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Cable Listens to Wall Street: Standalone Broadband Pricing Heading for $80/Month

Phillip Dampier October 18, 2017 Competition, Consumer News 10 Comments

Cable operators that have watched their stocks get pounded after warning their third quarter earnings would reflect an undeniable trend towards cord-cutting are considering dramatically raising broadband-only pricing to $80 or more to protect profits.

Comcast is among the largest cable companies responding to repeated calls from Wall Street analysts to boost broadband pricing, hiking broadband-only rates to around $65 a month after a customer’s $40 promotional pricing offer expires. Charter Communications also hiked prices earlier this year to $65 a month for its entry-level 60 or 100Mbps package, with further rate increases expected in early 2018. But those incremental rate hikes are not enough to satisfy analysts who fear cable’s video earnings losses are already higher than the revenue gained from charging more for broadband service.

In a note to investors, Morgan Stanley said the cable industry’s efforts to jack up prices for those dropping video service have made some progress, noting most companies raised prices by 12% in 2017, establishing a new beachhead rate of $65 a month — the rate broadband-only customers should now expect to pay.

“As video revenue growth is increasingly pressured, leaning on data pricing is tempting to sustain earnings,” said Benjamin Swinburne, a Morgan Stanley analyst in a report.

But recent rate hikes don’t go far enough for some. Prices must rise at least another $15 a month to satisfy Jeffries analyst Mike McCormack and restore industry profits lost from cord-cutting. McCormack notes customers who have not canceled cable television are being insulated from the most dramatic rate hikes impacting cord-cutters, pointing out the average customer with a bundle of services now pays around $49 a month for broadband service — $16 less.

“Cable companies are likely to raise stand-alone broadband pricing in order to combat the EBITDA declines from downsizing,” said McCormack in a report. “This practice is already evident and justified given the lack of a bundling discount. Based on our analysis, we estimate Comcast would need to raise stand-alone pricing to roughly $80 in order to break even from a profitability perspective.”

Swinburne

Jonathan Chaplin, an analyst for New Street Research who has called on the cable industry to double broadband pricing for more than a year, thinks the marketplace is ripe for sweeping rate increases.

“We have argued that broadband is underpriced, given that pricing has barely increased over the past decade while broadband utility has exploded,” New Street said. “Our analysis suggested a ‘utility-adjusted’ ARPU target of ~$90. Comcast recently increased standalone broadband to $90 (including modem), paving the way for faster ARPU growth as the mix shifts in favor of broadband-only households. Charter will likely follow, once they are through the integration of Time Warner Cable.”

Wall Street analysts typically use code language that avoids portraying the marketplace as a monopoly or barely-competitive duopoly, instead preferring to note there is little risk or headwind to prevent operators from boosting prices or using their large market share to their advantage. Chaplin argues that cable television is no longer to profit center it used to be — broadband is.

“In fact, the [free cash flow] lost from subs dropping pay-TV is generally recovered through higher [broadband] pricing,” said Chaplin.

Many analysts also argue that most of the proceeds collected from charging higher broadband prices should be used to buy back shares of stock or returned to shareholders, not used to upgrade or expand service. In fact, Wall Street is currently punishing Altice USA, sending its initial stock price from $30 a share to just $24.49 this week. One of the reasons for the fall is the money its Cablevision unit is spending to replace its coaxial cable network with fiber optics. AT&T’s stock has also suffered as the company continues to spend money on expanding its AT&T Fiber service while combating cord cutting with its U-verse and DirecTV services.

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FredH
FredH
3 years ago

If no one saw this coming – they were idiots. Next come the data caps for everyone.

EJ
EJ
3 years ago

They better do it while the getting is good. Raise your price and be put on the radar for unfair rate increases. Attempt to sell that you NEED to increase rates to a Bernie type president that fires that douche canoe of a FCC chairman to hire someone more inline with his/her beliefs. So you have three years to milk your $90 internet price. Mind you I was paying that for a long time to a COOP for 10 meg, but that is neither here nor there. As of right now internet providers can guarantee that they can raise prices… Read more »

Matt
Matt
3 years ago

Until an operator has the guts to give true à la carte options to the customer the trend is just going to continue. Everyone I know who has cut the cord has said the same thing. People are willing to pay for what they watch but not all the “hanger-on” channels so to speak. And there were plenty of mergers and consolidation under Obama as well. I don’t think it’s going to matter unless there is an administration willing to break up the big boys again or make sweeping legislation in regard to municipal broadband that’s currently being strangled out… Read more »

Larry Gall
Larry Gall
3 years ago

This has become far, far too important a resource for the likes of these jerks to control (in it’s entirety). The jerks I’m referring to are the Hollywood movie houses that started us down this path. Here’s a brief recap.. Whether it’s the cable companies buying into movie studios, or vice versa, the end result is a merge of the two. Now, what was the motivation? Hollywood, tired of years of falling ticket sales at theaters, while people preferred to stay home and watch instead, wanted to go where the eyeballs were. They didn’t just want to regain former movie… Read more »

EJ
EJ
3 years ago
Reply to  Larry Gall

Trump and Pia are a blessing in disguise you will see. As long as someone somewhere can muster a decent Bernie type person we only have three more years of this. The power will shift to far away from consumers creating a a door the size of a semi to regulate broadband as a utility. Then the game will change. You will either see more competition or utility based regulation. Either way the consumer will benefit. It is unfortunate this is the culture of America, in that things have to be pretty bad before we act. Still this is going… Read more »

George
George
3 years ago

It’s a good thing Charter was allowed to buy up Time Warner, or else we’d still have $15/mo cable internet service packages available…

If you’re not a heavy user, there are options. Unlimited cellular on a Mobly from ATT was only $20 for quite a while. Sprint has some similar options. I’ve helped a few retired folks boost their neighbor’s WiFi signal so they can at least share the costs. And with any luck the telco in your area will have much lower pricing.

JayS
JayS
3 years ago

Will these price hikes attract over-builders, like Google, to fire-up the trenching machine again? Insight the likes of AT&T, Verizon, T-mobile, Sprint and US Cellular to accelerate the deployment of 5g-fixed internet? Speed the launch of, soon to be deployed, LEO Satellite constellations? If it does not do any of these, the price of Cable/Internet is priced correctly. Sure, I want lower prices, but it initially takes higher prices to attract competitive innovators into the market.

Dave
Dave
3 years ago

How long before democrats force households to buy cable so they can get “real news”?
If they could force us to buy health insurance, then why would this be hard to imagine?.
The left wing are scum and the reason our founders wanted us armed.

Roger
Roger
3 years ago
Reply to  Dave

Better get your tin foil hat tuned up, Dave. The idea behind the ACA was a noble one. The idea of mandatory health insurance was to build the pool of clients so that the risk of taking on people with pre-existing conditions and to remove yearly and lifetime maximum was spread over a much larger base of clients. This, in turn, SHOULD have stopped the price from escalating quickly while covering a lot more people. This is the system that works so well in Switzerland. Unfortunately, too many lobbyist got their scummy little hands into things and made the bill… Read more »

Limboaz
Limboaz
3 years ago

What!? No mention of anti-trust hawk Paul Weiss being nominated to head the FTC? He needs to break up the tech behemoths, like Comcrap, Slime Warner, Google, Amazon, etc. That would be a good start. Of course, bringing competition into the Internet marketplace is pretty hard when the cost of competitors digging up entire cities to lay fiber and cables is prohibitive. This is a problem that will bedevil us for some time to come. I do think ISPs will have to be regulated like power and water utilities eventually, as much as it pains me to say that as… Read more »

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Stop the Cap!