CenturyLink, Frontier will need to increase capital to compete with Charter and Comcast

CenturyLink (NYSE: CTL) and Frontier are going to face more powerful competitive forces in Charter Communications (NASDAQ: CHTR) and Comcast (NASDAQ: CMCSA), two cable operators that have been increasing their network footprints via acquisitions and organic builds while upping broadband speeds in multiple markets.

According to an Investors Business Daily report, Morgan Stanley cut its rating on CenturyLink to underweight from hold and on Frontier Communications to equal-weight from buy. These rating drops are related to their geographic overlap with Comcast and Charter.

Simon Flannery, a Morgan Stanley analyst, said in the Investors Business Daily report that "CenturyLink and Frontier may need to increase capital spending to be more competitive" with cable operators in their regions.

Charter Communications, which recently completed its purchase of Time Warner Cable and Bright House Networks, immediately became one of the largest cable MSOs that will control a larger portion of the nation's video and broadband markets.

While CenturyLink and Frontier are increasing broadband speeds, the telcos continue to trail the cable operators which can more rapidly increase speeds, including 1 Gbps, by implementing DOCSIS 3.1 gear on their existing HFC networks.

The two telcos, which mainly serve Tier 2 and Tier 3 markets, will report their second quarter 2016 earnings in early August.

For CenturyLink, the story will center on its ability to regrow its broadband base. Following a quarter where it saw broadband subscribers decline due to a new credit policy, CenturyLink only added 7,800 new broadband subscribers in the first quarter.

However, it appears that CenturyLink has some weapons to lure and reduce the amount of customers churning over to cable. For one, the service provider continues to expand its FTTH service in various markets and it has launched trials to deliver 100 Mbps and higher speeds over existing copper by using a mix of bonding and vectoring technologies.

Frontier, which suffered a number of outages and setbacks following the acquisition of Verizon's assets in three states, will likely report lower broadband subscriber numbers.

Dan McCarthy, CEO of Frontier, told investors during a JP Morgan event in May that it had a large amount of customers who decided to go somewhere else for service. It's likely that these customers were new to the area and decided to go with Frontier versus a local cable provider. 

Frontier's issues have made its customers an easier target for Charter Communications.

In May, Bright House Communications, which recently became part of Charter, began offering up to $240 in credits to cover costs to switch to its service.

Later, Charter Communications and Frontier Communications filed suits against one another Connecticut over false advertising claims. Charter promised customers that it won't see transitional issues that affected Verizon FiOS subscribers when Frontier Communications acquired their assets.

For more:
- Investors Business Daily has this article

Special report: Tracking wireline telecom earnings in Q2 2016

Related articles:
Frontier's McCarthy: Verizon asset integration could have impact on Q2 subscriber adds
CenturyLink plans to reach 14M households with 100 Mbps over copper via vectoring

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