Cord cutting will get worse, but the financial impact will be limited

Binge TV watching bowl of popcorn
Wells Fargo pointed out that broadband-only subscribers who have cut the cord consume more data and that places increased emphasis on investing in the cable plant to improve throughput and capacity. (Renato Arap/E+/Getty)

During and after the COVID-19 crisis, cord cutting will get worse for cable companies. But the financial impact for those same companies will be limited.

Wells Fargo expects that video subscriber losses are going to accelerate for the biggest cable providers in the U.S. For 2021, the analyst firm now predicts Charter will lose 725,000 (up from a previous estimate of 520,000), Comcast will lose 1.37 million including business subscribers (up from a previous estimate of 1 million) and Altice USA will lose 195,000 (up from a previous estimate of 165,000).

That’s the bad news for cable companies, which are already bracing for accelerated video subscriber losses this year amid the dearth of live sports and abundance of economic uncertainty caused by the pandemic. However, Wells Fargo stressed tested different video subscriber loss scenarios and found that even in the most extreme cord cutting circumstances, the financial impact to adjusted EBITDA and free cash flow will be limited, particularly since it will be partially offset by broadband.

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In a scenario in which video subscribers decline at a 5-year CAGR of -10%, Wells Fargo estimates headwinds of approximately 20-40 bps on adjusted EBITDA and unlevered free cash flow (or adjusted EBITDA minus capex) by 2024.

“In our extreme scenario (‘really really bad’) of -20% 5-year video sub decline CAGR (4-6x current rates), Adjusted EBITDA and Unlevered FCF are only pressured by 50-100 bps by FY2024,” wrote Wells Fargo analyst Jennifer Fritzsche in a research note. “While the loss of video subs is an optical hit to revenues, the impact to profitability metrics is minimal given the substantial margin differential between high-speed broadband (+60%) and video (+15-20%). As more OTT plans take control of eyeballs, it will likely only further reinforce the need for a faster broadband pipe, in our view. This ‘need for speed’ should drive further subscriber upgrades to higher speed tiers (and translate into continued broadband ARPU growth).”

Wells Fargo pointed out that broadband-only subscribers who have cut the cord consume more data and that places increased emphasis on investing in the cable plant to improve throughput and capacity. The firm said average broadband usage has been growing historically at an approximate rate of 25-30% and that the COVID-19 pandemic has accelerated anticipated broadband consumption.

“While it’s unclear how data usage will trend the rest of FY2020 as states continue reopening, we do believe the longer-term trend of +25-30% increases to data usage will continue,” Fritzsche wrote.

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