Cable companies challenged by new broadband competition, regulation risk

Though broadband subscriber gains buoyed cable operators through the pandemic, analysts worry that increased competition from wireless carriers and the potential for greater federal regulation could impede the industry’s continued growth.

Cable operators continued to dominate the broadband industry in the first quarter. Of the 1.1 million net broadband subscriber additions posted by the U.S. broadband industry as a whole — including cable, telco and satellite providers — roughly 1 million of those adds came from cable, according to data from Kagan, a media research group within S&P Global Market Intelligence. In particular, Comcast Corp. reported 460,000 net first-quarter broadband adds, Charter Communications Inc. 355,000 and Altice USA Inc. 21,000. But some analysts see challenges to cable’s dominance on the horizon.

New threats
In a presentation earlier this month, New Street Research analysts said they see “four major threats” to cable’s continued broadband growth: wireless substitution as consumers may choose to drop wireline broadband service for 5G mobile offerings; competition from expanding fixed wireless broadband offerings; competition from expanding fiber services; and the risk of greater regulatory pressure under the administration of President Joe Biden.

“Fiber and cable are similar products sold at a similar price. In a rational duopoly, we’d assume that the two competitors split the market 50/50,” New Street Research analyst Jonathan Chaplin said during the call.

One reason cable has captured so much of the recent broadband growth is that in many markets, its primary competition is DSL service from legacy phone companies. DSL, delivered over older copper telephone lines, usually caps out around 25 Mbps to 100 Mbps, which is about half the normal speed range for cable internet, according to the consumer comparison site BroadbandNow.

But phone companies are stepping up their deployment of fiber. In March, for instance, AT&T Inc. said it plans to increase its fiber footprint by an additional 3 million customer locations across more than 90 metro areas.

“In areas where AT&T has deployed its fiber network, the company has 10% higher market share than its competitors,” AT&T said in a statement.

Fixed wireless
Beyond fiber, Verizon Communications Inc. is looking to compete with cable with its fixed wireless 5G Home Internet offering, which touts max download speeds up to 1 Gbps, and typical download speeds of 300 Mbps. In June, the company expanded the service to seven more cities, bringing its coverage to a total of 40 markets across the U.S.

Moreover, in April, T-Mobile US Inc. launched its own fixed wireless 5G home internet service, covering more than 30 million households. That service provides average speeds of over 100 Mbps, according to the carrier.

This is not to say that Chaplin expects these new services to stop cable growth entirely. New Street expects the industry to add 2.7 million broadband subscribers a year for the next 10 years.

“We don’t think the business is broken; there are just greater headwinds emerging from the pandemic than we realized at the start of the year,” Chaplin wrote in a June 23 research note focused on Altice.

Rate regulation
For Bernstein analyst Peter Supino, the bigger threat is the potential for greater regulation under a new Federal Communications Commission chair. The agency currently has a vacancy, resulting in a 2-2 partisan split. While Jessica Rosenworcel has been acting chair since January, President Biden is expected to name a new permanent chair shortly.

Supino said uncertainty regarding the appointment of an FCC chair, and the risk that Biden could choose someone more aggressive on broadband rate regulation, makes cable stocks vulnerable.

“Were [Gigi] Sohn appointed, we would expect cable stocks to tumble,” Supino said. Sohn is a former staffer for former Democratic FCC Chairman Tom Wheeler and comes from a public interest background. In addition to her work at the FCC, Sohn has had a long career as a public advocate, which has included being a co-founder and CEO of Public Knowledge.

“In such a scenario, we would expect Charter to decline more than Comcast given its much higher mix of EBITDA from internet service provision,” Supino said.

Whoever Biden names as permanent chair, once Democrats regain a majority on the commission, the agency is expected to quickly move on restoring net neutrality protections.

In 2015, a Democratic-led FCC passed an order that classified broadband as a Title II telecommunications service, giving the FCC more regulatory authority over broadband service providers and laying out three bright-line net neutrality rules that prohibited broadband service providers from blocking or throttling legal internet traffic or prioritizing certain traffic for payment.

In 2018, under Republican leadership, the FCC repealed the 2015 order, classifying broadband as a Title I information service and eliminating the FCC’s authority to impose net neutrality rules. Instead, internet service providers are required to publicly disclose if traffic is blocked, throttled or prioritized — though operators are not prohibited from those activities.

The risk of a return to a Title II classification is that it also enables the FCC to impose rate regulation and force unbundling, which would require internet providers to let competitors offer service over their networks. In its 2015 order, the FCC said it would forbear from regulating prices or forcing unbundling.

Blair Levin, a former FCC chief of staff who now works as a policy adviser at New Street Research, thinks the current commission would do the same.

“The Democrat majority, if one ever occurs, will reinstate Title II, but as long as there is no price regulation or mandatory unbundling, I don’t think it’s material,” Levin said.

Rosenworcel earlier this month reaffirmed her commitment to reinstating net neutrality protections, but she has not commented on rate regulation. She was, however, part of the 2015 FCC that opted for a lighter-touch regulatory approach.

Altice is set to announce earnings July 28; Comcast and Charter will follow on July 29 and July 30, respectively. S&P Global