Despite improving capital market conditions, 2024 was a difficult year for the U.S. telecom and cable industry due to high borrowing costs and increasing competition for broadband services that hurt credit quality for many companies. As a result, ratings downgrades exceeded upgrades by almost 2 to 1 and 25% of the companies we rate in the sector are at 'CCC+' or lower compared with 20% a year ago. We also tightened our ratings triggers for most cable operators during the year due to a more competitive environment.

U.S. telcos have continued to grow wireless service revenue in the low- to mid-single-digit percent range because of rate increases, greater adoption of premium plans, and postpaid phone subscriber growth, although the latter is generally slowing. At the same time, low handset upgrade rates are spurring margin improvement and EBITDA growth. These companies are also expanding their fiber to the home (FTTH) footprints either with new builds, joint venture (JV) partnerships, or mergers and acquisitions (M&A) to better compete with bundled offerings.

Capital expenditures (capex) were lower in 2024 following multiple years of mid-band spectrum deployments, and we believe that spending is likely to remain relatively stable in 2025 with companies allocating more capex dollars to fiber investments instead of to wireless.

For the wireline companies, fiber expansion and data demand from artificial intelligence (AI) sparked a new wave of investment activity and M&A. Lumen Technologies Inc. announced a series of Private Connectivity Fabric (PCF) transactions that bolstered its liquidity position, giving it greater financial flexibility. In May 2024, Windstream Holdings II LLC and Uniti Group Inc. announced their merger, bringing together Uniti's fiber infrastructure wholesale assets and Windstream's FTTH footprint.

In September 2024, Verizon Communications Inc. announced that it entered into an agreement to acquire Frontier Communications Holdings LLC for about $20 billion, which is expected to close in 2026. We expect additional consolidation in 2025 given the strong appetite for fiber infrastructure assets.

In the cable sector, fixed wireless access (FWA) and FTTH continue to take share from cable providers resulting in broadband subscriber losses averaging about 1.5% across the industry, with some smaller operators experiencing steeper losses of 6%-7%. These losses were amplified by the expiration of the Affordable Connectivity Program (ACP) in mid-2024, which caused some temporary customer churn. However, we believe that 2024 was likely the peak of subscriber losses as the pace of FWA customer additions stabilizes. Therefore, we project slight broadband subscriber declines of about 0.5% industrywide in 2025.

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Key Themes For 2025

We expect M&A and shareholder returns will limit credit metric improvement for the U.S. telcos in 2025.  Despite lower levels of capex and EBITDA growth, carriers faced some headwinds from higher interest expense and cash taxes. Still, free operating cash flow (FOCF) was healthy and leverage declined in 2024.

In 2025, our base-case forecast includes the following assumptions:

• Verizon: Capex increases by around $1 billion in 2025, partially due to an increase in FTTH passings by about 650,000 from 500,000 in 2024. We expect a modest decrease in FOCF in 2025 but remaining around $18 billion.
• AT&T: Capex is relatively flat as lower vendor financing payments is offset by a modest expansion of its FTTH passings to around 2.7 million from 2.5 million in 2024. We expect FOCF to decline to around $16 billion, primarily reflecting the loss of distributions from DirecTV, although this is partially offset by payments from TPG to buy the remaining stake of DTV that it didn't own.
• T-Mobile: A modest increase in capex, reflecting the incremental spending from US Cellular in the second half of 2025 but remaining in the $9 billion to $10 billion area. We expect FOCF to increase to around $17.5 billion in 2025 from $17 billion in 2024.

Notwithstanding our expectation for growing EBITDA and still healthy FOCF, we assume that M&A and shareholder returns, including stock buybacks, will limit credit metric improvement in 2025 and 2026. For example, we expect Verizon's S&P Global Ratings-adjusted leverage to decline to around 2.8x in 2025 from 3.0x in 2024. However, its proposed acquisition of Frontier will likely increase leverage back up to 3.0x in 2026. Further, the company indicated on its sell-side analyst day that it raised its net unsecured debt to EBITDA target to 2.00x-2.25x from 1.75x-2.00x and that it would consider share repurchases once it achieved 2.25x; we estimate this is about 2.7x-2.8x on an S&P Global Ratings-adjusted basis.

