Cable operators have a few years left of continued increased capital spending, but advances in customer equipment coupled with increasingly intelligent and high-capacity networks could drive spending down substantially.
Overall capital spending as a percentage of revenue could drop from its current level of about 15% of total revenue to 10% in the next five years, according to a report by U.K.-based New Street Research.
On average, New Street estimates that capex per home passed could fall from its current level of about $140 to around $120 per home passed. And that’s after some operators — Altice USA and Charter Communications — complete ambitious network upgrades aimed at increasing data speeds and improving efficiencies.
Altice USA is well underway with its “Generation Gigaspeed” project to bring fiber directly to the home. The upgrade is expected to take five years, and the company recently said it is on track to reach 1 million homes with fiber by the end of 2018.
While Altice is expected to see capex rise slightly in the next few years as it goes through that project — Morgan Stanley media analyst Ben Swinburne estimated it would spend an additional $3 billion over the next five to six years on Gigaspeed — other operators will see their capital commitments shrink.
That freed up cash could be used to bolster other parts of the business, introduce new products or simply be returned to shareholders in the form of stock buybacks and dividends.
Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said he believes how the extra money is used depends on the operator. For Charter, he sees most of that capital being reallocated to stock buybacks. In Comcast’s case, it could possibly go toward M&A; and for Altice USA, debt retirement and M&A.
“Eventually, after a couple years of decline, I think that all starts moving in the direction of Altice USA, to [fiber-to-the-home] where demand warrants,” Wlodarczak said.
Not everyone is convinced that capex is on the way down though. Moody’s Investor’s Service senior vice president Neil Begley said in an email message that while smaller operators may see some declines, the larger players will stay at or around current levels.
“I think that video product development and wireless spending will keep capex high for the large players,” Begley said. “But for the smaller players, since they do not possess the scale to develop their own software and hardware applications, and are unlikely to spend much on wireless other than to extend some fiber, there is a good chance for capex to decline to maintenance levels and commercial extensions of fiber.”
Capital expenditures have been up and down for cable operators over the years, especially as MSOs have embarked on new product and service initiatives.
Comcast, which began the national launch of its X1 platform in 2012, saw its capital spending rise sharply as it deployed new boxes and beefed up infrastructure across its markets. Capex for the company, which had normally risen by about $100 million per year prior to 2012, began to rise by about $500 million annually after that date. But that spending is expected to decline beginning this year, from $7.6 billion in 2016 to $7.02 billion in 2017 and to $6.8 billion by 2018, according to MoffettNathanson principal and senior analyst Craig Moffett.
Similar capex reductions are expected at other cable operators.
Longer CPE Life
Cable companies are approaching the end of the most recent upgrade cycle, according to the New Street Research report, written by analysts Frank Knowles and Andrew Entwistle.
What’s different this time is that new CPE in the form of set-tops and WiFi router equipment can be upgraded remotely, which should extend the life of the equipment substantially.
With the increasing trend of placing storage and functionality in the cloud, the era of the bulky set-top box also could be coming nearer to a close. New Street predicted that, long term, the typical set-top box will essentially be a dongle with IP access and encryption but with storage and intelligence housed in the cloud.
“We can see an end in sight for the expensive set-top box as storage and functionality move to the cloud, but offsetting this from a capex perspective is the increasing cost of solving customers’ in-home networking problems,” Knowles and Entwistle wrote. They added that additional costs for WiFi equipment, like home network hubs, could be offset in the short term by charging more for the service and in the long-term through reduced churn and better customer satisfaction.
Cox Communications is already doing this with its Panoramic WiFi product, a whole-home WiFi solution that costs about $9.99 per month. Comcast’s xFi product, a cloud-based home WiFi management platform, became available to existing customers in May at no additional charge.
New Street estimated that CPE costs per customer were fairly stable between 2012 and 2015 at about $100 per customer, but have fallen sharply in recent years, to under $80 per customer by the second quarter of this year.
Costs vary among operators – Comcast is deploying more expensive X1 boxes while operators like Cable One have de-emphasized video. But New Street expects CPE reductions alone to result in a 15% savings in overall capex per home passed from nearly $140 to $120.
“We think that core network spend can reduce as networks are modernized and virtualized, leading to savings in equipment maintenance and in space/power,” the analysts wrote.
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