Is Broadband Growth Slowing – 2Q 2019?

Leichtman Research Group recently released the broadband customer statistics for the second quarter of 2019 for the largest cable and telephone companies. Leichtman added Atlantic Broadband and TDS to their tracking list for the first time – both companies now have more customers than Cincinnati Bell, the smallest company on the list. Leichtman compiles these numbers from the statistics provided to stockholders. The numbers are lower than broadband customers counted at the FCC, and I think that most of the difference is to due to the way many of these companies count broadband to apartment buildings. If they provide a gigabit pipe to serve an apartment building they count that as 1 customer, whereas the FCC is likely counting the number of apartment units served.

2Q 2019 Added % Change
Comcast 27,807,000 209,000 0.8%
Charter 25,945,000 258,000 1.0%
AT&T 15,698,000 (39,000) -0.2%
Verizon 6,968,000 (5,000) -0.1%
Cox 5,120,000 20,000 0.4%
CenturyLink 4,750,000 (56,000) -1.2%
Altice 4,168,100 13,100 0.3%
Frontier 3,626,000 (71,000) -1.9%
Mediacom 1,303,000 15,000 1.2%
Windstream 1,034,300 1,900 0.2%
Consolidated 783,008 2,288 0.3%
WOW 765,500 (400) -0.1%
Cable ONE 681,762 3,377 0.5%
Atlantic Broadband 443,696 14,134 3.3%
TDS 433,400 5,800 1.4%
Cincinnati Bell 425,500 (1,200) -0.3%
Total 99,952,266 369,999 0.4%

Currently, these companies are seeing a composite annual rate of growth of broadband customers of 1.6% annually. These largest ISPs will surpass 100 million customers during this current quarter. Leichtman notes that these sixteen companies have added 13.5 million broadband customers over the last five years and 28.9 million over the last ten years.

These numbers raise the question if we are finally starting to see overall growth in the broadband market slow down. Consider the comparison of the second quarter of 2018 and 2019 annualized:

‘                                        2018                 2019

Cable Companies        2,987,721        2,128,844

Telcos                           ( 472,124)        ( 648,848)

Annualized Total         2,425,597        1,479,996

According to the FCC, over 85% of homes now have a broadband connection. Adjusting that statistics for rural homes that can’t get broadband, the penetration rate everywhere else is over 90%.

The growth of broadband customers added by cable company customers is slowing, with Comcast and Charter continue to be the only companies adding significant quantities of customers (over 200,000 each for the quarter).

Loss of telco broadband customers has increased over last year, mostly due to Frontier and CenturyLink losing DSL customers.

There are significant implications for cable companies if broadband growth stagnates because cable stock prices have been fueled by revenue growth driven by new broadband customers. As the number of broadband customers levels off, many industry analysts expect the companies to begin regularly raising broadband rates to meet Wall Street earnings expectations. We’ve seen the first signs of broadband rate increases over the last year, and the above slowdown is bound to rachet up the pressure on the cable companies.

Comcast’s Quiet Expansion

It’s been conventional wisdom in the industry that cable companies stick to their historic cable system boundaries and don’t really expand much. In much of the country, this is well understood and everybody can point to customers that have lived for decades just a house or two past the end of the coaxial cable network.

However, not all cable companies have stuck with this historic entrenchment. A good case in point is Comcast, which passed 53.8 million homes in 2013 but had grown that to 57.5 million passings by the end of 2017. A few of the new 3.7 million new passings came from the purchase of small cable systems, but most came through the growth of the Comcast network.

Many of the new passings came about as the result of the continued growth of urban America. As a country we’re still seeing rural residents migrate to urban centers – which are growing while rural America is mostly stagnant or even shrinking. Recent years have seen some of the largest ever growth in new housing construction – 1.5 million new living units over the last year – and Comcast gets its share of these opportunities in its franchise areas.

But the company is also expanding outward from its core cable franchise areas where that makes sense. This has mostly been done quietly with a street added here, a small neighborhood added there, and new subdivisions always pursued; Comcast is obviously looking around for growth when it can be done affordably.

The most surprising source of Comcast growth comes from expansion into areas served by other cable companies. Historically there was a gentleman’s agreement in the cable industry to not poach on neighboring franchises, but Comcast is no longer sticking to that industry norm. Over the last few years, Comcast has gotten franchises to operate in communities already served by other cable companies.

In 2017 Comcast got a franchise in Rochester, New Hampshire in an area already served by Atlantic Broadband. In 2018 Comcast got franchises in Waterford and New London, Connecticut in areas also served by Atlantic Broadband. Last year Comcast also got franchises to operate in five communities in Pennsylvania operated by Blue Ridge Cable – Warwick Township, Warwick Borough, Ephrata Township, Ephrata Borough and Lititz.

Incumbent cable companies have rarely competed with each other. One of the few exceptions was Midcontinent that overbuilt CableONE in Fargo, North Dakota in 2013. There are also two overbuilders that have built competing cable networks – RCN and WideOpenWest – but these companies started as overbuilders and were not incumbent providers.

For now, it looks like Comcast might be going after these markets to get lucrative business customers. For instance, New London, Connecticut is the home to two colleges and the Coast Guard Academy. There are some large businesses and medical centers in some of the towns in Pennsylvania. Even if Comcast only goes after large businesses that can be a big blow to the smaller cable companies already serving these markets. When I create business plans I always refer to the revenues from the few biggest customers in a community as ‘home-run’ revenues because just a few customers can make or break a business plan. Comcast will do great harm to its neighbors if they pick off their home-run customers.

Comcast has gotten so large that they probably don’t care any longer about the historic gentleman’s agreements that put a fence around a franchise area. Comcast is under constant pressure to grow revenues and profits and it’s almost inevitable that they’ll chase anything they view as low-hanging fruit. This is one of the characteristics of companies that become virtual monopolies – they almost can’t stop themselves from engaging in business practices that make money. A company as big as Comcast doesn’t make all of the decisions at the corporate level – rather, they give revenue and earnings targets to differrent parts of the company and those business units often decide to chase revenues in ways the parent might not have dictated. In many big corporations it is the bonus structure that often drives local decisions rather than corporate policy.

It will be interesting to see how this might change the nature of cable company cooperation. The cable companies have been incredibly effective in having a unified message across the country in terms of lobbying at the federal, state and local levels – what was good for one was good for all. But that’s no longer the case if Comcast starts competing with smaller neighboring cable companies. We saw this same phenomenon a few decades ago in the telephone industry and the small telcos all started lobbying separately from the big companies. The small and large telcos still sometimes agree on issues, but often they do not. It’s almost inevitable that the unified voice of the cable industry can’t survive competition between cable companies – but I also suspect Comcast doesn’t care about that.