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COVID-19 measures will 'accelerate' broadband-only subscriptions, analysts say

While the COVID-19 pandemic has impacted nearly every sector, analysts believe that the conditions created by the pandemic are likely to accelerate momentum for broadband services.

"We believe the impact of the recent stay-in-place measures only serves to accelerate the shift to broadband-only households," wrote Gregory McNiff, a cable analyst with Nomura's Instinet in a recent research report. "As broadband-only households increase, customers are likely to purchase higher-tier packages with their savings from the elimination of video packages," McNiff said.

This projected "acceleration" to broadband-only households will lead to more customers prioritizing bandwidth reliability, McNiff wrote. "We believe this dynamic favors the cable operators over the telcos given the former's superior network architecture," he said. In a separate research report, McNiff wrote that he believes the momentum will continue once more of society reopens.

As for individual companies, Matthew Harrigan, equity research analyst at The Benchmark Co., sees upside for Comcast, the largest broadband provider in the U.S. He projected in a June research report that Comcast will add 287,000 broadband customers within its footprint for the second quarter, up from the 209,000 the company added in the year-ago period.

McNiff expects Comcast's high-speed internet revenue for the second quarter to grow from $4.7 billion in the year-ago period to $5 billion for the second quarter of 2020.

Harrigan projects high-speed internet revenue growth for the quarter to be 8.4% at $5.1 billion, while McNiff forecasts similar optimistic broadband growth projections at other major US cable operators.

For Charter, McNiff projects net residential internet additions of 300,000, up from the 221,000 added in the year-ago period. As for revenue, he forecasts that the company's internet revenue will total $4.5 billion, up $9.9% from 4.1 billion in the year-ago period.

Looking beyond the second quarter, MoffettNathanson analyst Craig Moffett wrote in a recent report that Charter's decision to participate in the upcoming Federal Communications Commission's Rural Digital Opportunity Fund auction is "unambiguously good news."

The move by Charter is an effort to extend broadband services into more rural areas. The FCC voted in June to establish procedures for the first phase of the auction for the $20.4 billion fund.

"For Charter, it's almost certainly a financial win," wrote Moffett. "In essence, the subsidies will plug whatever gap is required to flip edge outs [unserved and underserved areas at the edges of their network] from negative to positive ROI," he said.

Moffett also called it a "growth win" for the company and said the funds should be thought of as "costless insurance to ensure that broadband unit growth sustains momentum." "More unit growth will make Charter less reliant on ARPU growth," he wrote.

The first phase of the auction is scheduled to begin October 29.

For Altice, McNiff said the company will see 30,000 net broadband additions for the second quarter of 2020, up from the 13,000 residential broadband net additions from the year-ago period.

Broadband revenue is projected to jump 13.6% year over year for Altice from $806.3 million in the year-ago period, according to McNiff.

However, subscriber losses for pay TV providers are expected to continue to mount, though projections vary about the pandemic's impact at different companies.

McNiff expects video declines at Charter to continue as new streaming platforms launch. For the second quarter of 2020, he projects a net loss of 175,000 residential video subscribers for Charter, an increase from the net loss of 150,000 in the year-ago period.

Comcast's NBCUniversal Media LLC launched Peacock, its streaming service with free and premium tiers, across the U.S on July 15.

Harrigan projects a substantial uptick in video subscriber losses for Comcast, estimating that the company will see a net loss of 521,000 video customers within the Comcast footprint. In the second quarter of 2019, the company lost a net of 224,000 total video customers.

While McNiff expects video losses to continue to mount at Altice, he projects that conditions imposed by the pandemic could have some positive impacts on the company's video business. "We expect both churn and gross adds to decline YoY given stay-in-place measures, but we raise our video ARPU to reflect the preference for higher-tier packages driven by such measures," he wrote in a report.

In the second quarter of 2019, Altice saw a net loss of 21,000 residential video revenue-generating units. In the second quarter of 2020, McNiff forecasts a net loss of 40,000 video customers.

Turning to AT&T Inc., Barry Sine, head of equity research at Spartan Capital, wrote in a July 20 research report that the group is seeing "no discernable strategic benefits" from the company's acquisition of DIRECTV and that it sees "no evidence of the promised synergies with AT&T's DirecTV video distribution business."

Among the three major U.S. cable operators, Comcast Corp. and Altice USA Inc. are set to report second-quarter earnings for the year on July 30, with Charter Communications Inc. scheduled for the following day.

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