U.S. Telecom and Cable & Satellite

Transcription

1 U.S. Telecom and Cable & Satellite Broadband Tax Institute October 2018 Craig Moffett (212) See disclaimers on slides 57-58

2 Craig Moffett Co-Founder and Senior Analyst, MoffettNathanson, LLC Craig Moffett has been elected to Institutional Investor Magazine s All-American Research Team in the U.S. Telecom and/or Cable & Satellite sectors on eighteen separate occasions, including nine separate appearances as the #1 analyst in America in either U.S. Telecom and/or Cable & Satellite. He has also been rated the #1 analyst in the U.S. Telecommunications sector by Bloomberg Markets, and he has consistently ranked #1 in Research Quality in Greenwich Research s annual survey in both Telecommunications and U.S. Cable and Satellite sectors. Prior to founding MoffettNathanson, Mr. Moffett spent more than ten years at Sanford Bernstein & Co., LLC as a senior research analyst. He was previously the President and founder of the e-commerce business at Sotheby s Holdings, the venerable auction house. Mr. Moffett spent more than eleven years at The Boston Consulting Group, where he was a Partner and Vice President specializing in telecommunications. He was the leader of BCG s global Telecommunications practice from 1996 to Mr. Moffett graduated from Harvard Business School with Honors in He received a BA from Brown University phi beta kappa in

3 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 3

4 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 4

5 The Pay TV value chain is being reshuffled massive scale will be required The Pay TV Value Chain Aggregation and Navigation Studios/shows (Production) Networks (Packaging/Branding/ Scheduling) Conglomerates (Risk management) Physical Layer (Transport) Warner Bros. Paramount Netflix HBO Amazon USA TNT Discovery ESPN Nat Geo MTV Nickelodeon etc. Disney NBCU Time Warner Fox Viacom Discovery/Scripps CBS etc. Netflix Comcast DirecTV Hulu Comcast AT&T Verizon Dish Network Charter etc. 5

6 The Pay TV value chain is being reshuffled massive scale will be required The Pay TV Value Chain Aggregation and Navigation Studios/shows (Production) Networks (Packaging/Branding/ Scheduling) Conglomerates (Risk management) Physical Layer (Transport) Warner Bros. Paramount Netflix HBO Amazon USA TNT Discovery ESPN Nat Geo MTV Nickelodeon etc. Disney NBCU Time Warner Fox Viacom Discovery/Scripps CBS etc. Netflix Comcast DirecTV Hulu Comcast AT&T Verizon Dish Network Charter etc. 6

7 The Pay TV value chain is being reshuffled massive scale will be required The Pay TV Value Chain Aggregation and Navigation Studios/shows (Production) Networks (Packaging/Branding/ Scheduling) Conglomerates (Risk management) Physical Layer (Transport) Warner Bros. Paramount Netflix HBO Amazon USA TNT Discovery ESPN Nat Geo MTV Nickelodeon etc. Disney NBCU Time Warner Fox Viacom Discovery/Scripps CBS etc. Netflix Comcast DirecTV Hulu Comcast AT&T Verizon Dish Network Charter etc. 7

8 The Pay TV value chain is being reshuffled massive scale will be required The Pay TV Value Chain Aggregation and Navigation Studios/shows (Production) Networks (Packaging/Branding/ Scheduling) Conglomerates (Risk management) Physical Layer (Transport) Warner Bros. Paramount Netflix HBO Amazon USA TNT Discovery ESPN Nat Geo MTV Nickelodeon etc. Disney NBCU Time Warner Fox Viacom Discovery/Scripps CBS etc. Netflix Comcast DirecTV Hulu Comcast AT&T Verizon Dish Network Charter etc. 8

9 The value creation story hasn t been fully written yet AT&T, Comcast, and Netflix : Past Five Years vs. S&P 500 Source: Bloomberg, MoffettNathanson estimates and analyses 9

10 Comcast/Sky: a platform-agnostic distributor or a satellite TV company? Sky: Exclusive European Content Rights Source: Sky F2017 Presentation 10

11 Re-imagining AT&T as a closed content machine AT&T: Before and After DirecTV and Time Warner

12 Comcast/Sky: what could go wrong? Continued Content Exclusivity Is Far from Assured Disney [Will Disney s DTC strategy mean they pull their content?] HBO [Will AT&T pivot to a DTC strategy for Europe?] Premier League: [Contracts are three years; will FAANGs bid next time around?] Margins [Will FAANGs enter the market with a different monetization theory and wreck margins in the process?] The core business [Will the core deteriorate more rapidly than assumed?] Comcast will need to rapidly pivot to in-house content to insulate against the risk of licensed content losses 12

