The U.S. telecom and cable sectors experienced a turbulent year in 2017, driven by speculation around mergers and acquisitions (M&A), major changes in federal regulation and U.S. tax law, the ongoing erosion of the pay-TV ecosystem, mature wireless phone industry conditions, and the growth of new technologies that are changing how consumers watch video content and use their phones. Notwithstanding a healthy economy, these are all trends we expect to continue in 2018. Against this backdrop of an evolving and uncertain environment, we expect many cable and telecom companies will see deteriorating credit metrics over the next year.

T-Mobile US Inc. and Sprint Corp. terminated their merger discussions late in 2017, leaving the U.S. wireless market with four nationwide players. As a result, our outlook for the U.S. wireless sector is negative. While pricing pressure has abated somewhat, we still expect wireless companies will see intense competition in 2018, which could hurt profitability. We also have a negative outlook on the U.S. wireline industry for 2018, reflecting secular industry pressures and heightened competition. In contrast, our outlook for the U.S. cable industry is stable, as its prospects gain from continued growth in broadband and commercial services—even as more consumers choose over-the-top (OTT) video platforms and the industry could eventually face a threat from 5G fixed wireless.

Finally, we have a stable outlook for the telecom infrastructure segment, which consists of the data centers and fiber companies we rate. Both industries gain support from the increasing amount of data and video consumed by residential, business, and mobile customers. Nevertheless, capital spending requirements to support growth are substantial and high leverage for these issuers will constrain free cash flow generation in the near-term. As a result, we do not expect any improvement in key credit metrics over the next year.

U.S. Economic Outlook

For our cable and telecom ratings, we focus on economic indicators that we believe most correlate with consumer demand, including real GDP, unemployment, personal consumption expenditures, and housing starts (see table 1).

Table 1

As a result of the tax cuts passed by the U.S. Congress in December 2017, which are valued at about $1.5 trillion over the next ten years, S&P Global Ratings expects U.S. real GDP to grow 2.8% in 2018 compared to our November forecast of 2.6%. The near-term boost is largely driven by a pickup in consumer and business spending. However, we expect growth will eventually revert to its longer-term trend, which we estimate at 1.8%.

We believe the tax package will have little impact on unemployment or wage gains through 2020, however, because the economy is already at or near full employment. We expect the unemployment rate will decline modestly to 3.9% in 2018 from 4.3% in 2017 with little improvement thereafter. However, business investment will get a near-term boost. To the extent this adds to capital deepening and productivity enhancements, it could generate a small amount of additional economic growth.

Tax Reform

We expect the net effect of the recent tax cuts will be positive for most cable and telecom companies, although it is still too early to indicate the exact impact on credit metrics or ratings due to uncertainty around capital allocation. Nevertheless, we believe that a lower corporate tax rate and the full expensing of qualified capital investments will generally more than offset the restrictions on interest expense deductibility and other items.

In our view, tax reform will disproportionately favor less-leveraged, investment-grade issuers. Limitations on interest expense deductibility, however, would more likely hurt highly-leveraged issuers, with the impact more skewed to lower-rated speculative-grade companies because the tax law allows only up to 30% of EBITDA to be deducted. We believe Verizon Communications Inc., AT&T Inc., T-Mobile, and Comcast Corp. stand to benefit the most from tax reform. On average, we believe that issuers with EBITDA to interest coverage of 2x or less, which are typically less profitable, would see little to no advantage as the negative effect of less interest deductibility would offset the advantage of a lower tax rate and full expensing of capital spending. Within the U.S. telecom and cable sector, we estimate that these companies account for about 14% of our rated issuers.

For Verizon, we expect incremental tax savings to be substantial because it was already a full tax payer. In addition to the lower corporate tax rate, Verizon will also get a boost from the expensing of qualified capital expenditures. In contrast, AT&T's historical effective tax rate was only 18% in 2016 and 14% in 2015. We therefore expect that tax reform will have less of an impact on AT&T's free cash flow generation relative to Verizon, although AT&T will still benefit from the expensing of qualified capital expenditures.

From a ratings perspective, while the incremental cash flow is positive for corporate credit quality, we also tax adjust companies' unfunded pension and other postretirement liabilities when calculating adjusted leverage. The lower corporate tax rate will slightly hurt adjusted credit metrics given substantial pension and OPEB obligations at these two companies, and we estimate that leverage will increase by about 0.1x for both Verizon and AT&T, which in turn could prompt these companies to accelerate pension contributions.

