moves, an excuse that the Barclays analyst is not buying.

“[T]his is a market share argument and it is not clear why this would drag growth down for the industry as a whole,” Venkateshwar said of slower housing moves. “While cable has gained share vs DSL over time and therefore lower moves would impact growth rates, it is mathematically impossible to get to negative growth as seen last quarter, purely on account of lower move activity. In addition, the decline in move activity is not new and has been going on for years and tends to worsen during recessions. Even if move activity recovers, there are new elements that are likely to reduce cable’s share of gross adds given fiber and FWA entrants.”

Going Mobile 

Other analysts have seemed to side, partly, with cable operators' view on fixed wireless access. In a research note Friday, MoffettNathanson senior analyst Craig Moffett said that while investors will likely focus on broadband performance for a while going forward, they will eventually come around to the thesis that wireless is the new growth engine for cable. According to Moffett, if video was Act I for cable operators and broadband was Act II, wireless is poised to be the industry’s third Act..

Charter added 340,000 wireless customers in Q2, ending the period with 4.3 million customers. Mobile now accounts for 5.5% of Charter’s total revenue. Though the segment isn’t profitable yet, once Charter’s CBRS offload initiatives are completed in the next few years, it will be more profitable than most could imagine, according to Moffett.

The same holds true for Comcast. The largest cable operator in the country added 317,000 wireless customers in Q2, ending with 4.6 million customers. Wireless makes up about 4.9% of Comcast’s total cable revenue and is growing at a 30% annual rate.

“[W]e believe wireless growth remains underappreciated,” Moffett wrote. 

Wells Fargo Securities' Cahall said the jury was still out on mobile valuations, and while unit economics are positive, they don’t yet exceed the cost of service. On the other hand, increased capital spending on wireless could make operators less  reliant on MVNO partnerships and more competitive with telcos. 

“Add it all up, and it's a very logical strategy, but we think the value is too uncertain at flattish adjusted EBITDA margins to offset the [broadband and capex] challenges,” Cahall wrote.

Venkateshwar also was impressed by cable’s wireless performance, but he added that any war between cable wireless and telco FWA will be won by the telcos. 

“Telecom operators have their own issues but their narrative around new revenue sources like FWA is more feasible, at least over the short term, because it is backed by significant capital investments in a fixed cost infrastructure that should provide operating leverage over time,” Venkateshwar wrote. “Cable companies on the other hand have no plans to invest in a full infrastructure based offering, but still believe they can do better with an MVNO model than operators elsewhere in the world have managed. This strategy makes sense to test out the market and launch a service, but to anchor [a] long term strategic pivot of the scale that cable companies are attempting on someone else’s network is not viable in our view.” ■

With the three top publicly traded cable operators expected to report second quarter results later this week, all eyes will be on whether the slowdown in broadband subscriber growth will be larger than, less than or equal to expectations.

Cable broadband growth broke records in 2020, as the pandemic forced most Americans to work from home and buy faster and faster tiers of service. The expansion of streaming video, as services like Disney Plus, HBO Max, Paramount Plus and Discovery Plus chewed up bandwidth normally occupied by SVOD stalwarts like Netflix, Amazon Prime Video and Hulu, also increased demand. 

When the dust cleared, cable operators added about 5.6 million broadband customers in 2020, more than double the 2.5 million added in the previous year. Most operators warned that subscriber growth would slow this year and probably next, most likely to 2019 levels. That appeared to hold true in the first quarter, when total cable broadband additions were about 3.8 million, according to Wells Fargo Securities media analyst Steven Cahall.

In a research note, Cahall added that as Q2 is usually a seasonally weaker period, overall broadband growth is expected to be at about 0.6%. He noted that while this is a 400 basis point decline from the previous quarter, it would still be the highest Q2 growth rate in five years (excluding 2020). 

Cahall is one of the more bullish analysts regarding broadband growth, noting that the segment outpaced expectations in the first quarter, as many operators said trends associated with COVID-19 continued. While Cahall still expects a deceleration in growth for the full year in 2021 (3.5%, compared to 5.6% in 2020), he notes it is still higher than the growth rate in the prior four years. 

“Commentary from most of our covered companies suggests subscriber gains similar to 2019 levels, with a back-half weighted growth profile,” Cahall wrote.

Altice USA is the first major publicly traded operator out of the box, expected to report its Q2 results on July 28 after the market closes. Analysts are expecting the operator to add between 10,000 and 28,000 broadband customers in the quarter, compared to Q1 2021, when it signed on about 12,000 high-speed internet customers.

Altice USA, which operates as Optimum in its East Coast markets and as Suddenlink Communications in the Midwest, has some of the highest broadband penetration rates in the industry, which has limited its subscriber growth in the past. Earlier this month the company said it would rebrand its wireless service as Optimum Mobile across all of its systems, a move it said was the first step in rebranding all of its products under the Optimum name. 