13 AT&T/Time Warner: what could go wrong? Crossed Lines? Pivoting from high-value DirecTV to low-value DirecTV Now helps wireless but hurts DirecTV Featuring Turner content on Watch DirecTV Now helps wireless but hurts Turner Pushing for a consumption based compensation for programmers is good for DTV but bad for WB Ramping production for HBO is good for volume but bad for margins Like Comcast (Sky), AT&T will have to outrun secular declines 13

14 DirecTV s traditional video product averages an adjusted margin of $49 per month DirecTV Satellite Adjusted Margin per Subscriber,

15 AT&T s DirecTV Now OTT service has no margin at all Live a Little $35 Package: Adjusted Margins 15

16 The pure play strategy has outperformed adventurism AT&T, Comcast, Charter, and Verizon: Past Five Years vs. S&P 500 Source: Bloomberg, MoffettNathanson estimates and analyses 16

17 Different operators are choosing different strategies Not Everyone Can be Right AT&T has chosen to differentiate wireless with content but is there more here than just discounting? Verizon has chosen to focus on network, and turn to advertisers for a second payer but are AOL/Yahoo (Oath) sufficient to provide a viable platform? Comcast still covets being a media giant The NBCU tail is wagging the cable dog Sprint/T-Mobile betting on horizontal scale but regulatory and integration risks remain 17

18 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 18

19 Unit growth in wireless relatively stable Total Subscriber Growth Note: Pre-paid and wholesale adjusted to exclude Lifeline program Source: USAC, Company reports, MoffettNathanson estimates and analysis 19

20 and ARPU is showing at least some sign of stabilization Big Four: As Reported and Accounting-Adjusted ARPU Growth Source: USAC, Company reports, MoffettNathanson estimates and analysis 20

21 After adjusting for accounting distortions, Verizon s post-paid ARPU is the only one growing (I) Big Four: Accounting-Adjusted Wireless Post-Paid ARPU Q YoY Growth: Verizon: 2.1% AT&T: -2.4% T-Mobile: -3.5% Sprint: -4.8% Verizon ARPU includes other revenue (primarily USF and other fees) to conform to the reporting of the other carriers 21

22 After adjusting for accounting distortions, Verizon s post-paid ARPU is the only one growing (II) Post-paid ARPU Growth (As Reported) Post-Paid ARPU Growth (Accounting Adjusted) Sprint ARPU is adjusted for a handset insurance accounting change. 22

23 Wireless service revenue growth starting to improve Big Four: Wireless Service Revenue Growth Rate 23

24 Verizon has been the biggest contributor, and the biggest beneficiary Wireless Service Revenue (As Reported) Wireless Service Revenue (Accounting Adjusted) 24

25 Still extreme separation between winners and losers Post-Paid Phone Net Adds (LTM) Total Branded Phone Net Additions (LTM) Note: AT&T is adjusted to include migrations. Note: AT&T is adjusted to include migrations. 25

26 Comcast s $12 per GB (and Charter s $14 per GB) option offers compelling pricing for below-average data users, and can be mixed with Unlimited lines Xfinity Mobile: Family Plan Example 26

27 Wireless isn t the problem where will AT&T find growth? Wireless Organic Service Revenue Growth Commercial Wireline Organic Revenue Growth Entertainment & Internet Organic Revenue Growth Source: Company reports, MoffettNathanson estimates and analysis Source: Company reports, MoffettNathanson estimates and analysis Source: Company reports, MoffettNathanson estimates and analysis 27

28 Organic growth for the Verizon and AT&T has diverged Organic Consolidated (ex-wireless Equipment) Revenue Growth Rate 28

29 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 29

30 Cable s organic growth is much (much) better but there are questions here, as well Organic Revenue Growth Rate 30

31 The pace of cord-cutting has been increasing and we are still only at the front edge of new vmvpd releases Linear Video Subscriber Growth 31

32 Video subscriber growth: Pay TV subscribership has been declining at an accelerating rate Average LTM Changes in Pay TV Subscribership Attributable to Household Formation and Pay TV Penetration 32

33 with cord cutting clearly gaining momentum LTM Average Occupied Household Formation Cumulative Change in Non-Subscribing HHs (Cord Cutters and Cord Nevers) Source: U.S. Census Housing Vacancies and Homeownership Survey, Company reports, MoffettNathanson estimates and analysis Source: U.S. Census Housing Vacancies and Homeownership Survey, Company reports, MoffettNathanson estimates and analysis 33

34 Satellite feeling the pain most acutely Cable, Satellite, and Telecom: Video Subscriber Growth Rate by Platform 34

35 But video is declining in importance for the cable operators Comcast, Charter, and Cable One: Cable: Video Gross Profit as a % of Total Comcast share of gross profit post-606 accounting changes Cable One is not pro forma for NewWave 35

36 Comcast s real at-risk margin for a cord-cutter that keeps broadband ~$8 Comcast: Adjusted At-Risk Contribution from Cord-Cutting Probability-weighted speed upgrade assumes 50% of cord-cutters pay an incremental $10-15 to upgrade to a higher-speed Internet tier. 36