For more highly leveraged issuers such as Sprint, DISH Network Corp., Charter Communications Inc., and Altice USA Inc. we do not expect any meaningful impact from tax reform. Sprint, for instance, does not pay any taxes and has net operating losses (NOLs) that can be used to offset future taxable income so we do not expect its tax position to change in the near-term. We believe that Charter will not see any near-term advantage because it also has rather large NOLs—although it will profit from a lower tax rate over time. DISH already benefits from the amortization of its spectrum licenses, which provides it with a tax shield that will now be offset by the limits on interest expense deductibility and a declining EBITDA base. Similarly, CenturyLink has sizeable NOLs acquired from the acquisition of Level 3, although the limits on interest deductibility and declining EBITDA will also offset thelower tax rate longer-term. For many highly leveraged issuers, such as Altice USA, we believe the advantage of a lower tax rate and the full expensing of capital expenditures will be partly offset by the restrictions on interest deductibility.

Ultimately, the boost from tax reform may or may not result in improved credit metrics for the companies we rate. While we believe that the new tax law will enable higher levels of aggregate free cash flow, any improvement in credit metrics will depend on financial policies. Typically, telecom and cable companies are more likely to use excess cash flow for shareholder returns rather than debt reduction. However, the partial loss of interest deductibility may cause them to allocate more cash flow to debt reduction. While we assume some incremental capital spending as a result of tax reform, we don't expect that these companies will increase their network investments significantly because of limited incremental returns on invested capital, although tax incentives could drive a modest acceleration of capital spending in 2018.

M&A Heats Up

In the U.S., 2017 proved to be an exciting year for M&A (see table 2), even though many rumored transactions never came to fruition. We expect M&A to remain active in 2018 because of secular industry pressures, the need for scale, technology convergence,changes in consumer preferences, ever-increasing programming expense, and intense competition in both telecom and cable.Nevertheless, recent developments associated with AT&T's proposed acquisition of Time Warner Inc. suggest that achieving regulatory approval for certain transactions is highly uncertain and that Makan Delrahim, head of antitrust at the U.S Department of Justice, may upset the traditional approach to evaluating mergers.

Unlike previous waves of M&A, the potential combinations that garnered headlines in 2017 included issuers from different sub-sectors, such as telecom and media companies as well as wireless and cable. Speculation around these types of mergers are driven by the potential longer-term convergence of distributions systems, vertical integration, revenue diversity, and technology shifts.

However, we believe that many of these transactions carry a great deal of risk. The strategic rationale and longer-term financial benefits of some potential combinations are highly uncertain. Moreover, with high valuations and low financing costs, we believe that acquiring companies are likely to increase leverage to fund M&A deals. Large telephone companies also have high dividend payouts, so even funding acquisitions with equity can hurt free cash flow metrics because these companies are unlikely to reduce their dividends.

In the fixed line industry, secular industry pressures are taking their toll on revenue and cash flow, forcing these companies to consolidate. We expect this trend will continue over the next couple of years even as acquisition opportunities are diminishing and we look to fewer M&A deals in 2018. While cost synergies are often substantial, acquisitions also require solid execution during the integration process to preserve margins, especially in larger-scale acquisitions with complex network and billing system migrations. Frontier Communications Corp.'s acquisition of properties from Verizon in California, Texas, and Florida (CTF), which was completed in the first quarter of 2016, offers a good example of operating and financial performance deteriorating rapidly because of integration missteps.

In wireless, aggressive competition and mature industry conditions have led to pricing pressure and weak revenue growth. The sheer size of the industry, however, and its massive ongoing capital spending and spectrum requirements imply that consolidation could make for ahealthier industry.However, there are only four nationwide carriers, so the prospects of consolidating to three seems to be off the table since the parent companies of T-Mobile and Sprint were unable to agree on terms. Over the long term, we believe this merger would have alleviated pricing and competitive pressure.

