With DOCSIS 3.1 enabling delivery of gigabit speeds and new bundled service offerings like wireless, cable operators now have an insurmountable advantage over incumbent local exchange carriers (ILECs), Jefferies analyst Mark McCormack contends.
“In addition to a lack of bundled offerings, the broadband speeds offered by the ILECs is in many cases far inferior to that of competing cable offerings,” McCormack said in a note to investors sent out late last week.
“The time to play catch up has passed, given the time to market advantage that cable has, and we expect continued pressures from cable as DOCSIS 3.1 steps up the speed advantage that cable already enjoys. In our view, it is far too late for the ILECs to ramp spend to compete, particularly given high leverage and the significant cost required to expeditiously play catch up."
The catalyst came in the second quarter, when CenturyLink reported the loss of 77,000 broadband subscribers, while Frontier Communications' loss was down 33,000. This came as the top cable operators added another 461,997 high-speed internet users.
“When Broadband adds went negative, it was a major red flag for the health of the companies, in our view,” McCormack said.
“Clearly, the aforementioned declines in broadband subscribers, tangled with the largely forgotten wireline phone, spelled trouble for both revenue and EBITDA for these carriers,” the analyst added.
“This mix shift of very high-margin legacy losses not being fully offset by gains in much lower margin Strategic services has created pressure, and has resulted in multiple dividend cuts for the group, with Windstream recently eliminating the dividend altogether. The shift in revenue is equally as painful for the enterprise/business segments, as high margin legacy products are replaced with Ethernet/IP, or simply lost to larger competitors. The elusive growth is exacerbated by the declining prices due to the strong competition for IP services.”