Cable – The Winds Are Also Shifting on Enterprise Side of the House
June 13, 2022 | There has been so much talk about the fact that Cable is under pressure in its consumer broadband business as the telecom players have (finally) woken up to the need for more fiber. But perhaps investors are not looking at another lurking issue in cable’s ENTERPRISE segment which may be somewhat hiding in plain sight. And Mr. Rutledge may have given us a very big clue as to what this is.
On the Charter Q1 2022 earnings call, in answering a question about Charter’s business services segment being a “bright spot” for the company, CEO Tom Rutledge started talking about some of the positive trends it is seeing – but then shifted. He said the following: “I know virtually all the cable operators are seeing some pressure in the wholesale segment for what was at one time a sort of side business almost – cellular backhaul.” The comment came somewhat out of left field – as this was not specifically asked. He went on to say: “we're doing well [in Enterprise] – but we have to drag in that line of business of the cellular backhaul, which is going away….” Going away?!?!
Importantly, this is not a headwind unique to Charter (note the part of the quote which said: “virtually ALL the cable operators”), but it is one worth calling out as I would bet many on the Street may have missed this subtle point. The bigger question is what is driving this? In some ways, this may be a second derivative outcome of the telecom awakening to fiber.
While Verizon rarely talks about its One Fiber initiative anymore, one of the key pillars of that effort was cost reduction. A major cost for telecom carriers is backhaul! At the Wells Fargo conference last year, Kyle Malady, Verizon’s CTO noted the following when asked about backhaul costs and future plans: “We have about 1/3 of our cell sites and small cells on our own fiber asset (backhaul). ….we like the owner’s economics of that. We also like the control of the network because we can maintain quality and reliability.”
With AT&T now targeting fiber to 30 million homes (by 2025), our strong guess is this fiber push will serve multiple things beyond fiber to the home. And for a company focused on cost reduction of $1B this year alone, cellular backhaul is a logical place to target. And don’t forget the other major wireless player – T-Mobile. While T-Mo is not necessarily targeting its own fiber build, it is benefitting from all the price compression resulting from the new competition. At a conference last month, Neville Ray (T-Mobile’s President of Technology) noted that while 100% of its leases are leased, the market for backhaul is “hyper-competitive.” At this same event, Ray said T-Mobile is able to lease multi-gig fiber for not much more than it once paid to lease copper lines. Good for T-Mo….not so great for the companies who provide that backhaul service.
So back to cable – the main lesson here is while the focus by investors these days is that the consumer broadband sky is falling for the cable sector, an argument can be made that the ‘worry list’ for this group maybe should be looked at with a bit of a wider lens. High margin revenue that is ‘going away’ typically is never a good thing unless it can be swapped out with other new high margin revenue sources. And unless I am missing something, I cannot see that manna coming down from heaven anytime soon.