Comcast and Charter may need new focus as broadband growth stalls amid competition

Brian Roberts, CEO of Comcast (left), and Tom Rutledge, CEO of Charter Communications

Drew Angerer | Getty Images

Comcast and Charter, the two largest cable companies in the United States, are struggling with the problem of broadband growth.

As tens of millions of Americans have canceled their cable TV subscriptions in the past decade, the cable industry has focused on the more profitable business of selling broadband Internet.

Now, the number of US households paying Comcast and Charter for high-speed internet is down for the first time, with the two companies reporting a decline in residential broadband in the second quarter. Comcast lost 10,000 residential customers and noted a drop of another 30,000 in July. Charter decreased 42,000.

Comcast CEO Brian Roberts and his Charter counterpart Tom Routledge blamed macroeconomic trends and stronger-than-usual gains during the pandemic as the main reasons for the losses. Comcast specifically noted that fewer people are moving as the main reason for the drop in connections.

“There has been a significant slowdown in the moves across our footprint,” Roberts said during a conference call about Comcast earnings last month. In the first year of the pandemic, he noted, the company added nearly 50% more customers than its previous average annual growth.

The abrupt end of the broadband growth streak is a major concern for investors in Comcast and Charter, who are trading near two-year lows. Comcast shares are down about 25% since the start of the year, while Charter is down about 33%.

And while pandemic and macroeconomic trends may reverse over time, Roberts also acknowledged earnings growth is another reason for broadband decline: new competition.

The rise of fixed wireless

For decades, cable companies had little competition in many regions of the country for high-speed internet.

Then about three years ago, T-Mobile launched its fixed wireless product, a 5G high-speed broadband product that serves as an alternative to cable broadband. As of April, T-Mobile high-speed internet is available to more than 40 million households across the country. Verizon said earlier this year that it plans to have between 4 and 5 million fixed wireless customers by the end of 2025.

In March, Roberts dismissed the fixed wireless connection as a “poor product.” T-Mobile has promised that half of the country will have speeds of at least 100Mbps by the end of 2024. Standard cable (and fiber) broadband can provide speeds twice as fast. Furthermore, fixed wireless connectivity is restricted by congestion on 5G airwaves. The cable, which passes the wires directly to the house, does not have such a limitation.

“We’ve seen lower bids and lower speed before,” Roberts said at the Morgan Stanley Technology, Media and Communications Conference. “And in the long run, I don’t know how viable this technology is.”

T-Mobile charges a flat monthly fee of $50 for its fixed wireless service. New Street Research has estimated average monthly cable broadband revenue per use of about $70, and is likely to rise to more than $75 by 2025.

Just as T-Mobile has grown into the wireless industry by offering lower rates, it appears to be doing the same with cables. In the second quarter, T-Mobile added 560,000 new fixed wireless customers as Comcast and Charter lost broadband subscribers. T-Mobile said that more than half of its new customers have switched from using cable.

“Demand continues to build from dissatisfied suburban cable customers to underserved customers in small markets and rural areas,” T-Mobile CEO Mike Seifert said during a conference call on the company’s earnings. T-Mobile also noted that Ookla’s nationwide speed test results in July showed 5G (187.33 Mbps) topping Comcast and Charter (184.08 and 183.74, respectively) broadband in terms of average speed.

Roberts disputed that customers are abandoning Comcast for any established service, claiming that T-Mobile’s growth depends on new customers.

“We don’t see that fixed wireless has any apparent impact on our momentum,” Roberts said during Comcast’s July 28 earnings conference call.

However, if fixed wireless networks continue to devour cable broadband growth, Comcast and Charter will need to convince investors there is another reason to put their money into cable, said Chris Marangi, portfolio manager at Gabelli Funds.

“There is no obvious catalyst,” Marangi said. “You probably won’t get active broadband growth in the next six months.”

It owns Gabelli Funds Charter, Comcast, Verizon and T-Mobile.