T-Mobile stated during its analyst day that it has $80 billion of capacity for investment and shareholder returns through 2027. The company already allocated $10 billion for the acquisitions of US Cellular and the JVs to acquire Lumos and MetroNet. It plans to return up to $50 million in dividends and share repurchases through 2027, leaving about $20 billion available for additional investments, debt reduction, or shareholder returns. However, we expect the company to remain within its net leverage target of 2.5x (around 3.2x-3.3x on an S&P Global Ratings-adjusted basis), which is supportive of the 'BBB' rating and stable outlook.

AT&T expects to have more than $50 billion of financial capacity over the next three years and will distribute about $40 billion over this period to dividends and share repurchases, split roughly equally, while maintaining its net leverage in the 2.5x area. The company is holding back $10 billion for potential discretionary uses, including organic investments, spectrum purchases, debt repayment, or additional shareholder returns. We had already factored stock buybacks into our base-case forecast since we expected AT&T to achieve its net leverage target in 2025. As such, we believe the company will reduce its adjusted leverage modestly to about 3.3x in 2025 and 3.1x-3.2x in 2026 from 3.4x in 2024. Further, we expect post-dividend FOCF to debt to be about 7%-9% over the next couple of years.

Convergence takes shape, resulting in increasing competition for in-home broadband and wireless.  In many markets outside the U.S., including several European countries, fixed and mobile convergence has long been a part of the customer experience. This is due to their smaller geographies that easily enable telecom operators to cover an entire footprint with both mobile and fixed line infrastructure. In the U.S., bundling connectivity services has proven more difficult since the wireless market is essentially nationwide whereas fixed line broadband services are more regional.

The two largest cable providers--Charter Communications Inc. and Comcast Corp.--cover about 58.3 million and 63.4 million residential and business passings, respectively. Both providers are able to bundle across their in-home broadband footprint with wireless service using a mobile virtual network operator (MVNO) agreement with Verizon. While terms of the MVNO are not public, the economics of the perpetual wholesale agreement are reportedly favorable to cable operators due in part to the scale benefits and the origins of the agreement, which date to a 2011 spectrum sale. We estimate that Comcast will generate at least $500 million of wireless EBITDA in 2024 while Charter turned a profit for the first time in the third quarter of 2024 and will grow wireless EBITDA in 2025.

At the same time, the two largest wireline telcos--AT&T and Verizon--cover about 28.3 million and 18 million passings, respectively. Including the proposed acquisition of Frontier, Verizon will cover about 28 million passings in 2026 with plans to reach 30 million by 2028. Similarly, AT&T expects to pass 45 million locations and another 5 million through its JV agreement with Blackrock by 2029. As part of T-Mobile's JVs, it will partially fund planned fiber builds to cover 12 million to 15 million passings by 2030. In aggregate, we expect the telcos will pass over 90 million residential and business locations by 2030.

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It appears that cable has the advantage with its ability to bundle broadband and wireless across a larger footprint and it will take several years for the telcos to approach cable's existing footprint. Furthermore, the capital-light nature of the mobile service with a high amount of traffic offload enabled by Wi-Fi hotspots, and a focus on broadband churn reduction rather than stand-alone wireless profitability allows Charter and Comcast to offer significantly lower wireless prices. Given that mobility service typically accounts for a larger portion of the total telecom spend in a household, the savings from discounting wireless can be substantial.

However, this advantage is less pronounced in areas where telcos have excess wireless capacity to sell FWA. FWA is truly a converged product, utilizing wireless resources that otherwise would not be monetized. Therefore, the potential exists for low pricing of FWA. The telcos have been marketing their FWA broadband product and bundling it with mobile service, particularly in areas where they don't have fiber. The results have been overwhelmingly positive with FWA taking share from cable broadband and digital subscriber line (DSL) service. The speeds available via FWA are better than DSL and less expensive than cable.

In roughly 50% of the U.S. where the wireline telco has not upgraded to FTTH, customers historically had a choice between copper-based services offering speeds of about 5 Mbps-50 Mbps and more expensive high-speed cable. Now there is a middle ground across much of the U.S. FWA speeds can vary based on location, equipment, and network traffic but are typically significantly faster than copper-based broadband.