37 Charter s at-risk margin is similar, at ~$11, but they get there in a different way Comcast: Adjusted At-Risk Contribution from Cord-Cutting 37

38 Commercial Services is an effective offset Comcast and Charter: Commercial Services Share of Total Cable Revenue Comcast and Charter: Commercial Revenue Growth 38

39 The real story is broadband, and broadband market growth has recently begun to slow Broadband Subscriber Growth 4.0% 2.7% 39

40 raising concerns about market saturation Residential Broadband Penetration Incremental Residential Broadband Penetration 40

41 Cable market share gains have not slowed Cable, Satellite, and Telecom: Share of Broadband Net Additions 41

42 and demanded speeds are increasingly beyond the capability of any of the TelCo s copper-based alternatives Cable, Satellite, and Telecom: Broadband Subscribers (Q to Q4 2016) Source: FCC, MoffettNathanson estimates and analysis 42

43 Share gains likely to slow from here Cable s Long-Term Broadband Share Cable Share Forecast Footprint Mix Implied LT Share Versus legacy DSL 90% 33% 30% Versus IP-DSLAM/FTTN 63% 34% 22% Versus FTTH 40% 32% 13% 100% 64% Cable s long-term share likely not much above current share 43

44 Increasingly, the opportunity is in selling broadband to non-video subscribers Penetration of Non-Video Subscribers 44

45 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 45

46 We can t even agree on what 5G really is A Set of Technical Specifications A Set of Spectrum Bands A Set of Use Cases A set of technical standards, mostly developed out of ITU working groups in Europe (METIS and METIS-II, Flex5Gware, SuperFluidity, etc.), promising: Enhanced spectral efficiency Up to 1 Gb per second data rates Hundreds of thousands of simultaneous IoT connections Improved signaling efficiency Super-low latency So-called millimeter-wave spectrum frequencies in the 28, 38, 60 and GHz bands Limited propagation ( foot radii) Very wide bands (up to 800 MHz) Current ownership concentrated in Verizon (StraightPath); AT&T (FiberTower); T-Mobile, and DISH Auction expected in 2019 Fixed wireless broadband (<2020) as announced by Verizon, AT&T, Starry, and others Business and use case unclear Mobility (>2020) applications typically associated with IoT and driverless cars but use cases and business cases don t really exist Limited trial by KT Telecom at Seoul Olympics (2018); broader deployment in time for Tokyo Olympics (2020)

47 Small cells remain an urban phenomenon Macro Site and Outdoor Small Cell Range in Dense Urban Environments, 800 MHz, 1.7 GHz, and 2.5 GHz, To Scale Source: MoffettNathanson estimates and analysis

48 5G will likely be limited to urban markets and therefore a lot less of the population than you might think Percentage of U.S. Population by Density Example: 10% of the population lives on land with a density greater than or equal to 10.6K people per square mile (by Census Tract) Source: FCC, MoffettNathanson estimates and analysis

49 Small cells currently skew to dense and higher-income zip codes Nodes by Population Density and Median Income Deciles

50 Threat from 5G fixed wireless broadband very uncertain How Large is the Addressable Market? Total homes in census blocks of appropriate density with available telephone poles or streetlights, without excessive foliage obstruction not already overbuilt with fiber We still don t have enough information to estimate any of these 50

51 Agenda The Rise of the Closed Media System Telecom: The Growth Challenge Cable: The Growth Challenge Whither 5G? The Omen of the Balance Sheets 51

52 As-reported net debt ranges from $1.0B to $176.6B... As-Reported Net Debt, Current 52

53 ...but debt levels are understated by the exclusion of operating leases and pension/opeb costs Net Debt Including Capitalized Operating Leases and Underfunded Pension/OPEB, Current 53

54 As-reported leverage ratios range from 2.1x to 5.3x As-Reported Leverage Ratios, Current 54

55 Leverage ratios range from 2.3x to 5.4x after including operating leases and underfunded pension/opeb Leverage Ratio Including Capitalized Operating Leases and Underfunded Pension/OPEB, Current 55

56 And Sprint s leverage jumps to 4.8x after adjusting EBITDA for lease accounting Leverage Ratio After Capitalized Operating Leases and Pension/OPEB and EIP/Lease Accounting Adjustments, Current 56

57 Some closing thoughts No Easy Recipe for Success, but Growth becoming harder to come by for all operators Minimizing share loss requires more than just price cutting service enhancement is critical Staying price competitive is an absolute must so strategic cost reduction is just as critical M&A may be part of the solution but only part, and timing matters Dealing from a position of weakness (without a competitive cost structure and service delivery platform) likely to make things worse rather than better 57

58 Q&A 58

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