The COVID-19 pandemic has led to an increased reliance on broadband for a multitude of use cases, but the shifting fundamentals of the cable industry could bode well for cable operators beyond the pandemic.
Speaking during a webinar presentation on Feb. 11 on the cable industry, Chris Mooney, a director at S&P Global Ratings, said the future could be especially bright for smaller rural cable operators.
Bright future for rural cable operators
"While the pandemic will eventually end, and EBITDA growth will likely decelerate in 2021, we think this structural shift towards faster internet speeds is permanent and more consumers will adopt a cable broadband connection in the future," said Mooney.
While Mooney believes secular tailwinds will benefit all cable operators, he believes rural providers stand to benefit the most as consumers move away from legacy DSL connections.
"Consumers in these markets tend to be lower income and typically use less data. ... So cheaper but slower DSL has been good enough for many households in the past," he said. "We think that we're starting to reach an inflection point where DSL may no longer suffice for a lot of those consumers. And in these more rural markets, competition tends to be the weakest, so we think that these rural cable operators are well positioned to capitalize on the trend towards faster internet speed requirements," he said.
While DSL is delivered over older telephone lines, cable broadband relies on coaxial cables or hybrid fiber-coaxial lines, which can carry more bandwidth. According to the consumer comparison site BroadbandNow, DSL speeds usually cap out around 25 Mbps to 100 Mbps, which is about half the normal speed range for cable internet.
Shift to broadband
Mooney also said he also views the industry trend of shifting towards broadband services as favorable for cable companies when it comes to earnings.
"It's very high margin and it's low churn. We think this larger EBITDA base is now more predictable," said Mooney. "We think there's still visible runway for growth for the next several years, coming from a combination of subscriber growth through market share gains and increasing overall in-home adoption and also upselling customers to faster internet speeds, and that should help with pricing," he said.
Regulatory risks
Over time, with increasing penetration and rising revenues per user, Mooney believes heightened regulatory scrutiny is likely. And over time, he believes regulation remains one of the biggest risks for the industry.
However, in the near term, Mooney said he does not believe there is a ton of risk of broadband pricing regulation.
"I think it's likely we'll probably go back to a Title II regime, but I think the focus will really be on an open internet and the net neutrality concepts of no blocking, no throttling and no paid prioritization," he said.
Under President Joe Biden, the Federal Communications Commission is widely expected to reclassify broadband as a Title II telecommunications service, restoring more regulatory authority to the agency over broadband service providers such as Comcast Corp., Verizon Communications Inc., AT&T Inc. and Charter Communications Inc.
C-band auction
Turning to the FCC's ongoing C-band auction, Mooney says he does not expect cable to be a very active bidder in the auction.
The auction made available licenses for 280 MHz of spectrum in the 3.7 GHz-3.98 GHz band, which is part of what is known as the C-band. This midband spectrum is seen as crucial for 5G since high-band spectrum cannot travel long distances or penetrate certain surfaces, and low-band spectrum has become crowded due to 4G wireless services.
Gross proceeds in the auction exceeded $80.9 billion, shattering the prior FCC auction record of $44.9 billion.
Still, Mooney does not believe cable companies drove that higher spending.
"I think that we've taken the view that really, the primary purpose of acquiring spectrum, is to off-load traffic in high-traffic, more densely populated areas and really improve the economics of an MVNO [mobile virtual network operator agreement] deal and use that wholesale relationship as a coverage blanket," he said. "That math just doesn't work at higher spending levels," he said.
Comcast and Charter both have MVNO deals with Verizon.
"They [Comcast and Charter] both seem to indicate that they like the current asset-light model and I'd be quite surprised if they were to spend something north of $10 billion combined," added Mooney.