Heightened competition from fixed wireless access (FWA) and fiber-to-the-home (FTTH) persists in a broadband market that is nearing maturity. This has limited broadband subscriber growth for cable operators and, in some cases, resulted in subscriber losses. Most of these cable companies have recalibrated their operating models to drive healthy financial performance. Therefore, we continue to believe the sector's credit quality remains solid overall, although certain operators are on shakier footing. Here we examine the evolving competitive landscape, compare different operating and financial strategies, provide our view on capital spending projections, and explain what could cause a change to our current ratings thresholds.

Frequently Asked Questions

How do you incorporate FWA competition into your ratings?

We do not expect meaningful cable customer churn from this technology but rather the continued reduction of potential customer growth opportunities although uncertainty remains. We believe network capacity limits this technology. The technology works well and is being offered at low prices. However, we believe this cannot continue forever as spare capacity will soon be exhausted. In addition, the economics of investing for additional FWA capacity are challenging given the high data usage and substantially lower price per bit compared with mobile.

We project FWA growth will stabilize at current levels of about 1 million homes per quarter over the next year as it continues to garner the vast majority of industry net adds. This will result in limited cable broadband subscriber growth as we believe most FWA subscribers are converting from inferior technology, such as digital subscriber line (DSL), which was the growth engine for the cable industry prior to launch of FWA. We estimate that there are still around 12 million – 14 million copper-based customers in the U.S.

We also recognize there are some customer conversions from cable, particularly at the lower end of the market where customers may accept slower speeds and are more price-sensitive. However, we estimate that the pace of FWA growth will begin to slow by 2025 as wireless network capacity fills up. This is consistent with guidance provided by T-Mobile and Verizon for a combined total of 11 million-13 million FWA customers by 2025 (from about 6 million as of June 30, 2023).

More C-band spectrum is becoming available in the second half of 2023, which we believe will create more network capacity. This, along with AT&T's entrance into FWA, underpins our forecast for a steady pace of growth over the next year. We believe the additional spectrum will be particularly useful for Verizon, as it deploys 100 megahertz of C-band spectrum, significantly broadening and deepening its mid-band spectrum holdings and thus increasing the "fallow capacity" (meaning the service is only offered in areas that have excess capacity where investments were made primarily to support mobility)on the network.

Separately, AT&T recently announced it will be offering FWA in certain markets, which represents a shift in posture for the company, as it had previously dismissed the service as poor. AT&T will remain primarily focused on FTTH while leveraging FWA in more rural areas and in markets that may not receive a FTTH upgrade in the near term. Still, the company's entrance into FWA could result in continued growth for the sector in 2025 even if T-Mobile and Verizon slow.

We believe most FWA customers are coming from legacy copper-based services and not cable, as evidenced by reportedly low cable customer churn. We continue to believe consumer behavior plays to cable's strength as rising data usage requires a fast, reliable internet connection. Therefore, given inferior speeds offered by FWA, we do not expect material market share losses to this competition. Still, we recognize that FWA speeds are generally fast enough for most consumer applications today, which makes it difficult for cable to convert these customers given the lower (albeit increasing) price points for FWA.

However, once network capacity fills up (which is already occurring in many neighborhoods), wireless operators will need to make additional network investments to support more FWA customers, which we believe could be difficult to justify on a stand-alone basis. In-home data consumption is exponentially higher than mobile but the price-points are lower, which is why FWA has a been a "fallow capacity" business case up to this point. We do not envision that changing. In fact, T-Mobile management recently highlighted several different investment strategies for FWA, noting that the economics were challenging on all of them. Therefore, while it continues to evaluate alternatives, the company does not view FWA as a service that will significantly threaten the broadband industry, but rather continues to target mid-single-digit percent market penetration.

What is not clear is when network capacity will become constrained, particularly for Verizon. The mobile edge compute opportunity is not materializing as fast as initially projected when the company made massive investments in C-band spectrum to support 5G. Therefore, more capacity may be available to allocate toward FWA. Management recently stated that they will achieve more than the current target of 4 million-5 million customers that we forecast through 2025.

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How will FTTH affect cable operating trends?

We believe that FTTH poses a competitive threat to cable. We expect FTTH competition will result in some market share loss over time given that FTTH offers very fast speeds and will present formidable competition for new customers. However, we believe cable providers, especially Comcast Corp. and Charter Communications Inc., are well positioned to defend against FTTH competition. This is because speeds offered are similar to FTTH, bundling mobile wireless with broadband is a powerful defensive tool, streaming aggregation with a superior customer interface can be a competitive advantage, and scaled providers can still offer more affordable video services (which more than 50% of the U.S. still subscribes to). Therefore, we believe the biggest impact that FTTH builds will have on cable is eliminating growth opportunities from existing copper-based customers that would otherwise likely switch to cable and migrate up market over time. For example, AT&T's fiber broadband trends have been sluggish, with penetration hovering at 38% as of June 30, 2023, compared with 36% two years earlier.

