Greetings from Kansas City and Cedar Rapids as we remember the twenty-fifth anniversary of the 9/11 tragedy. Thanks to the sacrifices of many, we remain free from the drumbeats of consistent terror. If you were too young (or among the 100 million Americans who have been born since 9/11), we encourage you to talk to those who lived through the days and weeks that followed.
This week, we continue our look back at 2Q earnings (and preview 3Q broadband losses for cable) with an evaluation of the cable industry’s current scale advantage. Challengers such as AT&T, Verizon, T-Fiber and smaller Fiber to the Home (FTTH) providers are hoping to quickly reduce those advantages through aggressive market share gains led by discounts on higher speeds. We analyze Comcast’s view of competition and provide some additional insights.
The Fortnight That Was
There were a lot of headlines, but not a lot of value changes for the ten companies we track (Fab Five +$212 billion, Telco Top Five unchanged for the week). Wireless/ FTTH telco stocks were favored over cable, and Apple’s new product launches (detailed below) were the primary driver of Fab Five changes.
.Interest rates are continuing to rise thanks in large part to government deficit spending and increased global debt demand related to infrastructure deployments. Headline inflation (see nearby chart) continues to remain high (+3.4% year-over-year, unchanged from July) as petroleum price hikes creep into things like airfares (+2.7% month-over-month and up 23.4% year-over-year – more from the release here). However, new cars (+0.6% year-over-year), used cars (-2.3%), motor vehicle insurance (-5.1%), food at home (+2.2%), medical care services (+2.5%) and shelter (+3.0%) dragged down the rate. These six components make up nearly 65% of the index. As goes energy, so goes inflation (and interest rates).
The Atlanta Fed’s GDP Now tracker is still forecasting a 3Q real GDP growth rate of 4.4% as of Friday (details here). We think that this rate will continue to glide down to 4%, which would be the highest quarterly growth since 3Q 2025. Imports continue to grow thanks to increased chipset and other accelerated electronics purchases, widening the trade deficit. It’s important to note that a real growth rate of 4.4% implies a nominal growth rate of 7.5% or higher – not an insignificant number.
Apple held their annual September hardware event, the first one led by CEO John Ternus. While the foldable phone launch stole the headlines, Apple introduced many improvements to their iPhone Pro and iPhone Pro Max devices. Storage cost options increased as much as $500 per device, and battery lives will improve to 36 hours for the iPhone 18 Pro and 45 hours for the iPhone 18 Pro Max (up from 33-39 hours on the current iPhone 17 Pro and Pro Max models). This PC Mag article does a terrific job of outlining all the details – the changes to the processors alone should drive strong adoption. Bottom line: The iPhone 18 Pro and Pro Max launches will be very strong, and the $100 baseline price increase will be easily absorbed by the wireless carriers. The success of this launch will not only be driven by product improvements, but also by the increasing expiration of 36-month equipment installment plans (and the addition of these longer duration payment options by T-Mobile).
Many of you asked us for thoughts on the iPhone Duo. Our first piece of advice: Do not be deceived by large backorder intervals – we believe, as a few articles have stated (one here), that supplies are going to be limited in the first year of production. This is not the iPhone Air (one of Apple’s few duds), but it is also not the iPhone X (one of many iPhone blockbusters). Unlike the iPhone 18 Pro (which will be free for most switchers with trade-in), the Duo is not available for pre-order until mid-October and we anticipate that most wireless carriers will not lead with Duo offers. Bottom line: Supply limitations will increase backlogs, but those backlogs will not last through January.
Finally, a comment on recent Brightspeed financial disclosures. While the company is looking at asset-backed securitization options, their auditors are sounding the alarm on the company’s current ability to pay their debts (Bloomberg article here – Apollo Global’s stock declined 3.5% on Sept 1 on the news and is down 5.3% in September). For those of you who are not familiar with the company, here is their current network map (link here):
We think that the company is going to need to look at selective asset sales (likely to AT&T) as a part of their restructuring. Missouri and the Carolinas would be great places to start.
2Q Earnings Review – Economies of Scale
“History never repeats itself, but the kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken fragments of antique legends.”
– Mark Twain (and Charles Dudley Warner), The Gilded Age: A Tale of Today, 1873
There are many reasons cited for the cable industry’s demise: lack of customer value, confusing products and pricing, poor service history, love of new technologies, etc. Regardless of the reason, the cable industry can’t seem to shake the “anyone but cable” tag that is attached once fiber to the home enters as a competitor.
Having a firsthand seat as the Triple Play (Internet+Video+Phone) was rolling out 20+ years ago, we see many of the elements (“broken fragments” in the Mark Twain quote) being used against cable as an incumbent. Our thesis is clear: Fixing cable’s reputation is solving the wrong problem. The cable industry needs to lead the technology revolution inside the home.
Instead, the cable industry has taken to traditional economics to justify their projected losses. Jason Armstrong’s statement at the Goldman Sachs Communacopia + Technology Conference says it all (apologies for the lengthy quote):
“I think one of the things that is new, we mentioned this on the second-quarter call, that we were starting to see irrational competition. It popped up a little bit in the second quarter. I would tell you it’s continued into the third quarter. So when we see fiber pricing, standalone fiber pricing, in the $30 to $40 range for a gig, when we say irrational, that’s what we mean by irrational. That to us is not a rational price point.