Also Read: Analyst: After a Strong 2021, Cable’s Broadband Trajectory Could Reverse in 2022 

At Comcast, which is scheduled to report its Q2 results on the morning of July 29, analysts believe that broadband additions could come in at nearly half the level the company reached in Q1. Cahall estimates that Comcast will add about 260,000 residential broadband customers in Q2, while Evercore ISI Group media analyst Vijay Jayant and Bernstein media analyst Peter Supinio are in agreement that Comcast should add about 275,000 residential and commercial broadband customers in the period. Still, that’s nearly half the 461,000 residential and commercial additions the company added in Q1.

Charter is expected to release its Q2 results on July 30, and Supino, who downgraded the stock to “market perform” on July 12, expects the nation’s second largest cable operator to add about 250,000 broadband customers. That is about in line with Cahall’s estimate of 246,000 additions. Jayant predicts the company will add about 265,000 high-speed data customers in the period. 

For the full year, analysts are pretty much in agreement that growth will be slower than in 2020, with some predicting it could be even less than in 2019. 

MoffettNathanson expects the top three operators to add about 2.4 million broadband customers in 2021, around half a million subscribers behind the 2.9 million they added in 2019. Supino estimated that overall growth would be about 2.7 million. Supino predicted that Charter would have the biggest drop in growth over the next two years -- he estimated the company would add about 1 million broadband subscribers in 2022 and under 1 million in 2023 -- spurred by expected increased regulatory scrutiny and stepped up competition from AT&T and T-Mobile.

T-Mobile has said it expects to add 7 million to 8 million 5G wireless broadband customers by 2025, implying additions of about 1.5 million annually. While Supino wrote that wireless broadband can’t match fiber-to-the-home, he believes a new segment is emerging in the market. 

“Consumer markets naturally segment ‘good, better, best,’" Supino wrote. “Historically, the enormous up-front capital costs and logistical challenges of supply growth have inhibited the segmentation of the broadband market. We believe the natural segmentation of the broadband market will provide more consumers with an opportunity to pay a lower price for ‘good enough’ broadband.”

Television advertising could “see a quick recovery” - especially in the spot market - “if the economic recovery is V-shaped,” Wells Fargo Securities analyst Davis Hebert said Tuesday (June 30) in an outlook on the post-COVID-19 media financial landscape.

Media economics, especially ad sales, should be "back to stability in the fourth quarter and may be back to normal in 2021," Hebert said during the first-ever webcast version of The Media Institute think tank's monthly luncheon in Washington.

But he also acknowledged that the growing use of streaming media - especially producers' direct-to-consumer (DTC) digital platforms such as HBO Max and Disney+ - will rearrange viewers' consumption patterns, with ripple effects on cord-cutting. Indeed, Hebert pointed out that "stackers" - a new breed of consumers who subscribe to three or four digital platforms - are creating their own virtual bundles, which is helping to offset cord-cutting losses to some operators who have content alliances.

"That's where things are going," he said. "Broadband growth should power through any concerns" about video cord-cutting, Hebert added, although he contended that factors - such as the return of sportscasts on broadcast and cable channels - may also curtail cord-cutting.

Also on the positive side for cable operators are cost-saving factors such as self-installation, which have seen growing acceptance during the lockdown. He said he's waiting to see the impact of cable's reach into small/medium businesses - an expanding category, although cable may fail to win business customers if those SMBs stumble themselves during the economic recovery and hence do not sign up for cable broadband service.

Hebert, a frequent speaker at media financial events,  also responded to a question about the fate of AT&T's media investments - especially DirecTV - with expectations of further changes in the direct broadcast satellite sector. He spoke from his home near Charlotte, N.C., where he is a Wells Fargo Securities director and senior high yield analyst.

Voicing optimism about ad-supported video-on-demand (AVOD) services, Hebert focused on appealing streaming options such as NBCUniversal's upcoming Peacock and ViacomCBS's Pluto TV as well as the new line-up of studio-backed streaming services, such as HBO Max and Disney+ along with YouTube's AVOD offerings, seeing them continue to "gain traction."

"Digital will continue to grow, but it was already growing at double digits," he said.

Related: COVID-19 Could Squeeze Networks More in Q2

Hebert also expects traditional media to thrive, especially over-the-air broadcasting which has a 6% CAGR over the next four years, according to Wells Fargo estimates. He is monitoring categories such as auto sales, which typically indicate economic recovery. He is also upbeat about the impact of political advertising, especially in the upcoming 3rd and early 4th quarters, which he expects to be vigorous this autumn.