In the cable industry, programming expense pressure and rising competition from over the top (OTT) providers, which source video through the internet, are prompting acquisitions among some mid-sized cable operators. These companies generally lack the scale and pricing power to negotiate programming contracts and are unable to pass through price increases unless they are willing to lose video customers. We also expect that cable operators will try to acquire fiber assets in 2018 in order to better target larger business customers and accommodate the growing demand for bandwidth. Nevertheless, purchase price multiples on fiber companies are very high, which could result in higher leverage for the acquiring companies and lessfree cash flow generation given the substantial capital spending requirements. However, a business risk perspective, we view the acquisitions of fiber assets favorably because they enable cable providers to better serve their larger business customers.

Table 2

5G: Threat And Opportunity

The U.S. wireless carriers have been at the forefront of 5G wireless initiatives. In our view, large U.S. carriers have the incentive to aggressively deploy 5G networks, as 4G wireless service is becoming a mature low-margin commodity-like offering. Even so, we believe there are risks associated with an accelerated 5G deployment strategy, and the near-term financial benefits are unproven.

We expect the first iteration of 5G will be a fixed wireless broadband service, which can potentially offer customers very fast data speeds that are comparable with existing cable broadband products. Already, Verizon has announced that it will deploy 5G fixed wireless broadband service in five markets in 2018 and plans to build out to about 31 million households longer-term, most of which will be markets where its fiber-based video product FiOS does not exist. We expect that AT&T will launch its own 5G fixed wireless product soon thereafter. We believe this service could represent a longer-term threat to the cable broadband moat, especially if Verizon and AT&T are able to achieve the 20% to 30% penetration that Verizon has indicated publicly is its aim. Moreover, the cost to deploy and maintain a fixed wireless network can be less expensive than building fiber directly to the home because last mile access usually represents the largest portion of the buildout cost.

Nevertheless, 5G fixed wireless has some potential drawbacks. Despite faster speeds, greater availability and lower latency, 5G fixed wireless uses high-frequency spectrum that has weaker propagation, making it better suited to dense, urban markets where there is already fierce competition. Moreover, it is highly uncertain whether a wireless-based broadband service can be as reliable and economical as a wired connection on a per bit basis, especially as consumer demand for data and video grows.

Unlike previous wireless technologies, we expect that 5G mobile network deployments will not be widely available for some time, especially since only the first specification for 5G cellular radio has been set, and the ability to monetize these investments is likely several years away. We expect 5G mobile deployments will also focus on dense urban areas, which limits the addressable market. At the same time, the build out costs associated with dense fiber for wireless backhaul, small cells, and the acquisition of high-band spectrum licenses could burden balance sheets while related revenues take some time to develop.

Regulatory Rollbacks

Since taking office in January 2017, Federal Communication Commission (FCC) chairman Ajit Pai has aggressively rolled back many regulations and key proposals enacted under the Obama administration in favor of a lighter-touch regulatory framework. The most significant action came in the form of the December 2017 order to reclassify broadband as a Title I service under the Telecommunications Act of 1996, as opposed to the more restrictive utility-like common carrier classification under Title II. While we expected the FCC to roll back Title II, it went much further by dismantling the so-called 'bright line' net neutrality rules against blocking, throttling, and paid prioritization of content. Instead, the FCC will protect consumers and businesses through a transparency rule that requires internet service providers (ISPs) to publicly disclose what they are blocking or prioritizing. The FCC will enforce failures by ISP's to disclose such actions.

The Federal Trade Commission (FTC), on the other hand, will investigate ISPs for unfair, deceptive, or otherwise unlawful acts or practices, including enforcement actions addressing the accuracy of these required disclosures. The shift in authority toward the FTC is less burdensome for ISPs because the FTC must engage in a much more laborious process than the FCC to issue monetary penalties, and such penalties are limited to demonstrating consumer harm. Therefore, we believe the order is a positive development for ISPs—including cable companies, wireless providers, and wireline phone companies—as it reduces the threat of price regulation and, at least for the next three years, opens the door to monetizing more data traffic.

To be sure, regulation of the internet is a controversial and evolving subject, not yet set in stone. On the heels of the FCC's order, House Subcommittee on Communications and Technology Chairman Marsha Blackburn introduced a net neutrality bill that would update the Communications Act to prohibit blocking and throttling of internet traffic but allow paid prioritization. The bill would also leave in place the new transparency requirements recently adopted by the FCC as well as the preemption against states adopting contradicting legislation. We believe it will be challenging to pass a bipartisan bill given the polarized political environment, particularly now that the Republican-led FCC has already dismantled many Democratic-led initiatives such as set-top box reform, special access reform, media ownership (UHF discount), and privacy rules. In the event that Congress is unable to pass permanent legislation, the next FCC administration can reverse the recently passed order and revert ISP's back to Title II. This ping-pong cycle could continue with each new administration. To the extent that regulation is viewed as transitory, we do not expect meaningful changes in investment decisions.