The telcos added about 3.8 million FWA customers in 2023 and we estimate they will add another 3.6 million in 2024 and 3.4 million in 2025. While AT&T's broadband strategy focuses predominantly on fiber deployments, both T-Mobile and Verizon have outlined longer-term FWA customer targets. Verizon expects to reach 8 to 9 million subscribers by 2028 from 4.2 million today, which implies about 1 million net subscriber additions per year. Similarly, T-Mobile plans to double the number of FWA customers by 2028 to 12 million. We estimate that in aggregate FWA penetration will be around 18% by 2028.

We previously assumed that FWA customer growth would slow materially after 2025 given that it is an excess capacity business model and at the end of the day, there is a limited amount of spectrum. However, it appears that the carriers are managing customer additions at a steady pace to achieve their longer-term targets. For example, in 2022 and 2023, T-Mobile was adding more that 2 million subs per year with the pace slowing to around 1.6 million in 2024.

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Wireless margin expansion is supported by low upgrade rates.   Wireless carrier EBITDA margins continued to improve in 2024 as consumers held on to their handsets for longer periods given the limited appeal of new devices and customer migrations to three-year upgrade cycles from two years, which reduces monthly handset expense. While this trend pressures equipment revenue, it also benefits profitability and free cash flow because the carriers are not spending to acquire new devices or increasing promotions to keep churn low.

How long this industry dynamic will last is unclear but we believe that upgrade rates will remain low until a new compelling iPhone attracts consumers. This could occur in late 2025 when Apple launches the iPhone 17, a handset that should have more promising AI capabilities. If consumers are drawn to these new features, it could spark a wave of annual upgrades that results in greater spending on handset subsidies, rising churn, working capital pressures, lower margins, and reduced FOCF generation.

Additionally, some of the carriers initiated cost-reduction programs. AT&T plans to decommission its copper network and achieve $6 billion of cost savings by 2029. Existing copper customers will be migrated to fiber in denser markets, or to FWA or satellite in less dense service areas. At the same time, Verizon is trying to improve its cost structure by reducing headcount ahead of its acquisition of Frontier. The company expects to save about $2 billion annually.

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AI has promising new benefits for U.S. telecom and cable operators but is unlikely to be a meaningful contributor to profit growth in 2025.  Like other industries, the sector is increasingly using AI to improve efficiencies, especially with customer service. We expect telecom and cable providers to step up their use of AI in 2025 to improve network optimization and design, back-office operations, customer support, marketing, and billing. These factors could drive incremental revenue, improve customer satisfaction, and enable margin expansion longer term, although we do not expect it to be a meaningful contributor profit growth in 2025.

AI algorithms already consume a lot of data that is transmitted over telecommunication networks, aiding in the development of this nascent technology. Investments in generative AI have driven an unprecedented level of capital expenditures across hyperscalers in 2024, with even more spending in the works for 2025. We believe those telecom companies that are most likely to benefit from AI-related bandwidth demand from hyperscalers in the near term are operators with fiber-rich networks such as Lumen Technologies Inc. and Zayo Group Holdings Inc., as well as data center operators such as Equinix Inc.

In the second half of 2024, Lumen announced a series of transactions valued at over $8 billion with hyperscalers including Microsoft, Google Cloud, AWS, and Meta to provide access to the Lumen network as well as the installation of fiber on new and existing routes to support the connectivity between data centers for AI-related bandwidth demand. Additionally, the company stated that there is likely another $3.5 billion of new deals in the funnel that will improve its financial flexibility.

As a result, we placed our ratings on Lumen, including the 'CCC+' issuer credit rating, on CreditWatch with positive implications, implying the potential for a one-notch upgrade. We expect similar deals for Lumen and other telecommunication providers will likely materialize over the next couple of years.

However, enterprise customers' adoption of AI has been constrained for some time by smaller operating budgets as corporate IT spending remains depressed, although early indications are for a rebound in 2025 as inflationary pressures subside. This could help improve top-line trends from business customers, a segment that has been in secular decline for the larger telcos with significant exposure to legacy products.

