"It's good to be cable."
That's the simplistic assessment of COVID-19's sweeping impact on the cable industry from MoffettNathanson analyst Craig Moffett, who views cable as among the industries best positioned to withstand the recessional effects of the virus.
But that statement merely scratches the surface on the totality of a report issued today by Moffett that takes a look at cable's exposure to a COVID-19-driven recession, with a particular focus on how the coronavirus crisis could affect Charter Communications.
"Cable is rightly viewed as defensive," Moffett wrote. "It will be much less affected than most by what by most accounts will be an astoundingly deep recession."
Although the full impact of COVID-19 on the cable business can't yet be known, Moffett notes that the effects of it will both impair and aid different elements of the cable business – from video and business services to its all-important broadband services category – to varying degrees.
Charter, he points out, is by far the largest US-based "pure play" cable operator and, therefore, among the most well-positioned to weather the crisis. While Comcast is a bigger cable operator, its Sky and NBCUniversal businesses have direct exposure to the effects of COVID-19. Notably, Comcast has already warned that COVID-19 could have a material negative impact on its overall business, including NBCU's parks division.
Although Charter's pure play position will help it weather the coronavirus storm, each business category won't come out of it completely unscathed, according to Moffett.
Charter's broadband ARPU stands to get a boost from voluntary speed upgrades and, interestingly enough, from video cord-cutting as bundled discounts are unwound, Moffett predicted. He noted that all cable operators he's spoken to have seen an uptick in this area.
Moffett believes Charter is fairly well protected from speed downgrades, as the MSO sells a small set of tiers: Standard (100 Mbit/s or 200 Mbit/s), Ultra (300 Mbit/s or 400 Mbit/s) and 1-Gig.
On the other hand, cable's broadband subscriber growth and new service installs will certainly slow down during the lockdown. "Across our coverage (wireless, telecom as well as cable) we're assuming that share gain shifts will be virtually frozen for most of Q2," Moffett explained.
Thus, cable, the share gainer in this scenario, will be hurt. "The share gains that might otherwise have come during the lockdown period will, at least in the way we're modeling it, be lost forever," the analyst noted.
Overall broadband growth will also take a hit as slower new household formation, a key driver in the category, causes negative residential broadband sub net additions in Q2. "A negative quarter would have only a minimal impact on financial results, and essentially no impact at all on longer term warranted value … but it could be a shock to see," Moffett wrote.
ARPU gains and slower broadband sub growth could be a wash for Charter, with its residential broadband revenue forecast only minimally affected, he predicted.
Moffett expects pay-TV cord-cutting to accelerate and go "from bad to worse" during a sports freeze and as US households seek ways to tighten their belts. However, pay-TV cord-cutting is not necessarily a terrible thing for cable ops, as it drives up their broadband ARPU – Moffett estimates that Charter's standalone broadband price is $8 to $10 higher than the bundled price.
Video subs will also be impacted by slower household formation. Moffett sees an acceleration in residential sub losses by 200, 350 or up to 500 basis points by the end of Q3, depending on the severity of the recession.
Video ARPU could also take a hit as customers move to less expensive, skinnier programming tiers, offset a bit by an increase in VoD revenues.
Moffett has already determined that COVID-19 will wreak havoc on the US commercial services market, with a particular detrimental effect on cable due to its emphasis on small and midsized businesses that might not survive the crisis.
Moffett notes that commercial services account for 14% of Charter's total cable revenue, with 60% of that revenue amount coming from the SMB segment.
"This segment will almost certainly be the hardest hit by the coronavirus shutdown," he wrote. However, the degree of that impact is still foggy because of the uncertainty surrounding how the US government stimulus package will impact smaller businesses.
Some analysts have already expressed concerns that US cable's mobile momentum will be slowed by the current crisis, as fewer consumers will be making the trek to stores to change their providers.
Although Charter's relatively new wireless segment accounted for less than 2% of consolidated revenues in 2019, it's a share gainer in the category. That means lower switching activity would hurt Charter's mobile subscriber results more so than incumbents such as AT&T and Verizon, Moffett noted. He expects that switching activity to be depressed over the next couple of quarters as customers postpone device upgrades.
For Charter, he assumes net adds will slow from his pre-recession models for Q2 and Q3 and then return to his pre-recession forecast in Q4 2020.
Rolling it all up
With all of those scenarios combined (and despite the uncertainties), Moffett expects Charter to be "significantly less impacted" by COVID-19 than many of its peers.
"Remarkably, even after stressing our model for broadband net additions, video cord-cutting, business services, and local cable advertising, we still project that Charter's EBITDA will grow in 2020 and, indeed, in every year of our forecast," the analyst concluded.
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- US broadband usage starting to plateau – OpenVault
- New Household Formation Vital to Cable's Broadband Growth Story in US
- COVID-19 to inflict pain on US commercial wireline sector – analyst
- Behind the numbers: How COVID-19 could change the US telecom industry
— Jeff Baumgartner, Senior Editor, Light Reading