Based on conversations with regulators, congressional staff, and lobbyists in Washington, we believe that rules against no blocking and no throttling are not very controversial and could form the foundation for cooperation. While paid prioritization creates more disagreement amongst various parties, the most divisive issue appears to be around the "general conduct standard" under Title II, which grants the FCC broad regulatory oversight and creates the potential for price regulation. Republicans generally believe that this standard grants unnecessary investigative authority to the FCC that could stifle innovation. By contrast, many Democrats believe it serves as an important consumer protection mechanism. Therefore, we believe that if Congress reached an agreement, it would likely involve the restoration of the net neutrality tenants of no blocking, no throttling, and no paid prioritization, while getting rid of Title II as a means to enforce them, which would reign in the FCC's regulatory reach.

Separate from net neutrality, the roll-back of Title II also affects internet privacy rules by restoring authority over ISPs to the FTC, which unlike the FCC is primarily an enforcement agency with only narrow rulemaking ability. The FTC has no specific rules related to privacy--only broad statutes and general principles related to unfair or deceptive practices. We view this shift favorably for ISPs, as it opens the door to more targeted advertising opportunities. It could also result in these companies engaging in M&A that would enhance their technical capabilities.

Similar to net neutrality, there is also a political divide when it comes to internet privacy. Democrats tend to favor a more restrictive "opt-in" regime in which consumers have to explicitly allow information to be shared with 3rd parties. Most Republicans prefer an "opt-out" approach that makes it easier for ISPs to monetize costumer data. Perversely, however, Marsha Blackburn introduced the BROWSER Act in May 2017, which set out to bring both ISPs and edge providers such as Amazon, Netflix, Google, and Facebook, under the same "opt-in" rules. The act struggled to gain support mainly because Democrats were reluctant to back a Republican-sponsored bill and Republicans were hesitant to support a bill that championed traditional Democratic principles around more restrictive regulation. We believe this highlights the challenges faced in passing legislation, leading us to believe that regulatory uncertainty, which could defer some strategic investments in the telecom sector, will persist.

The Cord-Cutting Threat To Cable

Rapidly evolving technology and consumer preferences are changing the way consumers watch video, with people increasingly streaming both live and on-demand content over the internet. There is now a crowded field of so-called virtual multichannel video programming distributor (vMVPDs), including Hulu Live, YouTube Unplugged, SlingTV, DirecTV Now, PlayStation Vue, Philo, and Fubo, among others, offering slimmed-down versions of linear TV options. Given the relatively low costs to become a nationwide TV distributor under this new model, it's possible additional entrants might compete with traditional cable TV providers in the future including Verizon and T-Mobile. Both plan to launch an OTT offering in 2018. On top of that, programmers are also offering direct-to-consumer (DTC) apps that provide a-la-carte live streaming options including HBO Now, CBS All Access, and Showtime, with The Walt Disney Co. announcing plans to offer DTC options over the next two years. As a result, cord-cutting trends have accelerated with cable providers losing about 1.2% in the first 9 months of 2017 (see table 3). We expect cord cutting to persist for the foreseeable future, with total cable subscribers projected to decline 1.5% in 2018 even as cable takes share from satellite and telecom companies in a shrinking universe that we project to decline about 3%.

Table 3

Having said that, we believe that these platforms have been designed in a way that primarily targets customers that don't already subscribe to traditional cable TV. Furthermore, our analysis of the various vMVPDs leads us to believe that the savings from cutting the cord may not be worth it for most consumers after factoring in the cost of broadband, lost content, and limitations on number of streams permitted. Another factor to consider is that most vMVPDs are operating at slim profit margins, or a loss, which could result in these introductory prices being raised in the future. The vMVPDs are also more exposed to rising programming costs, so future price increases may outpace those of large cable providers, which can leverage high-margin broadband to offset video margin compression.