Improved capital market conditions will drive more M&A in 2025.  After a two-year hiatus, the number of M&A transactions increased dramatically in 2024, although not at the levels seen in 2021. U.S. telecom and cable M&A was highlighted by Verizon's proposed acquisition of Frontier, which will add about 7 million fiber passings to its footprint. In the satellite pay-TV market, DirecTV Entertainment Holdings LLC announced it would acquire Dish DBS Corp. for $1 plus $10 billion of assumed debt. At the same time, TPG Capital announced its intention to purchase the remaining 70% stake in DTV that it didn't own. However, DirecTV subsequently terminated its planned acquisition of Dish DBS after lenders rejected a subpar debt exchange that was a requirement for the transaction to occur.

In the wireless market, T-Mobile plans to acquire the mobile operations of US Cellular and 30% of its spectrum license holdings in a transaction valued at $4.4 billion. In the tower space, operators have been looking to shed assets in riskier business lines or markets. Crown Castle Inc. announced it was exploring strategic alternatives for its fiber and small cell business while American Tower Corp. sold its India operations for about $2.5 billion.

We believe the rise in M&A deals in 2024 was due to a confluence of factors including:

• Lower borrowing costs enabled private equity investors to find acquisition targets.
• Rising equity prices and cash reserves for larger, investment grade credits.
• The high capital intensity of the industry and need for scale.
• Businesses in secular decline need to merge to extract synergies and offset revenue declines.
• Companies actively seeking fiber infrastructure to improve their broadband capabilities.
• Tower companies shedding less profitable assets.

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We expect the number of M&A transactions to increase in 2025, supported by lower interest rates, inflationary pressures subsiding, pent-up demand, and a growing disparity between stronger, investment-grade credits and speculative-grade companies. And, flush with over $2.5 trillion in dry powder, private equity sponsors are coming under increasing pressure to deploy capital. Therefore, we expect them to be active participants in the M&A market over the next year. Furthermore, the Republican party, which favors deregulation, will control both houses of Congress and the presidency, likely resulting in a more accommodating FCC and Department of Justice (DOJ).

Specifically, we believe the cable sector is ripe for additional consolidation. As competition increases from FWA and FTTH, smaller operators without a profitable wireless service may find it difficult to compete. Other potential acquisition targets are digital infrastructure companies, including providers of fiber connectivity and data center operators.

The pace of fiber builds will accelerate in 2025.  We estimate the telcos expanded their FTTH service by about 6.3 million homes in 2024 (comparable with the 2023 build pace) and now cover about 56% of U.S. households.

We expect FTTH deployments to accelerate in 2025, including Lumos Fiber and MetroNet, which will get fresh capital from T-Mobile and its partners to accelerate their network builds. We forecast AT&T will add about 2.7 million passings in 2025, ramping up to over 3 million passings per year thereafter. Verizon added about 500,000 homes in 2024 but we expect it to accelerate its build pace to 650,000 in 2025 prior to closing on its proposed acquisition of Frontier. We estimate that T-Mobile's JVs will add about 1 million passings in 2025, expanding their fiber footprints to around 10 million by 2028. As a result, we forecast new fiber passings of around 9 million in 2025 and penetration to reach about 62%.

We also expect the build pace to remain strong over the next few years driven by the following:

• Telcos, including AT&T and Frontier, are protecting their legacy copper infrastructure.
• Inflow of private capital from infrastructure funds and private equity sponsors for some of the smaller telcos, such of Cincinnati Bell Inc. (d/b/a Altafiber).
• Notwithstanding the high cost per passing, which can be around $1,200, fiber is best conduit for transmitting data, and can be marketed as a premium product with higher average revenue per user (ARPU).

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U.S. tower operators are reshaping their portfolios.  After several years of healthy growth driven by rising U.S. wireless carrier capex to build out mid-band spectrum and support 5G network deployments, top-line trends for the tower operators in the U.S. weakened in the second half of 2023 and in 2024. Additionally, carrier consolidation and bankruptcies in international markets and exchange rate fluctuations contributed to overall revenue and EBITDA declines. These companies are reviewing their portfolios to reduce risk.