Fear of investing in cables

The fear among cable shareholders isn’t just that Comcast and Charter may be at the end of an era when it comes to broadband growth. Also, the new competition will lead to lower prices. The combination of promotional pricing and faltering growth could turn broadband into something that looks more like the wireless business, which has been hobbled by price wars and low profit margins for years.

It’s too early to tell whether fixed wireless connections will take market share from cable companies in the coming years or if congestion issues are forcing wireless service providers to limit the number of users, said Craig Moffett, communications analyst at MoffettNathanson. Moffitt noted that fixed wireless networks use much more data than mobile wireless networks, but only generate about 20% of revenue based on current prices.

“Time will tell if this transition to fixed wireless is just a temporary opportunity,” Moffett said.

It’s likely that fixed wireless is simply “momentary” and customers will dismiss service over time as too unreliable or lacking in speed, said Walt Beck, an analyst at LightShed Partners.

“Right now, it seems to be working,” Beck said. “They’re taking cable customers.” “We’ll see if that’s sustainable two or three quarters from now.”

Cable’s tech advantages could shift investor sentiment toward Comcast and Charter if steady wireless growth declines.

“While the narrative of the slowdown ahead of increased competition does not bode well for sentiment, we believe that the cable network’s advantage over the majority of its footprint will drive sub-growth,” JP Morgan analyst Philip Cusick wrote in a note to clients.

The cable goes to wireless

Moffett predicted that with television declining and broadband growth slowing, the next chapter for cable would be wireless.

Wireless became a new growth story for Cable, as Comcast and Charter used a joint network agreement with Verizon to boost their mobile services. Comcast wireless revenue grew 30% year over year in the second quarter and more than 80% over the past two years. Charter’s wireless quarterly sales grew 40% over the same period last year; Two years ago, the company didn’t even generate wireless revenue because the business was so new.

Comcast and Charter have to share wireless connectivity with Verizon under their network agreement, which leads to lower margins. Moffett said a well-managed mobile virtual network operator still had margins of only about 10%. But he said that could grow over time.

“Wireless communications may not be better than broadband, but it’s a much bigger business,” Moffett said.

Charter’s chief financial officer, Chris Winfrey, said during the company’s second-quarter earnings conference call that the potential of wireless cables is being underestimated.

Given the push among wireless companies toward broadband, along with the cable companies’ transition to mobile service, some believe a merger of the two industries is inevitable.

“It doesn’t make sense not to make, purely operational synergies, synergies in capital allocation, and from a brand synergy point of view,” Altice CEO Dexter Goei told CNBC last year. Altice is the fourth largest US cable provider after Comcast, Charter and Cox.

Joy said that the more services customers provide from the same provider, the less likely they are to leave.

Mergers and acquisitions as a last resort

Moffett said a merger of Comcast or Charter with T-Mobile, Verizon and AT&T is unrealistic given the United States’ regulatory position on market power. However, different presidential administrations can have different views of what is acceptable. For example, Sprint and T-Mobile were able to merge under the Trump administration after years of telling government officials not to bother even trying.

“Never say never, right?” Goei said. “Strategic transactions where you have different services, I don’t understand why that shouldn’t be something the antitrust department would allow.”

If wireless cable consolidation isn’t on the cards, there are other potential ways deals could renew investor interest.

Regional cable operator Wade Obinwest and Suddenlink, an asset owned by Altice USA, are in talks with potential buyers, according to people familiar with the matter. Marangi of Gabelli said:

Charter or Comcast can also purchase a non-cable asset to bring renewed investor excitement to their companies.

“It’s Management 101; when companies go into the earlier growth phase, they look to mergers and acquisitions,” said Beckek of LightShed Partners.

Investors are also likely to view an overseas acquisition as a distraction rather than a new opportunity. Moffett said shareholders would likely resist deals for media assets, such as Comcast’s previous acquisitions of Sky and NBC Universal.

disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.

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