2024: The Year of Cable Consolidation?

Nov 21, 2023

By Ted Hearn, Editor of Policyband

Washington, D.C., Nov. 21, 2023 – Current trends suggest a merger wave could wash over the cable industry in 2024.

Broadband isn’t a growth story. Cable TV has a foot and a femur in the grave. Wireless is a hot play for sure – but really just for Comcast and Charter, which are living dangerously by clinging to Verizon’s 5G infrastructure on favorable terms that might not last much longer.

For cable, the days of rapid broadband growth fueled by the stay-at-home pandemic are long gone. According to one count, all major wireline broadband providers added about 53,000 customers in the third quarter, while T-Mobile and Verizon together added about 900,000 subscribers to their fixed wireless access (FWA) base attracted to low prices, no contracts, and easy installation.

FWA competition is starting to sting: Wide Open West’s stock crashed more than 60% after reporting FWA-induced broadband subscriber losses two weeks ago. Colorado-based WOW is expecting more pain in the fourth quarter. And Comcast stunned Wall Street by reporting a third quarter loss of 18,000 broadband subscribers.

On the cable TV side, operators in the third quarter took another massive hit. According to Leichtman Research Group, “top cable providers had a net loss of about 1,015,000 video subscribers in 3Q 2023 – compared to a loss of about 985,000 subscribers in 3Q 2022.”

Meanwhile, YouTube TV continued to appeal to cord cutters by adding 600,000 subscribers in the third quarter. Although Comcast and Charter are fighting back with their new Xumo device, the hybrid cable-streaming approach is untested and may not resonate with consumers who already have their hands full with Rokus, TiVos, and Amazon Fire TV Sticks.

A precarious macroeconomic picture also supports the notion that cable consolidation could dominate the 2024 headlines.

Inflation is taxing the purchasing power of cash on the balance sheet and elevated interest rates are raising borrowing costs – which combined could cause fiber players backed by private equity to slow their deployments in the months ahead. Included in this category are regional Internet Service Providers (ISPs) GoNetspeed, Metronet, and Vexus Fiber. AT&T, meanwhile, has already stepped back from its most bullish fiber deployment forecast.

Cable’s tenuous condition today has in fact been building for a while. Denny Law, CEO of Golden West Telecommunications, said the price of fiber optic cable has shot up as high as 50% since 2018 along with recent higher costs for fuel and labor. Supply chain headaches have left key inputs on backorder for at least six months in some cases.

“All of those things flow through to increase the price of the broadband deployment,” Law told the South Dakota Searchlight in June.

Government support for broadband is not an automatic elixir. Although funding under the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program is about to ramp up, Charter CEO Chris Winfrey has said he might avoid states that tack on onerous conditions to BEAD rules fashioned by the National Telecommunications and Information Administration (NTIA).

Under intense pressure from Capitol Hill, NTIA recently lifted a letter of credit requirement that some smaller ISPs viewed as a threat to their BEAD participation. NTIA effectively wanted BEAD recipients to use the letter to document that they would hold 25% of the grant dollar amount in a cash bank account for the duration of a BEAD-funded project.

“Where state BEAD rules are not conducive to private investment, we will not participate in those states,” Winfrey said last month. "The states that adopt the NTIA’s proposed guidelines on things such as Internet tiers, dictating Internet tiers, dictating pricing, labor practices, those just won’t be attractive states for us to bid in."

The BEAD funding recipients also need to come up with 25% in matching funds, and that could lead to some difficult conversations with bankers troubled by the punitive impact of the Federal Communications Commission’s new Net Neutrality proposals and Digital Discrimination rules, which could lead to rate regulation. Although NTIA has authority to waive the 25% match, it plans on doing so “only in special circumstances.”

Viewed together, the risky political and economic climate cable is facing suggests the time has come to bulk up for self-protection, assuming it will be more efficient to buy than to build.

Support for this approach came in October when Virginia-based Shentel announced it would acquire Horizon Telcom in Ohio for $385 million. Although Shentel executives assigned numerous efficiencies and synergies to the combination, they also pointed out that paying $51,000 per fiber route mile was substantially less than the cost to roll out fresh fiber.

“We believe the $385 million purchase price was an attractive price point to invest, when considering Shentel’s higher trading multiple today and the estimated $75,000 per route mile replacement cost to overbuild a comparable fiber network,” said James J. Volk, Shentel’s Senior Vice President and Chief Financial Officer.

If cable broadband providers in rural markets are looking to sell, Charter could be a buyer for several reasons, including that the company has gained considerable experience in recent years by being more active in rural areas at scale than just about anyone.

Charter is planning on passing 300,000 locations in 2023 by relying on some of the $700 million it has received under the FCC’s Rural Digital Opportunity Fund (RDOF). By extending its network to areas adjacent to its RDOF-supported builds, Charter said it is on course to hit 1.3 million passings over a multiyear period.

Clearly, when it comes to provisioning rural broadband, Charter is all in and it might accelerate its timetable by looking to buy a rural cable broadband operator like publicly traded Cable One. Cable One wouldn’t come cheap, but it’s current market cap of $3.13 billion is way down from its $13 billion stock market valuation just three years ago.