• Crown Castle announced a strategic review of its fiber and small cell business, which could result in a full or partial sale of these assets. While the small cell business has good growth prospects as the carriers look to densify their networks in urban and suburban markets, the fiber segment is very capital intensive and has not generated good returns on investment, resulting in large discretionary cash flow (DCF) deficits. The sale of these assets could be good for the credit quality, depending on the use of proceeds, future dividend payout, and the company's target leverage.
• American Tower closed on the sale of its India operations for $2.5 billion and announced it would reduce its investment in higher risk emerging markets. These factors contributed to our upgrade on the company to 'BBB' with a stable outlook from 'BBB-'.
• SBA Communications Corp. announced that it planned to review its portfolio of assets in markets where it doesn't have sufficient scale.

Starlink will continue to disrupt the satellite industry while Amazon enters the market in 2025.  Starlink has taken market share from incumbent operators in recent years. We believe it will continue to be a formidable competitor, particularly as it continues to add depth and capacity to its constellation. Clearly, Starlink has a competitive advantage in residential broadband relative to other satellite operators with its low-latency service but it has been more successful than previously anticipated in in-flight connectivity (IFC), maritime, and government and we expect these trends to continue.

The primary limitation of the network is capacity constraints in high-traffic areas, given that uniform nature of LEO capacity. However, we believe this can be at least partly overcome with the launch of more satellites, which deep-pocketed Starlink plans. Furthermore, Amazon Kuiper plans to roll out commercial service in 2025 with a mesh network of more than 3,000 satellites when fully deployed by 2029. Amazon could take a similar approach as Starlink once launched, with affordability a key principle of the constellation. We believe this could reduce incumbent satellite operators long-term growth prospects in mobility and place increasing pressure on its in-home broadband segment in the coming years.

A new political administration in the U.S. may favor Starlink.   Starlink owner Elon Musk has close ties to President-elect Donald Trump and may be able to influence decision making at the federal level in several ways. First, Starlink could be better positioned to receive government subsidies to build out into rural America as part of the $42 billion Broadband Equity Access and Deployment (BEAD) program, or others such as the Rural Digital Opportunity Fund (RDOF). Secondly, the FCC could act quickly to approve applications to launch new satellites, increasing the capacity on its network. There could also be spectrum policy changes that benefit Starlink or it could be allowed to operate with higher power levels to allow for faster speeds and an even more competitive service. Finally, it's possible that government contracts may increasingly favor Starlink technology.

Rating Trends

In 2024, high leverage and interest rates continued to weigh on the sector with downgrades outpacing upgrades by about 2 to 1 although this was an improvement from 2023 when the ratio was 5.1. About one quarter of the sector is now rated 'CCC+' or lower, up from 20% in 2023. Additionally, the outlook bias remains negative. Over 40% of U.S. telecom and cable issuers have a negative outlook or are on CreditWatch negative, primarily in the cable and satellite sectors.

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A few high-profile names, including EchoStar Corp. subsidiary Dish Network Corp. and Lumen Technologies Inc., completed subpar distressed exchanges to push out maturities and raise new money. In cable, we took several rating actions on some of the smaller cable providers and tightened thresholds.

That said, we believe the likelihood of lower interest rates, improved capital market conditions, and slower inflation could bode well for the industry, although rating trends may be somewhat bifurcated, depending on the subsector. S&P Global Ratings' economists expect inflation to remain above the 2% target in 2025 but they expect the federal funds rate to reach 3.5%-3.75% by the end of next year. We expect further ratings pressure for smaller cable providers that lack a profitable mobile product to bundle with high-speed data (HSD) services as well as companies with highly leveraged capital structures.

Sector Outlooks

Consolidation and a predictable competitive environment bode well for steady wireless service revenue and earnings growth.  Notwithstanding mature industry conditions, aggressive competition, and market share gains by the cable providers, the U.S. wireless industry remained healthy during the first three quarters of 2024. We expect industry postpaid phone net subscriber additions of about 8.7 million in 2024, down around 4% but stronger than our previous expectations of a 7%-9% decline, while rate increases and increasing adoption of premium plans should support healthy service revenue growth for the year. We also forecast that cable will take about 38% of net adds in 2024, lower than our previous expectations of over 50%. Further, bundling and the lack of new compelling handsets have reduced the level of switching activity, contributing to solid earnings growth.

