Moody’s Investors Service expects cash flow in the cable industry to rise at a 6% clip as broadband increases are expected to outpace cord-cutting by a 2:1 margin.
In a report issued Tuesday (Oct. 31), Moody’s said its positive outlook on the industry is driven by consolidation synergies and broadband demand, even in the face of stiff competition from Netflix and soon, 5G wireless offerings.
While cable video subscribers have been declining – Moody’s estimates the business lost around 1% of its video base this year – broadband growth was 5% and the credit rating agency expects that trend to continue over the next 18 months. In the report, Moody’s projects the industry will replace video subscribers by at least 2 times as many broadband customers “and probably many more, with only moderate video losses.”
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Cost savings as the industry consolidates, especially resulting from existing mergers like Charter-Time Warner Cable, and Altice-Cablevision-Suddenlink are expected to contribute between 1.5% and 2.5% of cash flow growth and nearly 5% over a two-to-three year period.
Higher margin broadband services grew eight times faster than video in the second quarter, according to Moody’s, so its future forecasts are relatively conservative. In its report, Moody’s noted that a minimum replacement ratio of 2:1 is needed to protect top line revenue, while a 0.5:1 ration protects gross profits.
While Netflix has been a growth engine, it has served more as a complement to cable offerings rather than a replacement, Moody’s wrote, noting that cable has managed to retain most of its video base during the past five years when Netflix increased its U.S. subscribers from 22 million to 51 million.
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“Ironically, there is a solid argument to be made that these services, which require more and more broadband, have been a cable (not video) catalyst rather than a killer,” Moody’s wrote, adding that for every Netflix subscriber gained, cable gains a high-speed data customer.
Moody’s called that trade off “very favorable to the business model with HSD a much higher-margin business, with higher barriers to entry, and no exposure to programming-cost inflation.”