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Wireless will boost US cable performance and help boost broadband prices

When a headline is published claiming that broadband prices in the US are set to double in the coming years, our first assumption is that the findings have come from a report commissioned by a cable company. But this one wasn’t. The bullish forecast is from New Street Research, a US investment analyst firm with a reputation for being close to the mark.

Comcast, the largest cable company in the US, will lead the charge in hiking residential and business broadband prices, according to New Street, which argues that broadband today is underpriced, having failed to keep pace with the explosion in penetration and usage.

“Our analysis suggested a ‘utility-adjusted’ ARPU target of ~$90. Comcast recently increased standalone broadband to $90 (including modem), paving the way for faster ARPU growth as the mix shifts in favor of broadband-only households. Charter will likely follow, once it is through the integration of Time Warner Cable,” wrote the analysts.

There has been a global resistance to paying more for better broadband and largely people need to see a tenfold performance improvement before they will go out and cancel their existing supplier and pay more for a faster service. The high end services are certainly going up, but broadband is getting cheaper per megabit per second (Mbps).

Comcast’s second quarter high speed internet revenue was $3.68bn, with 25.3m subscribers. It had high speed internet ARPU of $40.58 in 2009, rising to over $50 in 2014, and in its most recent Q2 results ARPU slipped backwards to $48. This makes New Street’s projected ARPU of $90, within an unspecified time frame, seem overly optimistic.

While Comcast does offer internet-only services for around $85 to $90 a month, we suspect New Street’s ARPU calculations have included broadband packages bundled with TV, in which case a decent channel line-up and 100Mbps connection from Comcast will set you back $90 today – a strategy the cablecos are pushing aggressively. But if customer instead opt purely for video over-the-top services, rather than a pay TV bundle, then of course they would become broadband only customers.

As pay-TV comes under pressure as a concept, and more and more people choose to live with perhaps a Sling TV subscription, plus DirecTV Now, Netflix and CBS All Access, instead of a Comcast bundle, then more and more people will be on broadband only – but what speed and package will that be?

So doubling broadband returns is not an inconceivable future, but it will be some way off.

Today, Comcast’s Xfinity broadband packages range between $40 and $150 a month, for speeds of just 25Mbps right up to 2,000Gbps (fiber-only). Last year, its cheapest offering was priced at $30 a month, and 10 years ago this was $42 a month. That’s a tiny $2 reduction in 10 years, but a $10 rise in just one year. Although, some of these price fluctuations get lost due to special offers, various bundles and regional variations.

Cable is less susceptible to cord cutting than most other businesses, suggests New Street. Separate, perhaps contradictory, findings from Leichtman Research Group, published just last week, found that 21% of US TV homes do not subscribe to a linear or virtual pay TV service, up from 16% in 2014 and 12% in 2010. The report adds that traditional US cable, satellite and telco video service providers have experienced a 3.1% subscriber base shrinkage in the past year.

New Street said in a client note: “The traditional pay -TV market saw the worst loss of subs on record this quarter. We don’t expect this trend to change anytime soon; however, we think cable should be somewhat insulated because: 1) they should take share in a declining market, helped by the pull-through effect from growing share in broadband; 2) we don’t think cable makes much money in pay TV. In fact, the free cash flow lost from subs dropping pay TV is generally recovered through higher HSD (high speed data) pricing.”

That statement is largely true, and some observers have suggested that broadband makes 95% of cable profits. However going forward, with a particularly broadband animated AT&T, with new offerings due in fixed wireless, multi-dwelling unit G.fast services and its new AirGig backhaul over power lines, cable dominance is not assured.

Comcast’s MVNO venture is another space closely watched by New Street Research, and for which it is equally optimistic, calling it the best offer in the market for a premium wireless services. Subscriber figures for the cableco’s wireless business were revealed this week by a source close to the matter speaking to Bloomberg, claiming that Comcast has added 200,000 mobile subscribers since the service launched in April. That’s more bad news for AT&T and Verizon, which have suffered from successful subscriber poaching strategies by T-Mobile and Sprint.

Last year, New Street projected that the US wireless market will be 10% owned by cable operators by 2020, stealing away an estimated 35m subscribers from large wireless carriers in the process, rising to as much as 20% market share by 2021 – causing incumbent MNOs to lose between $1.8bn and $3.8bn in EBITDA in the period.

Concerning wireless consolidation in the US, analysts at New Street Research said recently that the closer cooperation between the two large cablecos will hasten a Sprint/T-Mobile tie-up, writing in a client note: “The emergence of cable as a serious new entrant significantly improves the odds of a Sprint/T-Mobile merger being approved. This announcement on its own may not be enough to convince regulators that we are in a five-carrier market, but it helps.”

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