We expect this trend to continue in 2025, although the introduction of new AI capable handsets could result in increased promotional activity, more handset upgrades, and margin compression in the fourth quarter and 2026. In 2025, we expect service revenue growth of around 3% for the telcos, down from 3.6% in 2024, based on some of the following assumptions:

• Very modest 0%-1% postpaid ARPU growth, as well as higher average revenue per account (ARPA), due to the adoption of higher-end rate plans, bundling of premium services, modest rate increases, and a growing number of lines per household, partially offset by a greater mix of lower ARPU business customers.
• Industry postpaid subscribers increase around 2%-3% in 2025.
• Industry postpaid phone net adds of around 7.8 million in 2025, down about 10% from 2024 due to mature industry conditions. We also assume that cable takes about 37% of the postpaid phone net adds, comparable with 2024.

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We expect upgrade rates will remain low in 2025 as consumers hold on to their handsets for longer periods given the limited appeal of new devices and the migration of customers to three-year upgrade cycles from two years, which reduces monthly handset expense. Assuming Apple launches a new AI integrated handset in September 2025 that drives higher upgrade rates, we do not expect the full impact will occur until 2026. Coupled with cost-reduction initiatives and increased operating leverage, we expect solid wireless EBITDA growth of 4%-5% in 2025, modestly lower than our forecasted 6% growth in 2024.

U.S. telco leverage will be stable in 2025. Notwithstanding our expectation for solid earnings growth and healthy FOCF, we expect the telcos to prioritize shareholder returns and M&A, which will constrain leverage improvement over the next couple of years.

• Verizon: We previously forecasted a decline in adjusted leverage to 2.9x in 2024 from 3.1x in 2023. However, the company took a $1.7 billion charge, which we include in our EBITDA calculation, during the third quarter of 2024. As such, leverage is likely to be around 3.0x, slightly above our previous base-case forecast. In anticipation of its proposed acquisition of Frontier, we expect Verizon to increase its financial capacity from DCF. Coupled with EBITDA growth of about 3%, we expect leverage to decline to around 2.8x in 2025 before increasing back to the 3x area in 2026 to accommodate the purchase of Frontier.
• AT&T: We expect leverage of around 3.4x in 2024, down from 3.6x in the prior year. In 2025, we expect FOCF to decline by around $1.5 billion due primarily to the loss of distributions from DirecTV but remain healthy at around $16 billion. However, we also assume the company will repurchase about $3.5 billion to $4 billion of common stock and pay about $8 billion of dividends as part of its new three-year capital allocation program such that leverage improves only modestly to about 3.3x during the year.
• T-Mobile: We expect leverage to decline to 3.1x in 2024 from 3.4x in the prior year. However, we assume that leverage will likely remain in the low-3x area over the next couple of years as the company issues debt to fund M&A and stock buybacks.

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U.S. wirelines are reaching an inflection point and demand for fiber assets is robust.  Notwithstanding their exposure to legacy products and services such as DSL, video, and landline voice, wireline operators are expanding their FTTH footprint and are growing overall broadband revenue from a combination of higher ARPU and the addition of new fiber customers across their footprints. At the same time, cost-reduction initiatives and an increasing shift to higher-margin fiber broadband will lead to better cash flow. As a result, while revenue is declining in some cases, EBITDA appears to have reached an inflection point and we expect most of these companies to record EBITDA growth in 2025. That said, the wirelines need to demonstrate more progress in stabilizing revenue that will establish a more realistic path to sustained earnings growth.

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More importantly, the market demand for fiber assets is growing as these companies increase their penetration of homes passed. In addition to Verizon's acquisition of Frontier, Canadian telco BCE Inc. announced it would acquire Ziply Fiber for $3.6 billion as it looks to get a foothold in the U.S. fiber market, which has a more favorable growth profile relative to Canada. T-Mobile also announced it will enter into JV partnerships with private equity sponsors to acquire Lumos and MetroNet with the intention to expand its FTTH footprint to cover 12 to 15 million passings longer term.

Unlike its peers, Lumen's consumer business only accounts for about 20% of revenue and management has chosen not to invest its capex dollars to build fiber. The company derives most of its revenue from communication and networking services for larger business customers. This segment is in secular decline as customers migrate to less-expensive, software-defined networking technologies with revenue falling in the high-single-digit percent area.