The biggest risk to cable, in our view, is aggressive pricing for a sustained period by one or more vMVPD, perhaps to gain scale for targeted advertising, which is attractive because of the unicast nature of the consumer relationship. Although deep-pocketed owners can subsidize this strategy for most vMVPDs, we view this as unlikely given the need to eventually earn a return high enough to maintain viability. Another risk to cable providers is piracy, which Charter Communications CEO Tom Rutledge claims is happening today. To the extent that customers are able to share passwords and split the cost of a single account, the savings from cutting the cord become more appealing.

We view the threat of DTC offerings to cable distributors as a manageable risk because we see sports as the glue holding the video bundle together, with programming rights for the biggest, most popular sporting events spread across several broadcast and cable networks. Therefore, to the extent that more DTC options become available, sports enthusiasts who want to cut the cord would have to purchase several sports-oriented OTT services to get the full sports experience. Viewers who don't watch sports can buy Philo (which includes live content from AMC, A+E, Discovery, Scripps, and Viacom), but they would also likely need to complement their subscription with other OTT options since Philo lacks news and content provided by broadcast networks. Combined, these services could be cost prohibitive considering that DTC apps will be priced at a significant premium compared with their cost within a cable bundle. In addition, we believe the inefficiency and inconvenience of navigating various streaming services strengthen the case for content aggregation. We believe traditional pay TV providers such as Comcast Corp., Charter Communications Inc., or AT&T Inc. could become aggregators of online video content if DTC apps gain more traction.

Rising Capital Expenditures

In the telecom industry overall, we expect capital expenditures to increase by around 6% to 8% in 2018, driven by spectrum deployments and network upgrades to accommodate increased mobile data traffic (see chart1). There may also be modest incremental spending stemming from tax reform. We believe that a lot of the increase will be driven by higher spending at Sprint, which has already stated that it expects its capital expenditures to increase by $1.5 billion to $2.5 billion in 2018 as it increases coverage and expands the buildout of its 2.5 GHz band. For T-Mobile, we expect capital expenditures will increase in 2018 as the company deploys its recently acquired 600 MHz spectrum licenses.

For AT&T and Verizon, long-term growth opportunities in wireless will likely mean increased investment in their wireless networks, while both companies will also allocate capital to fiber infrastructure to accommodate growing demand for data and wireless backhaul. Following the passage of tax reform, AT&T announced that it would boost its capital spending by $1 billion in 2018, although we note that the company will need to increase its capital expenditures in 2018 anyway for the build out of FirstNet, the public safety broadband network. We believe that most of that cost will be offset by a U.S. government subsidy..

While pure wireline companies need to increase their network investments in order to better compete with cable providers, we expect that their total capital expenditures will nevertheless decline by 1% to 3% in 2018 as these issuers try to preserve cash flow and strengthen their balance sheets.

In the cable industry, we expect capital spending to increase at by 5% to 6% in 2018—similar to the growth rate in 2017--as companies continue to invest in upgrading their networks for greater bandwidth capacity, higher broadband speeds, and more advanced video services (see chart 2). Although less regulation and tax breaks could theoretically accelerate spending, we believe competitive factors are the key driver of spending plans. Many cable operators are upgrading their hybrid-fiber-coaxial (HFC) network to DOCSIS 3.1, which involves upgrading electronics in the network that could spur the replacement of non-compatible customer premise equipment over the next few years. Several operators, including Comcast and Charter, also plan to continue to lay fiber deeper into their networks and add more optical nodes to enhance performance. Other operators, such as Altice USA, are choosing the more expensive option, over the next five years, of extending fiber all the way to the customer premises to provide faster internet speeds than an HFC network. Overall, we believe continued capital investments by the cable industry will enable them well to maintain their competitive advantage over legacy telecom networks and potentially reduce future operating expenses, while also positioning them to offer broadband speeds comparable to future 5G fixed wireless.

We estimate that our rated data center operators will spend around 40% of revenue on capital expenditures in 2018, mainly to support new facilities and site expansions. While we expect data center REITs (real estate investment trusts) will lead industry spending, we still expect non-REIT peers to spend around 30% of revenue on capital expenditures.

For our rated fiber providers, we estimate that the ones that own most of their network will spend around 35% of revenue on capital expenditures in 2018. That spending will be to expand into new markets and add buildings to their existing fiber networks.

