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Slowing Broadband Growth Lowers Moody’s Cable Subscriber Metric

The slowing pace of broadband is having a big impact on Moody’s Investors Service’s latest cable metric – the Video Replacement Rate, or the pace at which new broadband customers replace lost video subscribers – driving the average VRR for cable operators in Q3 to new lows.

According to Moody’s, the average VRR in the cable sector dropped to 5.9 times in the third quarter, down from 7.3 times in the prior year. Declining broadband growth appears to be the biggest culprit. According to Moody’s broadband subscriber growth declined by 500 basis points in Q3 2017, driving the overall VRR down.

Comcast and Charter Communications, which together represent about 80% of Moody’s broadband universe, had a big influence on the decline, with their combined broadband growth down 0.6% from Q2, according to Moody’s.

According to Moody's, the VRR represents the absolute value of the change in broadband subscribers over the previous four quarters, divided by the change in video subscribers over the same period. Moody’s also calculates the ratio on a rolling four-quarter average to smooth out distortions.

The credit rating agency said that with average revenue per broadband customer at about half that for video subscribers and broadband profit margins at about three times video, the economic loss from a departing video customer can be neutralized by growing broadband subs at a fraction of the video unit loss. Moody’s estimates that a ratio of about 2 broadband subscribers added for every video customer loss should offset revenue losses, while a ratio of 0.67 times takes care of profit declines.

The downturn in the VRR also means that revenue and cash flow growth are falling, Moody’s said. Revenue growth was down 500 basis points to 4.9% in Q3 2017, and EBITDA (a measure of cash flow) growth dipped to 7% from 8.4% in the previous quarter.

“We project the VRR will approach 5 [times] at the end of 2018, suggesting revenues and EBITDA growth will come down further,” Moody’s wrote, adding that its current forecast puts total EBITDA growth at 6% over the next 12-to-18 months.