That said, recent business wins from hyperscalers and other technology companies to provide connectivity for AI data demand could prove material in Lumen's path to repairing its balance sheet. Lumen has secured about $8 billion of these deals to provide custom fiber networks that include dedicated access to existing fiber in the Lumen network and the installation of new fiber on existing and new routes, enabling them to support increasing demand for AI workloads. These PCF sales come at an opportune time since they will bolster the company's liquidity position and give it greater financial flexibility to integrate network and IT systems over the next couple of years. Further, management stated that there is about $3.5 billion of potential new deals that are being negotiated and could provide Lumen with additional runway to execute on its turnaround strategy.

Telecom capex will increase modestly in 2025.  After two consecutive years of declines, we expect U.S. telco capex to increase around 3% in 2025. However, more capex dollars will likely be allocated to FTTH builds instead of wireless network upgrades. We base our forecast on the following assumptions:

• Verizon's capex increases modestly to support FTTH builds.
• A small increase in T-Mobile's capex assuming it closes on its acquisition of US Cellular in the second half of 2025.
• AT&T's capex remains relatively flat.
• Lumen's capex increases around $200 million for new PCF deals.
• All other wirelines' capex remain at similar levels.

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U.S. tower leasing trends and EBITDA will show modest improvement in 2025.  Even though some signs of a pick-up in U.S. leasing activity are emerging, we expect earnings growth will remain soft in 2025 due to limited wireless capex growth, partially offset by some cost reduction initiatives. While we expect organic tenant billings growth will be solid at around 3%-5% across the three tower operators, headwinds from straight line revenue, prepaid rent amortization, and churn from Sprint site decommissions are likely to persist in 2025.

International markets have not fared much better. Both American Tower and SBA have exposure to emerging markets where carrier bankruptcies and customer consolidation have resulted in higher churn in some countries. Additionally, currency fluctuations in emerging markets have reduced dollar-denominated returns and constrained earnings growth. As a result, we expect these companies will try to divest certain market portfolios where they lack scale.

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Overall, we expect adjusted leverage for the tower operators to remain steady in 2025, although there is some uncertainty. For Crown Castle, adjusted leverage remains above our downgrade threshold of 6x, although a potential sale of the fiber and small cell business could result in lower leverage, depending on the allocation of proceeds and future financial policy, including its net leverage target and dividend distributions. SBA is currently operating under its net leverage target (and our upgrade threshold) so we believe the company is likely to pursue more acquisition opportunities or alternatively, buy back stock. In contrast, we expect American Tower's adjusted leverage to remain stable, in the mid-5x area, although debt-financed M&A remains a longer-term risk.

Cable subscriber declines will likely persist in 2025.  U.S. cable operators are faced with maturing broadband market conditions combined with elevated competition from FWA while wireline operators are upgrading from inferior copper-based internet to FTTH. There are four primary ways for cable operators to gain subscribers, which we believe will be insufficient to offset increased competition for at least the next two years:

• New home formation within existing markets, which we forecast will average about 1.5 million per year in the U.S.
• Footprint expansion, which will average an incremental 1.5 million homes per year industrywide due to edge-outs and in part to growth from government subsidies in more rural markets.
• Market share gains from copper-based services. We estimate there are still roughly about 10 million copper-based customers that will eventually switch to higher-speed alternatives.
• New in-home broadband customers that historically used wireless-only or did not have access to an internet service. There are not many of these potential customers left as 92% of U.S. households have an in-home broadband provider compared with 85% pre-pandemic in 2019 according to Leichtman Research. It's likely that the end of the ACP program in 2024 resulted in a temporary reduction in in-home broadband homes in 2024.

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Given that most cable net additions are likely to come from footprint edge-out activity and new home formation within the existing footprint, we expect that cable's HSD penetration levels will continue to decline as competitors take share. We project that average cable industry HSD penetration will decline to about 45% by 2027 from about 48.5% today assuming a relatively mature market with few new broadband customers; a roughly even market split with FTTH--which will approach 74% coverage by 2027 (from 56% today); FWA garnering about 15% market share by 2027.