Chart 1

Chart 2

Wireline Industry: Outlook Negative

We are maintaining our negative outlook on the U.S. wireline industry. During 2017, revenue declines accelerated due to secular industry declines, shifting consumer patterns, and intense competition. These factors have contributed to declining stock prices and wider bond spreads for regional wireline companies, such as Frontier Communications Corp.. and Windstream Holdings Inc. The impact has been less on larger, diversified companies with significant wireless businesses, notably AT&T and Verizon.

While debt maturities for both Frontier and Windstream in 2018 and 2019 appear manageable, these pure wireline providers face large debt refinancing needs in 2020 and beyond and will need to improve operating and financial performance in order to alleviate investor concerns and address these looming maturities.

Notwithstanding consolidation in the industry, we expect mid-single-digit percent revenue declines in the wireline industry for 2018 due to ongoing wireless substitution and the loss of broadband customers to the cable operators, who havea superior broadband product and are starting to upgrade their networks to DOCIS 3.1. Similarly, in the small and midsize business (SMB) segment, we expect the U.S. wireline companies will face aggressive competition from the cable operators, which are building market share. We also expect margins to deteriorate due to a shift to less profitable products and services while cost saving initiatives are unlikely offset revenue declines. These factors, as well as longer-term refinancing risk, contributed to our recent rating downgrades for both Frontier and Windstream to 'B' from 'B+'.

We believe that wireline companies with the most exposure to fiber and larger enterprise customers are best positioned to maintain credit quality longer-term. While cable is trying to move up-market and target midsize business customers, we believe wireline companies face less risk in the enterprise segment. That's because this category has higher average revenue per user (ARPU) and lower churn than smaller business customers, and isn't subject to significant competition from cable. Still, we believe that new cloud-based technologies such as software-defined wide-area networks (SD-WAN), which are used to connect enterprise networks, could pose a new threat to the industry since they are more flexible, open, and less expensive than traditional WAN technologies.

Wireless Industry: Outlook Negative

Our outlook for the U.S. wireless industry remains negative, given that the sector is mature and remains very competitive with the presence of four nationwide carriers. We expect service revenue for the sector to decline in the low-single digit percent area in 2018 based on very limited subscriber growth and lower ARPU because of aggressive competition, especially as all the carriers now offer unlimited plans. Despite more aggressive promotions and the launch of unlimited plans from AT&T and Verizon, we still expect Sprint and T-Mobile will continue to gain share in the post-paid segment from their larger peers although subscriber gains should moderate. However, we believe that almost all the service revenue growth will largely come from T-Mobile. In contrast, we expect service revenue from the other carriers to decline around 3% to 5% in aggregate 2018. The industry's shift to unlimited data plans could also hurt profitability over the next year.

Moreover, the entrance of cable providers Comcast and Charter into the wireless market through their mobile virtual network operator (MVNO) agreements with Verizon could create incremental pricing pressure and margin compression. Although their wireless business is still nascent, we believe that any incremental competition hurts the wireless industry.

We expect that higher levels of capital spending coupled with pricing pressure and weaker margins could hurt the industry's free cash flow and key credit metrics. For the industry overall, we expect aggregate free cash flow (EBITDA, excluding the benefit of lease accounting less capital expenditures) to decline by 5% to 7% over the next year. Sprint, which is increasing its capital spending significantly in 2018, is particularly susceptible to price compression given its weaker profitability.

Cable Industry: Outlook Stable

The outlook for the U.S. cable industry remains stable, reflecting our view that continued growth in broadband and commercial services will more than offset video declines over the next two years, as cable's broadband moat provides a very powerful pricing counterbalance. By charging a premium for standalone broadband, and by upselling a portion of cord-cutters to faster broadband tiers, cable operators can minimize the earnings and cash flow damage from video subscriber losses. Therefore, we believe the threat of cord-cutting is a manageable credit risk to cable operators in the near-term. Longer-term, if cable operators become more reliant on broadband as a stand-alone product, the threat of 5G fixed wireless substitution could become magnified, particularly for cable operators in more densely populated regions where 5G will be deployed. We believe investments in technology to improve the video experience combined with entry to wireless through MVNO agreements are part of large cable providers strategy to strengthen the bundle and create a stickier customer base. We believe this positions large cable providers better than smaller providers that have tighter video margins, less investment resources, and a more limited scale to offer a wireless product.

