Cable Industry's Broadband Growth Slows
High-speed Internet services have been the growth engine for cable operators amid continued pay TV subscriber losses. Accordingly, cable executives have in recent years repeatedly described their broadband service offering as a new core product.
Outgoing Time Warner Cable CEO Glenn Britt, for example, told investors in 2011: "It has become our primary product. People are telling us that if they were down to their last dollar, they would drop broadband last."
But third-quarter earnings season saw two big cable players – Time Warner Cable and Cablevision – report broadband subscriber declines, raising some concerns among investors about a slowdown in growth momentum. For TW Cable, it was the first-ever broadband drop.
"Broadband is growing at a moderating pace for the cable operators," said ISI Media analyst Vijay Jayant, highlighting that it was a maturing business. "While the industry continues to be mainly focused on where video subscribers are headed, more attention should be paid to the trend that broadband and voice subscribers are increasingly seasonal and tied to the movement of cable bundles."
But observers also emphasized that TW Cable faced particular pressure in the latest quarter amid its carriage dispute with CBS, which led some customers to drop pay TV and additional services, such as broadband.
Wunderlich Securities analyst Matthew Harrigan also noted that TW Cable and Cablevision are both exposed to more competition from telecom providers. "These two are subject to heavy [Verizon] FiOS and [AT&T] U-verse overlays," he said.
Still, the cable industry overall saw slowing growth in broadband additions in the third quarter.
According to MoffettNathanson founder and analyst Craig Moffett, cable operators overall added 517,000 broadband subscribers in the third quarter, down from 671,000 in the year-ago period.
Comcast accelerated its growth by adding 297,000 broadband users in the latest period, up from 287,000 in the year-ago period, and Charter added 98,000, compared with 78,000. Cablevision lost 13,000 after adding 19,000 in the year-ago period, and TWC lost 9,000.
Credit Suisse analyst Michael Senno noted a big pay TV subscriber drop at TWC amid the CBS carriage dispute, but emphasized that the broadband decline "is most concerning since high-speed data is the growth engine for cable, but this highlights one of the consequences of losing video subs."
Meanwhile, "Cablevision is a bit of a victim of their own prior success – with a 55.3 percent penetration of broadband, compared to 39.5 percent for major cable providers as a whole, they have more limited upside subscriber growth than others," said Leichtman Research Group president Bruce Leichtman.
For the year-to-date, broadband subscriber growth has also slowed somewhat. In the first three quarters of 2013, the 17 largest cable and telecom providers in the U.S. added about 1.93 million broadband subscribers, compared to about 2.15 million in the first three quarters of 2012, according to Leichtman Research Group. "With top providers now having over 83.6 million subscribers, the broadband industry continues to grow, but at a slightly slower pace than a year ago," said Leichtman.
Analysts mostly believe absolute broadband sub growth is bound to continue to weaken for cable operators amid a maturing market.
"For years, broadband has been the growth engine," Moffett said. "The broadband market is nearing saturation, and that means growth is slowing for everybody."
He emphasized though that "more and more, it is a battle for market share" in the broadband space, and that cable is looking good compared with telecom companies.
"The cable operators are still taking the lion’s share of net subscriber growth, and cable’s technological superiority has never been greater," Moffett said. "The speed you can get from your local cable operator is gapping away from what you can get from the phone company."
Leichtman predicts that the overall industry will add about 2.4 million-2.5 million broadband subscribers in 2013 and about 2.1 million in 2014. "There will be quarters, particularly [seasonally slow] second quarters, when we see some cable companies reporting subscriber losses," he told THR. "But overall there is still some upside left."