We expect the pace of builds to slow over the next few years for many wireline companies given high financial leverage, funding needs, exposure to floating-rate debt, and higher costs for equipment and labor. In fact, we now estimate FTTH competition will gradually increase to 48%-49% of the U.S. by the end of 2025 (from about 40% today). This is down from our previous expectation of 55% a year ago as higher labor costs, inflation, and rising interest rates have caused the competing wireline operators to scale back FTTH deployments to alleviate cash flow pressure.

Ultimately, the level of FTTH penetration becomes depends on many factors including telco's existing fiber assets and infrastructure, the use of aerial versus buried fiber, market density, and returns on capital. However, we do not expect FTTH to significantly exceed 55% in the long term given that population density will decline with new projects. Most of the U.S. population lives on a small percentage of land, most of which has already been overbuilt with fiber. While there are still neighborhoods that have fiber to the node with meaningful densities, we believe the economics will become increasingly challenging over time. Furthermore, roughly 50% of the U.S. is covered with buried infrastructure, which costs roughly double because digging and trenching is often the most expensive part of a fiber build. Most fiber builds up to this point have been in aerial markets.

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We estimate the cable industry will lose about 1 million subscribers per year over the next two years to FTTH. This is based on the following assumptions:

• FTTH competition will increase by about 4 million-5 million homes per year through 2025;
• FTTH typically splits the market with cable, garnering 40%-45% penetration representing about 1.75 million to 2.25 million new FTTH customers per year (assuming achieved in year one) ; and
• Existing telco penetration averages 15%-20%, meaning 750,000–1 million new FTTH customers were existing telco copper customers not coming from cable.

How have cable operators adjusted to the competitive environment?

Most cable operators have launched or are in the process of launching a wireless offering (delivered on a wholesale basis using another carrier's network). Comcast and Charter, by far the two largest cable operators in the U.S, both launched a low-priced wireless service several years ago, which has helped retain existing broadband customers through bundling. Many smaller operators are now following suit. These two large operators have also partnered to deliver a differentiated streaming aggregation platform through the Xumo brand.

However, we have witnessed divergences recently with respect to investment approaches and growth strategies, including:

• Comcast began amending its operating model in the second half of 2022 to drive strong financial performance and margin expansion in a lower-growth environment. For example, it made reductions to its workforce, pursed other cost take-outs, and increased its focus on optimizing average revenue per user (ARPU) though price adjustments and upselling. These efforts have been effective, with Comcast reporting accelerated growth in domestic broadband ARPU and record EBITDA margins in its domestic cable business during the first half of 2023.
• Charter has taken a more balanced approach by continuing to pursue targeted customer growth initiatives. These include its rural footprint expansion and a greater emphasis on selling converged service bundles such as Spectrum One. As such, it has invested in these initiatives over the past few quarters, which stabilized its margins (due to wireless subscriber acquisition costs and rural operating expenses). However, with many of these investments and initiatives in place, we expect Charter will begin to see improved operating leverage over the next year including a reacceleration in residential broadband ARPU growth and a return to more sustained margin expansion.

Can cable operators continue to grow broadband ARPU?

Yes. We believe there is continued runway for growth in ARPU long term as customers migrate to faster speed tiers, although the balance may shift more toward price increases and monetization of add-ons over the near term.

We believe increasing data consumption will continue to support ARPU growth over time, although the pace of uptiering may slow. According to Pew Research Center, 26% of broadband users subscribe to 1 gigabit per second (Gbps) speeds in 2022, more than double the previous year. We believe this number will continue to increase over time, particularly if data consumption trends mirror the exponential increase we have witnessed over the past decade. This is supported by Altice USA Inc.’s data that shows 39% of new customers sign up for 1 Gbps compared with only 21% of its existing base (as of June 30, 2023).

However, we believe the pace of speed uptiering could slow as the average speed taken is now about 415 megabits per second (Mbps) according to Pew Research Center. We believe internet speeds of 400 Mbps are more than sufficient to meet the needs of most consumers today, which could make it more challenging to upgrade customers to the more expensive 1 Gbps tier in the near term. For example, Comcast has reported that about 75% of its customers take at least 400 Mbps, leaving fewer customers available to migrate up. Eventually, we believe the most popular tier will be 1 Gbps, but that could take several years to occur--only 33% of its customers use the 1 Gbps tier today.

