THE COWEN INSIGHT
As we navigate through the post-pandemic “Criticality of Broadband” era, we expect record-setting FTTH deployments over the next 5 years, reaching >80MM HHP. To make sense of the FTTH upcycle four Cowen analysts collaborated, leveraged proprietary surveys, and constructed Cable/Telco/Fiber broadband industry models to identify trends and those best positioned on the road to Gigabit America.
Fiber – Coming to a Neighborhood Near You
We expect the Telco operators alone to build fiber to 38MM homes over the next five years. Furthermore, by 2025, we expect three out of four net broadband additions to be FTTH subscribers. The Cable decade of dominance of DSL share-stealing is over, though we note that it is far from doom-and-gloom for Cable operators.
To make sense of the FTTH upcycle characterized by record-setting deployments for the next decade, in this report four Cowen analysts collaborate across multiple disciplines. They give a FTTH 360-degree view, leverage two Cowen proprietary surveys, and leverage Cowen’s comprehensive Cable/Telco broadband industry database.
This report identifies trends to make sense of the current “2020 pull-forward” noise, shares a broader long-term industry forecast, details each carrier’s FTTH initiatives, examines the bullish regulatory landscape, assesses the risk to Cable operators, and identifies those best positioned in the ISP, network equipment, and engineering & construction industries.
FTTH Doesn’t Lead to Cable’s Demise
One of the key debates is whether broadband is a “zero-sum game”, and more specifically whether the FTTH success equates to Cable’s demise. However, we note that the U.S. total addressable market is also expanding. Our comprehensive industry model (incorporating Big Cable, Big Telco, FTTH builds, FWA, and smaller operators) suggests that the industry will add 17MM broadband subscribers by 2027 for 97% penetration of occupied homes (90% of total homes) from 90% (82% total homes) today. Growth is primarily driven by the post-pandemic “criticality of broadband” and what we identify could be $130B+ of incremental government funding.
Furthermore, Cable will play effective defense, as our proprietary survey shows Cable is expected to lock in existing subscribers with 1 or 2 year promotions, cut prices, bundle with Mobile, and has an affordable pathway to 10 Gbps speeds to easily compete with FTTH. With Cable’s defensive marketing plan and speed upgrades, the vast majority of subscriber losses will be from the 15MM DSL subscribers, not Cable, as our model shows Cable can maintain a still solid 58% market share in 2027 compared to 60% today.
Telco Operators – Transformation Will Take Time, Value Appreciation More of an Art than Science
The next few years will be historic in terms of Telco FTTH upgrades. Consumers will have access to speeds of 1 Gbps+, closing the digital divide, expanding the total addressable market (rural/low-income) and achieving a “Gigabit America.”
After years of hemorrhaging subscribers, we expect Big Telco to stem the tide of losses to Cable, again by taking their own DSL customers and adding 7.7MM subscribers over the next five years. We expect Telco Broadband market share to increase by just 200 bps by 2027E (27% from 25% in 2021E) given the expanding TAM and DSL cannibalization.
Each Telco is coming from a different place, but we generally expect long-awaited residential revenue and EBITDA inflections in the 2023/24 timeframe, and we finally have greater visibility. The key debate for Telcos is “when do investors give credit for the transformation?” as we consider the multi-year journey, enduring years of FCF burn and inflated balance sheets, but steady growth in Fiber Broadband EBITDA (which should command a 12x multiple).
We believe timing the valuation appreciation will be more of an art than a science. We believe investors will focus on the fiber subscriber growth, subsequent fiber broadband EBITDA growth/visibility, build cadence, cost/HHP, and labor/equipment shortages. Each Telco is undergoing a metamorphosis from legacy declining copper assets to next-gen, future-proofed growth companies.
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