New Street: AT&T’s fiber build-out cut into Charter and Comcast’s growth—but that won’t last

New Street Research highlighted the decline in residential cable broadband subscriber growth, citing cable company data and its own estimates.

Wall Street analyst firm New Street Research issued a report tracking AT&T’s fiber build-out efforts and how those moves have cut into the growth of Charter and Comcast. However, the firm predicted Charter, Comcast and the rest of the cable industry will eventually be able to rekindle their momentum in the market for high-speed broadband connections and will “outpace consensus expectations, and massively outpace the growth of telcos.”

“Cable continues to capture over 100% of industry net adds; however, their gains shave slipped from a peak of 118% in the trailing twelve months up to 1Q17 to 108% in 3Q17,” the New Street analysts wrote in a research report issued yesterday. “Telco net declines have narrowed considerably in that timeframe, primarily due to improved trends at AT&T. The majority of the drop in Cable adds, from their peak of ~3.7MM in mid-2016 to 2.9MM in 3Q17 is attributable to the slower pace of gains from the Telcos.”

In looking at the recent slowdown of Charter and Comcast’s high-speed broadband internet businesses, New Street traced the situation in part back to the close of AT&T’s acquisition of DirecTV. At that time, in July of 2015, AT&T committed to building out 12.5 million new locations with fiber.

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And, as New Street noted, AT&T has been working toward that goal and has been scoring share as a result. “AT&T has expanded from roughly 1MM homes passed with fiber to 6MM in the past 8 quarters. They are seeing success in markets where they deploy fiber, claiming that penetration rates approach 50% within two years of entering a market,” the firm wrote. “They reported 2.0MM fiber broadband subscribers at the end of 2Q17, and we estimate that has grown to 2.3MM at the end of 3Q17. This implies mid-30% penetration of the fiber footprint compared to 18% overall.”

Indeed, AT&T has itself been pointing to its successes in the area of fiber deployment and the resulting gains of broadband internet customers. In its most recent quarter, the operator said that it gained 125,000 new broadband customers. “Total broadband subscribers grew for the fourth straight quarter,” boasted AT&T CFO John Stephens during the company’s quarterly conference call.

AT&T’s fiber deployments are competing directly with cable operators, primarily Charter and Comcast. As New Street Noted, AT&T has deployed its “Gigapower” fiber service in 57 markets, and fully 55% of those locations fall within Comcast’s footprint.

Further, the firm said AT&T’s competition against cable will increase in the coming years. “We expect sub pressure to mount over the next two years and only to stabilize once AT&T’s has completed their FTTH deployment. We expect AT&T to deploy FTTH to ~2.5MM homes in 2017, ramping to 4MM homes in 2018 and 2019,” the firm said. “Comcast and Charter will continue to take share in the non-fiber markets.”

And not surprisingly, AT&T has been working to goose its growth in its fiber markets with discounts on service and bundlings, including bundles offering fiber, pay-TV and wireless service.

However, New Street said that AT&T can’t afford to continue to offer those discounts; the firm calculated those discounts could result in losses as high as $2 billion, lowering its corporate valuation by $2 per share.

Thus, the firm said AT&T may well lose customers as it increases its rates.

“A typical Cable customer will be faced with 20-30% rate increases when their promotional offer expires,” the New Street analysts wrote. “By comparison, AT&T’s subscribers will face an 60-80% price increase at the end of the two-year promotional period. A step-up of this magnitude will drive high churn among these subscribers. Now that they are bundled with wireless, AT&T may lose the wireless relationship in addition to the pay-tv and broadband relationship (especially with Comcast now offering a competing bundle with wireless.”

Concluded New Street: “We believe Cable broadband adds will face pressure as AT&T deploys fiber and we are lowering our estimates for broadband growth in 2018 and 2019. It may take Comcast and Charter an additional two years to reach our 55-57% penetration target; however, they will still get there, delivering attractive growth along the way.”

New Street isn’t alone in its view that AT&T is leading a fiber assault on cable. In a recent report, Deutsche Bank reached largely the same conclusion, though it also noted that around 81% of the country has broadband and that much of it is underpriced. Cable’s current share of the U.S. wired broadband market stands at around 64%.

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