Cable sector set to weather a US recession
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Michelle Clancy
| 23 December 2018

As fears of recession take hold going into the new year, the US cable and satellite space should remain somewhat resilient, according to analysts at MoffettNathanson.

The firm said that despite recent market volatility, cable stocks have mostly narrowly outperformed expectations, with the exception of Dish Network (the satellite company has underperformed in both the first and second half of the year). In a recession state, that trend could continue, thanks to the fact that demand and need for broadband market tends to stay steady even in poor economic circumstances – a fact that help most providers make up for video losses.

“This focus on broadband has been at the core of our cable call,” the firm said in its year-end report. “Margins should rise, capital intensity should fall, and multiples should expand as broadband gradually displaces video.”

MoffettNathanson also said that cord-cutting fears are overblown, even if more people are likely to ditch pricey TV subscriptions during a recession.

“We continue to believe investors pay too little attention to new household formation when forecasting rates of decline for video and we believe investors may be overestimating the “conversion rate” of traditional video losses to vMVPD gains,” analysts said.

The team also noted that 5G and wireless substitution for home broadband aren’t going to have the big effect on broadband take-rates that some investors foresee. For 5G, the addressable market according to Verizon and Starry, the first two providers, is only about 30% of the country, located in dense urban areas. AT&T is also overbuilding that same 30% with fibre, scheduled to wrap up in 2019 – thus not only is 5G availability going to be limited, but it will face tough incumbent competition.

There are also technical limitations, the firm said.

“Working with millimeter wave spectrum presents very real physical limitations (distance and penetration),” researchers noted. “There are serious questions about financial returns (particularly for Verizon’s small-cell model).”

Overall, the longer term picture for broadband will remain bright, the firm said, even if unit growth decelerates as the market nears saturation.

“Cable’s market share picture continues to look compelling, and its broadband pricing power story looks largely unchanged,” analysts said. “Cable’s commercial services story looks pretty compelling, too. Yes, the market is slowing down at the top level, but that’s partly because cable is gaining share so rapidly (and repricing incumbent business down in the process).”

Pay-TV divisions will continue to suffer though – but not enough to bring the overall business down.

“Structural changes in the way video is delivered point to a radical reshaping of the video market,” the firm said. “For better or for worse (we’d speculate mostly worse) the industry really does seem bent on moving to a closed model, with profound implications for all involved.”