He acknowledged that the forecasts for autumn advertising "are all over the map."

In a lengthy summary of pre-pandemic conditions, Hebert pointed out that the media industry has been seeing "leakage" for a considerable time, which is why "the stock market has not been kind to media companies." He stressed that "the pandemic accelerated the trend...perhaps permanently."

Risk Losing Young Viewers Entirely

Echoing an oft-voiced fear, Hebert warned that traditional media companies "risk leaving a whole generation [of young adults] behind" - audiences under the age of 34. "This is where the world is tilting," he said.

Hebert admitted that the DTC migration "happened much faster than expected."

Asked about the outlook for AT&T and its beleagured media empire, Hebert observed that, "we've seen the strategy change after the Warner acquisition," including retiring of some brands and moving away from DirecTV satellite broadcasting.

"AT&T has had the worst video subscriber losses in the industry," he reminded the online audience. Invited to speculate about future developments such as a DirecTV merger with rival Dish, Hebert quoted Dish founder Charlie Ergen's view that, "It makes a lot of sense." But Hebert acknowledged that such a satellite merger would face lengthy scrutiny, especially if the Democrats take control in Washington in January. He cited the recent two-year ordeal to merge Sprint and T-Mobile as an example of the challenge in eliminating a competitor. He added the prospect of Ergen's effort to get into the terrestrial wireless business and abandoning satellites might further complicate that process.

"There are a lot of hoops to jump through if we ever see consolidation," Hebert said.

Although he cited 5G wireless service as a major factor moving ahead, he characterized it as a "2020 to 2030" development, not an immediate widespread service. "We’ll see investment for a long time.

Two prominent media financial analysts, in separate presentations to two different groups, proclaimed their enthusiasm for broadcasting, cable and traditional media while acknowledging the growth of digital media in a revamped "revenue mix." 

Both analysts said they believe the frenzy over digital delivery is slowing.

"Big advertisers are going back to traditional media because they recognize that their digital advertising is not working out," Marci Ryvicker, managing director and senior equity analyst at Wells Fargo Securities, said at a monthly luncheon of the Media Institute on April 3.

Later that day, Laura Martin of Needham & Co. said, "Digital has sullied its brands" by underperforming. In a presentation to the Women in Cable Telecommunications D.C. chapter, Martin cited the extension of traditional TV brands through TV Everywhere and direct-to-consumer services such as CBS All Access as models for "the resurgence of TV."

Both analysts envision a continuing wave of media mergers, although they offered few predictions about specific deals.

"Everybody's a buyer" in the volatile broadcasting sector, Ryvicker said. She acknowledged the regulatory caps on homes reached may affect short-term growth for the largest companies.

She was bullish on Sinclair because "scale is important."

"They've under-promised and over-delivered," Ryvicker said.

On other topics, Ryvicker cited the recent collaboration of Viacom, Time Warner (Turner) and Fox Networks Group  to form "OpenAP," which will help advertisers target specific audiences. She characterized such moves as valuable. 

Ryvicker also predicted  that 2018 political advertising "will go up" thanks to the volatile campaign situation, and she expects that "cable news channels will continue to have big ratings through this administration."

She singled out Disney's performance on several levels and added that she thinks "NBC is trying to do what Disney did" in focusing on specific audience segments for growth.

Ryvicker described the impact of streaming video bundles as creating "a lot of nervousness and guessing" among investors. She expects that only three aggregators will survive on a broad scale, citing Hulu (largely because of its media ownership), Apple (even though it has no product yet) and Amazon.  

In response to a question, she said that she doesn't expect Apple to buy Disney because it doesn't fit with Apple's agenda to "get a device into every home." But she said that it would be "more dangerous if Apple bought Netflix," which is so well established; she did not elaborate.

"We don't have enough data to know what any of this means," Ryvicker confessed.

Martin, senior analyst, Entertainment & Internet, at Needham & Co. and CEO of Capital Knowledge LLC, cited efforts by Google and Facebook to pivot into video delivery companies, but doubted that they have the ability to reach mass video audiences.  

She said that many of the digital providers (not including Netflix) have one or two million customers compared to the 90 million pay TV users nationwide.

"The feel very 'niche-y' to me," Martin said. 

She acknowledged that customers "want rebundling," and pointed to deals such as the one between Showtime and Netflix as a possible harbinger of future alliances.  

Martin also emphasized the value of live viewing -- including sports and other content. She cited the ongoing "revenue mix shift" as advertising and subscriber fees are adapted to the evolving role of digital and mobile video consumption.

Summing up her outlook on cable, Ryvicker drew a knowing laugh from the Media Institute audience when she reminded it to "disengage the company and its stock."

"People hate Comcast but love Comcast stock," Ryvicker said.