New Household Formation Vital to Cable's Broadband Growth Story in US

Jeff Baumgartner
News Analysis
Jeff Baumgartner, Senior Editor, Light Reading
1/14/2019



Penetration rates and stealing market share from the telcos remain important avenues for the US cable broadband growth path, but the rate of new household formation is a more critical -- and perhaps less appreciated -- metric in determining how much runway is left for what's become the industry's most important business, a top analyst says.

Tracking that rate of growth has never been more important, Craig Moffett, analyst with MoffettNathanson LLC , said a new report, "Broadband Outlook 2019," as high-margin broadband -- not video -- becomes cable's "core product," and as investors view cable operators as infrastructure companies rather than as media conglomerates. Comcast Corp. (Nasdaq: CMCSA, CMCSK), which owns NBCUniversal LLC and UK-based Sky , is a notable exception among US cable operators.

"Investors broadly understand that broadband is a better business than video, and moreover, that broadband is much more highly valued by customers than video," the analyst said. "Cable's pricing power story is all about broadband, not video In short, video just doesn't matter very much anymore. Broadband does."

And that has played into stock swings. When a cable operator beats broadband estimates, the stock has tended to go up, and do the opposite when broadband sub growth has shown signs of slowing. Moffett estimates that broadband has penetrated about 80% of occupied US homes.

With respect to penetration, cable's position has not changed much -- it's still gaining share -- despite FTTP competition from the likes of Verizon Communications Inc. (NYSE: VZ), Google Fiber and AT&T Inc. (NYSE: T), while aggressive and promotional pricing by rivals have had modest results at best. It's too early to know how new 5G-based fixed wireless services will tilt the scale with respect to in-home broadband replacement. (See Broadband Incumbents Should Be 'a Little Bit Nervous' About Starry Analyst and 5G Fixin' to Become 'Largest Existential Threat' to Broadband Providers Analysts.)

Household data critical, but tough to track
Moffett said it's not an overstatement to stay that new household formation is "now likely the single most important input into broadband unit growth forecasts," and one that gets far too little attention. While that household data is a vital puzzle piece in determining broadband growth trends and working out which cable stocks are best (and least) well-positioned in that key marketplace, locating those data pieces is a tough task.

That data "is terribly frustrating to track -- data sources are available only with a delay and are often contradictory -- but new household formation is likely to be incredibly important to cable stocks," Moffett wrote.

Though broadband penetration rates have been slowing (3.7% in Q3 2016, to just 2.3% in Q1 2018), new household formation gains have reaccelerated to almost 3%, Moffett estimates.

Taking that a step further, he believes that new household formation of about 1.6 million contributed about 1.2 million broadband net additions over the last 12 months.

As household formation rates differ on a regional basis, they have varying degrees of impact on the MSOs covered by Moffett. "These trends appear to most clearly advantage Cable One, and they most clearly disadvantage Altice USA," he wrote. "They likely narrowly favor Charter over Comcast."

Of that group Cable One Inc. , with a footprint concentrated in high-growth Texas, Idaho, Arizona and secondarily in New Mexico and Oklahoma, makes it "likely a net winner here" given its exposure to faster-than-average household formation growth overall. (See Cable One Gets Credit for Putting Pipes Ahead of Programming.)

The other extreme is Altice USA , which is concentrated in slow-growth New York state (the former Cablevision Systems properties is equal to about two-thirds of Altice USA's overall footprint), and exposed to slower-than-average household formation.

Comcast, meanwhile, has somewhat greater exposure to this key household formation growth and a "modest net loser" in this respect, while household formation in Charter Communications Inc. areas is growing at roughly the national average, Moffett noted.

— Jeff Baumgartner, Senior Editor, Light Reading

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