While the US wireless and broadband markets are expected to be "minimally affected" by the COVID-19 crisis and the possible recession to follow, the nation's commercial wireline service sector will need to brace for a period of pain, a top industry analyst warns.
And that pain will be felt across the board for service providers that focus on enterprise customers, small and midsized businesses and wholesale services.
"We are standing on the precipice of a potentially dramatic decline in macroeconomic growth and business activity," Craig Moffett, analyst with MoffettNathanson, warned in a new report that presents a dim view on the near-term financial impact on the wireline service market wrought by a COVID-19-driven recession.
While there are still many unknowns associated with the effects of the new coronavirus and what future actions will be taken to help slow its spread, Moffett said it's "reasonable" to assume a decline in revenue growth across the US commercial wireline market of 5% to 7% for full-year 2020, widened from a decline of 1.5% in 2019.
Among some individual players, Moffett points out that AT&T and Verizon's consolidated business have "fairly modest exposure" to the commercial wireline market – about 14% of AT&T revenues come from business services and 11% for Verizon. Meanwhile, companies such as Cogent, GTT, Zayo and Uniti have 100% of their revenues coming from that segment, and roughly 75% for CenturyLink. That mix is lower for Frontier Communications (44%) and cable operators such as Altice USA (15%), Charter Communications (14%) and Comcast (7%).
From a high-level view, Moffett said a set of sub-segments in this overall market will be impacted by COVID-19: Overall subscribership (most relevant to SMBs due to potential bankruptcies and closures); traffic volumes (more relevant to larger businesses as some traffic shifts to residential networks); and market share and pricing (driven by a shift from incumbent providers to insurgents that offer price breaks).
Pressure on cable's strong SMB position
Still, US cable operators won't be spared from some of that pain. Business services now account for about 10% of most cable operator revenues, but the effects of COVID-19 will be amplified by the fact that this part of the cable business is heavily weighted on SMBs, such as retail outlets, restaurants and hospitality venues, that are being hit hard by the current crisis. Moffett estimates that roughly 60% of cable business service units come from small accounts, compared to just 20% for major US telcos such as CenturyLink, AT&T and Verizon.
With that risk factored in, Moffett expects a 2% decline in revenue growth in cable commercial services in Q2 2020 versus earlier expectations of "significant growth," and a base case forecast of -3% for Q3 2020. However, the analyst also expects a rebound to flat growth in Q4 2020, with the segment recovering afterward.
Moffett expects SMBs to "absorb a disproportionate share of the damage, but relatively low spend per SMB should act as a cushion." Wholesale revenues and larger, enterprise-level accounts will also get hit, but likely not to the same degree unless there is a prolonged recession, he added.
On the wholesale side, dark fiber revenue is expected to be more insulated given its critical role and longer average term contracts, a scenario that should help companies such as Zayo and Crown Castle Fiber, Moffett surmised.
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— Jeff Baumgartner, Senior Editor, Light Reading