Therefore, we believe cable operators could be more reliant on price increases and selling add-ons to grow ARPU. We do not anticipate a significant increase in churn if price increases are gradual. Many cable operators are offering Wifi security, network management, modem refresh, and whole home coverage for an additional fee. For example:

• Charter offers Advanced Wifi for an additional $5 per month (which 45% of customers use); and
• Comcast offers XFi Complete for $15-$20 a month (25%).

Do you think there will be a price war that will depress ARPU?

We do not envision a price war with the competition. We expect cable operators will maintain discipline against FWA, recognizing there may be a limit to how many customers can be loaded on a wireless network. Instead, most operators are highlighting speed advantages in marketing campaigns, and many have increased the entry-level speeds above what T-Mobile is capable of offering.

With respect to FTTH, we believe these competitors rely on driving ARPU higher to earn an acceptable rate of return, which places a natural floor on how aggressive they will be with price long term. For example, AT&T Fiber has been raising prices, with its ARPU up 8% in the second quarter of 2023. To the extent that FTTH prices are lower, most cable operators will use aggressive wireless prices to offset any discounts being offered by FTTH competition on in-home broadband to retain broadband customers, rather than lower broadband ARPU.

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How do you view increased network investments that cable operators are embarking on?

We generally view these investments favorably. However, we also recognize that elevated capital expenditure also reduces financial flexibility at a time when EBITDA growth is slowing.

We believe the coaxial network upgrade cycle that most cable operators are embarking on over the next three years is necessary and will provide a path toward long-term ARPU growth while also serving to protect existing market share. These upgrades are within the historical capital spending envelope of 12%-14% of revenue and can be achieved for a relatively affordable amount of $100-$200 per home passed. These investments will enable multigigabit download speeds and at least 1 Gbps upload speeds, which are important from a marketing and competitive standpoint.

We also view rural footprint expansion favorably provided that it does not increase financial leverage but rather comes in lieu of shareholder returns, which we expect it will for most cable providers. Government-subsidized rural footprint expansion will help drive subscriber and EBITDA growth because there is no competition from fiber in these markets, so customer penetration will likely be above average. We believe this will be the primary driver for subscriber growth in the future given the increasingly competitive and mature conditions in incumbent markets.

Altice USA is the outlier in the industry because it is embarking on a FTTH network upgrade, which is more expensive than a coaxial upgrade. The company's elevated capital spending has eroded its free operating cash flow and eliminated its leverage reduction capability near-term. Given that its debt to EBITDA is currently elevated at about 7x and it has a limited equity cushion, we believe the company would be better served preserving cash flow and applying it toward debt reduction. While we recognize that FTTH is the best technology available and it will future-proof the network, we believe the recent weakness in Altice USA's operating performance is due primarily to poor management.

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How will cable's wireless offerings impact financial performance?

For Comcast and Charter, we believe wireless offerings will be a key driver of EBITDA growth over the next three years as the businesses scale and the drag from new customer additions is more limited. We expect these operators to continue to aggressively pursue customer growth, especially Charter, as the cable industry accounted for about 50% of wireless industry net adds in the second quarter of 2023.

Both companies have about 10% of broadband homes on wireless plans, so we believe there is a long runway for growth with an economically healthy mobile virtual network operator. We believe the economics will improve over time while these companies move traffic on-network as they deploy owned Citizens Broadband Radio Service spectrum via stand-mounted small cells.

We also believe attractively-priced mobile wireless serves as a churn reduction mechanism for its broadband customers. Given the capital-light nature of the service combined with the fact that these operators are not running wireless to maximize stand-alone profits, we believe they can match or exceed any discount on broadband offered by an FTTH competitor, particularly considering that the average wireless spend is 3x the in-home broadband bill.

For smaller operators, we believe wireless will be a drag on profitability initially. It took Comcast about four years to reach stand-alone profitability. Given their more limited scale, these smaller operators may not receive such attractive terms on their wholesale arrangements, which could limit their ability to price as aggressively as Comcast and Charter. Furthermore, certain highly leveraged operators such as Radiate and Altice USA do not have the financial flexibility to absorb wireless losses, which could limit their effectiveness.

What could cause you to adjust your rating triggers?

We could revise our rating triggers if business prospects weaken and competition is more intense than we currently envision such that EBITDA growth turns sustainably negative. This could be caused by higher-than-expected FWA subscriber growth and network investments, FTTH penetration exceeding our long-term expectations of about 55% of the U.S., or greater-than-expected pricing pressure from new competition. Therefore, we will be closely monitoring operating metrics such as HSD ARPU growth, HSD subscriber trends, wireless growth and profitability, and footprint expansion initiatives.

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