When a company like that has to sit in front of this room and say $1,500 to go build out a household, $2,000 rural markets, substantially more than that, and that’s — the economic case for that is built on ARPU of this and penetration of this, $30 to $40 as a starting point on a gig product, which is your flagship product and higher speeds than fixed wireless, is not a rational price point, right?
And so as we look at it, we think we’ve been incredibly rational in our approach to the market. We think as you look at broadband and wireless and think about the converged opportunity over time, our entry into broadband, we got lucky, quite frankly.
We for 60 years had plant that was allocated to video and coax cable into a household and could naturally transition that plant from video into broadband and do it in a high-capacity way. So we’re off and running obviously on that. We have been for 20-plus years, but more recently taking that plant to multi-gig symmetrical has been the strategy, but that is a several hundred dollars per household transition. Copper to fiber is a potentially thousands of dollar transition.
So I point that out because when you see pricing the way we’ve seen pricing, that’s — you’d really question, I think, returns, especially on a standalone basis. So if you look at that, our intention and our goal and what we think we’ll do this year is, on a year-over-year basis, we do think full year we’ll improve our broadband subscriber losses. I think quarters are going to look different within that. This particular quarter, I don’t think we’ll improve year over year. So the pressure we’ve seen, in particular with irrational fiber pricing, is going to cause that. But as we step back, incredible hand to play.”
Based on our market research, this appears to be a shot at AT&T. Given their strategy to bundle whenever possible, they are likely offering a standalone 1 Gbps price in anticipation that the customer will bundle with AT&T once any equipment installment plan expires. As a reminder, AT&T (pre-Lumen) competes with Comcast in markets like Chicago, Miami/ Ft Lauderdale, San Francisco, and Houston.
What Comcast and cable are missing is the franchise value discussed in the previous Brief (here). In one construction project, there is infrastructure for AT&T Wireless, AT&T Business, and AT&T Fiber. Residential is not bearing all the costs for Houston. On a given downtown street, there are retail stores, multi-dwelling units, single family homes, and businesses. Each of these revenue streams comes with unique use cases, value propositions, and CLVs for AT&T. Viewed through this lens, a $50 price point (generating contribution margins of 75% or $37-38/ mo.) for 1 Gbps is highly rational if AT&T’s market share is low (likely the case in new copper-to-fiber communities). At $2000/ home passed that’s 50-55 months (4+ years) of customer revenues to break even on the fiber investment.
But we know from the previous Brief as well as from other conversations we have chronicled that AT&T is not thinking about payback, but rather a 7–10-year internal rate of return. Viewed in that light, standardizing on 1 Gbps (more than enough bandwidth for most households for the foreseeable future) is a strategically smart move as it sets a price/performance ceiling that is minimally attractive to fixed wireless alternatives while piquing switching interest from homes that have had Comcast for decades.
We are also developing a thesis around in-home wireless network offload, something we thought had been used by everyone for the last decade (we were clearly incorrect that mobile voice over Wi-Fi adoption was ubiquitous, and our research shows that around 40-50% of wireless traffic offload occurs in commercial buildings and residences unless the device’s connection manager defaults the wireless user to Wi-Fi). If AT&T owns the broadband connection, why should any wireless traffic destined for an AT&T tower not be routed through Wi-Fi? At that point (absent interference between the handset and the home Internet access point) doesn’t AT&T control the connection? Does the spectrum savings defray the fiber build cost, particularly in multi-dwelling units (MDUs)?
Lastly, the standard of a “bundled world” (Video+wireless+broadband) is less attractive than it was a decade ago. The fragmented alternative of Roku + YouTube TV + YouTube Premium + Netflix is OK with most households. YouTube’s algorithm is materially better than Xumo’s and pricing is similar. Wireless decision timelines are going to increase due to T-Mobile’s movement from 24-to 36-month equipment installment plans. If cable is willing to enter the iPhone promotion arena with more aggressive iPhone 18 offers than the Big Three wireless carriers, then we will change our thesis. So far, aggressiveness has been confined to MRC discounts (e.g., free or 50% discounted line for up to a year). While valuable, it’s not as compelling as a full product match of Verizon’s or T-Mobile’s iPhone 18 offer.
Bottom line: Cable continues to enjoy substantial economies of scale with broadband. As Jason states above, their incremental cost to deploy symmetrical speeds is several hundred dollars per home passed. What could cause greater market share losses isn’t a continued 1 Gbps promotion, but through tier speed pricing (see T-Fiber pricing nearby – $20/ mo. isn’t a big leap for many families). We think speed will be used as a differentiator due to low incremental costs and perceived value. Cable needs to start thinking like a challenger.
We will start our Apple iPhone charts (separate post coming out Sunday afternoons) on September 20. The next full Brief will be dedicated to data center capital spending trends. In the meantime, if you have friends who are interested in being notified each time we publish a Brief, please have them sign up at www.sundaybrief.com.
Go Chiefs, Royals and Sporting KC!
Important disclosure: The opinions expressed in The Sunday Brief are those of Jim Patterson and Patterson Advisory Group, LLC, and do not reflect those of CellSite Solutions, LLC, or Fort Point Capital.