We estimate that cable operators collectively grew broadband subscribers by about 5% by the end of the third quarter of 2017 compared with the same period in 2016, as the number of homes with high speed data (HSD) grew. We estimate total cable subscriber growth in 2017 will come in at 5.1%, falling to 4.2% in 2018 and 3.9% in 2019 (see table 4). Customers are migrating to the higher speeds offered by cable and away from the slower copper-based digital subscriber line (DSL) service offered by local phone companies. We believe cable will continue to capitalize on its competitive advantage over DSL to take market share and grow its broadband subscriber base over the near-term, although the trend will moderate two to three years from now as the number of DSL homes shrinks. Longer-term, growth in broadband revenue will be contingent upon cable's ability to successfully monetize rising data consumption, which we believe can be more easily achieved under the lighter-touch regulatory environment employed by the new administration (to the extent it is not reversed in the future).

Table 4

Overall, we forecast mid-single-digit percent revenue growth for cable providers in 2018, with relatively stable margins as the rising cost of programming is offset by growth in higher-margin broadband. For most operators, commercial services continue to increase at double-digit percentage rates as cable raises its share of the SMB market and keeps moving upstream to service mid- to larger-size businesses.

Telecom Infrastructure Industry: Outlook Stable

Data Centers

We have a stable outlook for the U.S. data center industry. Our view is supported by increased IT outsourcing, data growth, and increased application complexity. We expect healthy demand for data center solutions will result in strong revenue growth for the sector in the mid-teens percent area in 2018. We estimate that around two-thirds of IT applications reside in existing enterprise data centers and that data outsourcing needs will continue to grow exponentially along with increases in internet users, connected devices, video consumption, and mobile data usage. We don't, however, expect any meaningful improvement in overall credit metrics given the industry's substantial capital spending requirements and M&A activities, which are often funded with new debt.

Scale will be increasingly important for the data center industry in 2018. Scale enables data center operators to better offer interconnection services (where networks are created for the economic exchange of data traffic among customers, including network operators, cloud providers, and enterprises). As hybrid IT data center solutions (utilizing a combination of colocation, managed services, and private/public cloud services) become more prevalent, we expect enterprises will increasingly need to employ services that can quickly connect various IT environments.

Further, we believe that scale enables data center operators to benefit from the edging out of data. Growth in video and mobile use has already created the need for data to reside closer to end users to reduce latency. We expect this trend to accelerate over the next several years with the growth of the internet of things (IoT), which comprises internet-connected devices, vehicles, and buildings, and 'smart' devices.

Due to this elevated capital spending, we expect most data center operators will generate negative free operating cash flow over the next few years. Cash flow deficits, we believe, will primarily be financed with incremental debt, preventing any significant near-term leverage improvement from this segment's relatively high levels of between 5x-8x.

Given the importance of scale, there has been a flood of M&A over the past few years at high multiples—typically between 12x-14x. The large size of recent transactions is likely to limit the size of future deals. However, we still expect further consolidation, given the fragmented nature of the industry, which could take the form of roll-up mergers.

Fiber Providers

Similarly, we expect that the U.S. fiber industry will benefit from rising demand for bandwidth. Despite a deflationary pricing environment for IP data transit and significant overall price-based competition from ISPs, including cable operators, wireless providers, and wireline phone companies, we expect revenue growth in the mid-to high single-digit percent area for most fiber-centric providers in 2018. We believe revenue growth will result from growing mobile data and video consumption, enterprise IT outsourcing to data centers and the cloud, wireless backhaul and carrier network densification via small cells, continued migration of media content OTT, and connected devices.

While declining prices for IP transit will remain a key theme in the sector, we expect margins to improve modestly in 2018 due to ongoing industry consolidation, more traffic being driven on-net, and moderating price declines that lead to higher demand.

With the exception of Crown Castle International Corp.'s acquisition of Lightower, the majority of announced fiber deals were smaller in scale in 2017. Still, acquisitions of fiber assets commanded high multiples in the 13x-15x range, which reflects the significant value ascribed to fiber within the broader telecommunications and cable sectors. Because of the importance of fiber to a number of industry participants including wireless, wireline, cable, tower and other communications infrastructure REITs, and the potential for meaningful cost synergies to be achieved, we expect continued robust M&A activity over the near-term.