Cable stocks are hard to own (again) for a whole new reason

The cable-cut movement has certainly proven frustrating for cable TV companies. The same applies to their shareholders. There is some consolation, however, in the fact that the growth in cable companies’ broadband business has offset this large-scale churn of their cable TV subscribers.

Now broadband growth is about to hit a wall. That is the finding of a recently published study by the telecommunications market research company Leichtman Research Group. The high-speed internet market in the United States is approaching – or perhaps already – reaching saturation point. From now on, the key players in the industry can at best hope to simply exchange existing customers with each other.

What does this mean for corporate investors? Let’s take a look.

Saturation is an issue

As of November, 90% of US households can surf the Internet from their homes. And of that 90%, 99% you enjoy access to high-speed internet connections. But before you think the numbers mean that 10% of the potential market has yet to be tapped, know that more than half of the country’s non-Internet subscribers don’t own a computer.

Connect the dots. Population growth aside, the US broadband market is the largest it has ever been. And for that purpose, you should know that the US Census Bureau reports population growth of less than 1% for both 2021 and 2022. This in turn means there will be fewer people having babies in the years to come.

Leichtman’s results aren’t hard to believe either, even though they’re based on a relatively small sample of just under 2,000 people. Komcast‘s (CMCSA -0.23%) and Charter Communication‘ (CHTR 0.05%) Broadband subscriber growth has slowed significantly since early 2022.

With these two companies together accounting for more than half of the country’s total broadband market, their fortunes are representative of the rest of the country’s broadband service providers. In the same direction, although not shown on the map, AlticeUSA has actually seen its total broadband subscriber base shrink since late last year.

And it’s not just cable’s broadband customers. AT&T as well as lumens also lost fixed-line broadband customers in the third quarter of 2022, according to Leichtman Verizon CommunicationsThe fixed-line broadband customer base grew by just under 35,000. These tepid results mark a similar decline in the number of consumers paying for high-speed Internet services provided by companies other than cable TV providers.

Data source: Leichtman Research Group. Chart by Author.

While not immune to the impact of market saturation on their potential growth, some wireless companies are contributing to industry saturation and the resulting churn from cable’s broadband business.

T Mobile now serves around 2.1 million broadband customers who don’t need cables to or from their homes. Verizon has approximately 1 million such subscribers. The two companies propose that together they could serve between 11 and 13 million of those fixed-line customers before the end of 2025.

Of course, this growth only exacerbates the saturation/competition problem for cable companies like Charter, Spectrum’s parent, and Comcast, Xfinity’s parent.

Time for Charter and Comcast to answer tough questions

It’s not necessarily the end of the world for all traditional cable names. Comcast is also the parent company of film and television studio NBCUniversal, streaming platform Peacock and Britain’s Sky. The company is also growing its mobile phone business at a surprisingly fast pace, and by the end of the third quarter of 2022 it had nearly 5 million mobile customers. Meanwhile, broadband remains a cash cow for most cable TV broadband providers.

On the whole, however, it’s more of a problem for these players than not. High-speed Internet is Comcast’s largest revenue stream, accounting for 20% of the company’s revenue. For charters it is even more extreme. A little over 40% of its revenue comes from broadband versus a more modest 32% from cable TV.

All of this means that high-speed internet service providers will be forced to figure out how to navigate the new, saturated environment – ​​which will likely involve a bit of cost management consideration. Traditional cable TV companies, already on the defensive due to shrinking cable TV businesses, are facing the brunt of this challenge. Neither Charter nor Comcast will be particularly compelling investments until the two organizations can sort out their response to broadband industry headwinds.