Smaller operators more vulnerable competition.  These cable operators are not as well positioned as their larger peers to effectively defend against FTTH competition. They lack the scale and financial resources to bundle broadband with defensive services, such as mobile and video, as profitably as Comcast or Charter, which benefit from more-attractive video programming and their wireless wholesale arrangement. This is particularly true for operators that have high broadband ARPU, including Cox Enterprises Inc., Cable One Inc., and Block Communications Inc. among others, that have not historically faced this level of competition.

Cable mobile subscribers will continue to grow.  We believe the ability to offload traffic in high-density areas presents an interesting and unique opportunity. In these more urban areas, it is capital efficient to use a facilities-based approach and uneconomical to build wireless networks in more rural markets. Therefore, we view favorably the ability to utilize Verizon's high-quality network for coverage in rural markets while enjoying some benefit of owner's economics in more urban areas. This advantage is magnified if the variable rates paid to Verizon are based on average cost to serve. Averages skew toward urban usage, with lower costs. If these operators utilize the wholesale MVNO agreement more heavily in rural areas where the cost to build is high, they could capture an arbitrage and take advantage of favorable pricing dynamics.

To this point, the traffic offload has been on Wi-Fi networks both in and out of the home. For example, Charter has stated that it offloads 88% of its mobile traffic onto Wi-Fi. Comcast is even higher at about 90%, according to company management. This enables potentially better margins, lower prices, or both, than the average MVNO operator that utilizes a wholesale agreement. Both operators own CBRS spectrum and are in the initial stages of deploying via strand-mounted small cells, which can enable even more traffic on-network over time in densely populated areas.

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We expect both operators will continue to grow mobile subscribers as they offer significantly lower prices than the major wireless carriers. However, the pace of growth will likely stabilize in absolute terms as they continue to migrate up-market where brand loyalty and inertia may be more pronounced, and price-sensitivity may be less.

EBITDA growth is still attainable.  We project slight cable industry earnings growth in 2025. This will primarily come from a modest increase in broadband APRU, footprint expansion, and business services, partly offset by a reduction in broadband penetration levels due to elevated competition from FWA and FTTH and the absence of political advertising revenue. For Charter and Comcast, we expect better wireless economics to be a larger contributor to EBITDA in 2025 and beyond.

Chart 15

However, there is a wide range of outcomes. We believe smaller operators that lack a compelling mobile product--particularly those with higher penetration and ARPU levels—are faced with the prospect of EBITDA declines. More specifically, we project EBITDA to shrink about 3% in 2025 for Cox Communications, Altice USA Inc., Block Communications, and Mediacom. Conversely, certain rural operators, such as Mega Broadband Investments Intermediate LLC (d/b/a Vyve Broadband) and Midcontinent may face less competition and could continue to grow earnings considering Vyve is relatively underpenetrated and Midcontinent benefits from a JV with Comcast that allows for a stronger video bundle than most small operators.

BEAD participation likely more muted for cable operators.  Until recently, Charter had expressed the most interest of public cable operators in potentially participating in the $42 billion federal subsidized program to build high-speed internet into unserved locations that are expensive to reach. On the company's recent third-quarter earnings call, management indicated a lower outlook for BEAD-related capital spending due to recent broadband map updates that result in fewer adjacent opportunities to its existing network combined with a less favorable rules framework when compared with other grant programs, such as RDOF. The company has indicated that beyond 2025, total capital spending will be on a meaningfully downward trajectory, even inclusive of BEAD spending. We believe this will contribute to a near-term improvement in FOCF-to-debt metrics, particularly for Charter, increasing financial flexibility at a time when competitive pressures are accelerating.

Chart 16

Credit quality for U.S. telcos will trend stable while cable operators will contend with weaker business conditions.  Overall, we expect credit quality to be stable or show modest improvement for the U.S. telecom sector on the back of solid wireless earnings growth, increasing penetration of FTTH and FWA, demand for fiber connectivity, some consolidation, and healthy FOCF. In contrast, mature industry conditions and increasing competition will continue to hurt business prospects for cable operators. We believe that some of the smaller providers are increasingly vulnerable because they lack a scaled mobile product to bundle with broadband.

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