AT&T, Verizon and Tier 2 telcos’ stocks threatened by cable’s broadband speeds, DOCSIS 3.1 migrations

Technology abstract background

AT&T, Verizon and a growing group of Tier 2 ILECs continue to see their core wireline broadband business suffering losses at the hands of cable companies, which have a broader array of high-speed service options. That's a factor that will continue as cable providers migrate to DOCSIS 3.1.

Jefferies said in a research report that besides not having a diversity of bundled offerings, many ILECs' broadband speeds are far lower than what cable operators offer, particularly in areas where telcos only offer lower-speed DSL.

“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,” Jefferies said. “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.”

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Jefferies added that “when broadband adds went negative, it was a major red flag for the health of the companies.”

It’s hard not to notice the second-quarter differences between cable and telco broadband growth.

The top 10 telcos lost nearly 230,000 broadband subscribers during the second quarter. While this is lower than the loss of about 340,000 broadband subscribers in the same period, it is still notable.

AT&T and Verizon may have reported gains with their IP-based broadband and Fios subscriber counts, adding 112,000 and 49,000 subscribers, respectively, but these companies saw sizable legacy DSL losses.

Cable, alternatively, added about 460,000 broadband subscribers in the second quarter.

"At the end 2Q 2017, cable had a 64% market share vs. 36% for telcos,” said Bruce Leichtman, president and principal analyst for Leichtman Research Group, in a release. “The broadband market share for cable is now at the highest level it has been since the first quarter of 2004."

CenturyLink, Frontier, Windstream challenges

Outside of AT&T and Verizon, the challenges at CenturyLink are even more acute with each of these providers seeing large broadband losses during the quarter to cable competitors.

Clearly, the biggest loss was seen at Frontier Communications. Following a challenging integration process after purchasing Verizon’s wireline assets in California, Texas and Florida, the service provider continues to suffer broadband losses.

Frontier lost a total of 101,000 broadband subscribers, ending the quarter with a total of 4.06 million broadband subscribers. The service provider told investors that it has a number of new subscriber promotions in the works to prevent future churn, but it did not provide any specific details about what those promotions will consist of.

CenturyLink also suffered another sizable loss during the quarter as 77,000 subscribers fled the telco for cable competitors. CEO Glen Post said that the losses show the effects of cable’s ongoing gigabit-speed DOCSIS 3.1 drive on its broadband base.

“This was driven to a great degree of our stronger cable competition, particularly 1 gig offerings in some of our key markets, coupled with aggressive pricing,” Post said during the company's earnings call, according to a Seeking Alpha transcript.

Windstream, while completing its ambitious Project Excel initiative to bring 50 Mbps and above speeds to more consumers, still lost 21,800 broadband subscribers.

Jefferies said that slower speeds and the absence of more bundles put this group at a continued disadvantage.

“We see the RLEC/ILEC offerings that lack a wireless/video bundle and suffer from inferior speed (CTL, FTR, WIN) to be the most at risk for continued secular decline,” Jefferies said.

Business service growing pains

But consumer broadband is only one issue for wireline providers. Service providers’ business revenues continue to be challenged by businesses migrating away from copper-based T-1 to Ethernet and cloud services.

This trend was certainly felt across all of the service providers.

At AT&T, business services revenues were $17.1 billion, down 2.7% year-over-year due to continued declines in legacy services and fewer wireless equipment upgrades, partially offset by growth in strategic business.

The telco hopes that its automation service delivery efficiencies as well as SDN and virtualization will enable it to grow more strategic business revenues in the future.

Verizon and CenturyLink saw similar pains. Verizon reported that enterprise revenues declined 4.1% on an organic basis to $2.38 billion due to “persistent trends in our legacy products and pricing compression in the marketplace,” said CFO Matt Ellis.

CenturyLink reported second-quarter enterprise segment revenues were $2.22 billion, down 9% from second quarter 2016, a factor it said was due to revenue reduction associated with its sale of colocation assets as well as a decline in legacy revenues.

“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,” Jefferies said. “The elusive growth is exacerbated by the declining prices due to the strong competition for IP services.”