Wall Streeters explain why cable will beat telecom in the battle for broadband customers

Wall Street

Telecom companies will likely lose the long-term battle for broadband, according to a new survey from Cowen Equity Research.
The stronger economy allows households to pay more for better broadband connections, and cable has an advantage there.
The survey also suggested a slight increase in cord-cutting trends, though the analysts predict it won't impact cable company margins.

We just got an indication that cable companies may trounce telecom operators as the two industries battle for broadband subscribers.

Bolstered by a strong economy and growing necessity for a fast, persistent in-home internet connection, cable companies have continued growth opportunities via share stealing from the telecom industry, according to a new survey from Cowen Equity Research.

"Telco should lose the long-term battle [for broadband] with an inferior price-value proposition as consumers will demand higher speeds," according to the analysts.

The report, published each quarter in front of earnings, surveyed a statistically comparable portion of the US population to understand consumer behavior. Home broadband is becoming so essential that the analysts labeled it a utility, akin to access to clean water and electricity. And the nature of the technology employed by each operator gives cable companies an advantage.

In the telecom sector, the cheapest option for broadband access is typically DSL. DSL — or digital subscriber line — is service that's provided over a copper wire. This type of service is slow and unreliable with limited ability for streaming. The cheapest option at cable companies, on the other hand, is offered over a coaxial cable. That means faster speeds and more reliability, but often at a higher price. Fiber is the fastest and most costly option, and is offered by both cable and telecom companies.

"The stronger economy allows people to pay for broadband," Cowen analyst Greg Williams told Business Insider. "Unemployment is the lowest since the 1960s and GDP is strong."

The survey returned results that said 23% of unsatisfied cable subscribers planned to switch, compared to 36% of dissatisfied telco subscribers who planned on switching.

OTT isn't as big a threat as it seems to cable companies

At the same time, the survey suggested a slight uptick in cord cutting among respondents, as subscribers search for cheaper options for video content. But as cord cutting increases slightly, the Cowen report noted they don't expect a commensurate increase in margin losses.

"OTT doesn't have a lot of relevance," Williams said. "Consumers are not leaving the broadband provider. It has very little impact on margin to cut the cord."

Cable companies are able to keep margin losses down by jacking up their standalone broadband prices when customers decide to unbundle their video packages. And when users drop their video service, cable providers are able to shed the programming costs it takes to provide subscribers with content, like ESPN. So while cable companies lose the revenue accompanied with video service, they also cut the cost it takes to provide it to their customers.

It's a point that cable companies have started to publicly express.

"Cable success as an industry, despite the challenges of standalone video product margin pressure, is because at our core, we provide connectivity," Charter CEO Tom Rutledge said on the company's second quarter 2018 earnings call.

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