In several of my previous BTR columns, I discussed how North and South American cable operators, telcos, all-fiber providers, utilities, and other broadband players are steaming ahead with fiber-to-the-premises (FTTP) deployments. Despite an uncertain economic environment, rising labor costs, and continued supply-chain shortages, the frenzied pace of fiber installation shows few signs of slowing down.
This month, instead of running through general market trends like I usually do, I would like to focus more on how two leading U.S. cable operators – Altice USA and Charter Communications – are pivoting to fiber builds and getting some interesting results. Their examples may well prove instructive for other cablecos either already undertaking or still contemplating their own shifts to FTTP networks.
Fiber forward with Altice USA
Let’s start by looking at what is probably the most fiber-forward of big cable companies, Altice USA. Altice, the fourth-largest cableco in the United States, has been leading the industry’s charge to all-fiber networks. Over the past four-plus years, the operator has overbuilt its legacy hybrid fiber/coax (HFC) network by extending fiber lines to nearly 2.2 million homes in the greater New York City metropolitan area, including just shy of 1 million new households last year.
In fact, Altice extended fiber lines to an impressive 251,000 homes in the fourth quarter of 2022 alone, after adding a hefty 321,000 homes passed in the third quarter and 270,000 in the second quarter, accelerating into a record annual pace of deployments. The latest wave of deployments came after the operator brought fiber to 390,000 homes in 2020 and another 271,000 in 2021.
And Altice is not stopping there. Plans call for the operator to bring fiber lines to at least another 900,000 households passed this year, boosting its grand total to beyond the 3 million mark. That amount would enable the company to cover more than half of its New York metro region franchise area with fiber, which would be about one-third of its entire nationwide footprint.
“I’m a big believer in fiber as the best broadband technology for the future,” declared new Altice CEO Dennis Mathew, speaking on the company’s fourth-quarter earnings call in late February. “We are going to continue to drive fiber in the East.”
While Altice has recently scaled back from its earlier, even more ambitious plans to upgrade much of its more rural southwestern U.S. territories to FTTP, it still intends to install fiber in some of them. The company’s latest capital spending plan calls for deploying fiber lines this year to 50,000 homes in Suddenlink territories, rebranded as Optimum West.
“In 2023, we will press ahead with a fiber build across the [New York] tri-state area, as we’ve made great progress here and it’s a relatively low cost for us to upgrade,” Mathew said on the Q4 earnings call. “Across the western footprint, though, we’re going to look to be more opportunistic about where we upgrade for fiber in the near term, focusing on areas that give us the best return on investment.”
Moreover, Altice is carrying out a “new-build growth” initiative that enabled it to pass 200,000 homes with FTTP lines in areas adjacent to its legacy regions last year. This “network edge-out” program is targeted to add another 150,000 homes passed this year, mainly in the operator’s western regions.
“For 2023, new builds remain a significant driver of growth and we plan to deliver at least another 150,000 passings as we balance the pace of rollout against the volume of fiber passings we want to achieve,” Mathew said.
While going heavy on fiber is an expensive proposition in the short term, Altice is clearly betting that its aggressive, capital-intensive fiber deployment strategy will pay off in the long term. Indeed, the MSO has committed to spending another $1.7 to $1.8 billion on its fiber buildout program this year, after laying out $1.9 billion on it in 2022 (up 55% from the year before) and more than $1.2 billion in 2021.
Fortunately, this historic pivot to fiber appears to be starting to pay dividends for the operator. After slogging through multiple fiscal quarters of broadband subscriber losses and revenue declines due to fierce competition from Verizon and other telco rivals, especially in the coveted New York metro area, the cableco is beginning to turn things around.
In the fourth quarter, for instance, Altice trimmed its residential broadband customer losses to 8,000, with subscriber growth resuming in its western footprint. That marked a big improvement from the 43,000 customers that it lost in the prior quarter and the 16,000 subscribers lost in the year-ago period.
Similarly, the operator is starting to see its broadband revenues stabilize, its churn rate decline, and its customer experience metrics improve, among other key measures.
“We’re seeing benefits of fiber from a churn perspective, from an ARPU [average revenue per user] perspective,” Mathew said. “We know that fiber, from an operating perspective, delivers incredible experience from a speed as well as from a network management and maintenance perspective.”
These early signs of a financial rebound emerge as Altice rolls out 2-gigabit and 5-gigabit symmetrical services over its new fiber lines, putting it in the forefront of large MSOs. In its latest earnings report, the company revealed that its new 5-gig and 2-gig Optimum Fiber Internet services are now available in its New York metro region across Long Island and Connecticut. As a result, the company closed out last year with multi-gig service available to 45% of its households passed by fiber.
Moreover, Altice reported that it is achieving 40% penetration rates for 1-gig or faster service in the fiber new-build areas. Plus, approximately 20% of its total residential broadband customer base now take 1-gig speeds, offering the company a significant growth opportunity.
“We are seeing signs of recovery,” Mathew summed up. “But the need to remain focused and disciplined in our strategy and capital allocation is critical.”
Charter and fiber
For its part, Charter has not been nearly as bold or as brash as Altice about its fiber deployment strategy. But, in its quieter way, the nation’s second-largest cable operator has been getting more aggressive about shifting to FTTP as well, as it seeks to take advantage of public subsidies from the federal government’s Rural Digital Opportunity Fund (RDOF) and other funding sources.
Indeed, in 2022, Charter built fiber out to about 200,00 homes as part of its overall goal to extend FTTP lines to more than 1 million locations under the first phase of the RDOF program. In 2023, under that subsidy program, the company aims to add another 300,000 rural households across its footprint.
And that’s before we start talking about the U.S. government’s much larger Broadband Equity, Access & Deployment (BEAD) program, which is now making available nearly $42.45 billion in public funding for new broadband networks across the country. Like many other leading cablecos and telcos, Charter also intends to rely on BEAD funds to extend its reach substantially.
“You’re essentially building a [new] cable company…over several years from scratch,” new Charter President and CEO Chris Winfrey noted two years ago while he was the company’s CFO.
As with Altice, this emphasis on new fiber builds is beginning to pay off for Charter. Company executives say they are seeing rural households snap up subscriptions when fiber hits their markets.
Speaking on the company’s fourth-quarter earnings call in January, new Charter CFO Jessica Fisher said the operator has been achieving healthy 40% penetration rates in its fiber new-build areas within the first six months of turning on service. The company reports that it’s spending roughly $3,000 per home passed to build the new rural fiber networks.
“We continue to grow after we hit that 40% at six months, but you can time them in that way,” Fisher said. Speaking on the same earnings call, Winfrey said he also expects the operator’s penetration rates in the new-build areas to grow.
In recent reports on Charter’s ambitious rural fiber buildout strategy, two Wall Street analysts applauded the company’s rural fiber approach. They argued that Charter’s financial returns on investment should come out much higher than the returns that Charter could realize from buying other cable properties or repurchasing its stock shares.
For Charter, there’s “no better use of resources than rural expansion,” the analysts at New Street Research argued in a recent report on the operator’s rural fiber strategy. “Our analysis suggests that Charter creates four to five times as much value with every dollar they invest in rural expansion than with share repurchases at current prices…. In rural markets, they build an asset worth $9,100 (per home passed) at a cost of $4,200, creating value of $4,900…. They are also far better off investing in rural than buying extant cable assets.”
In his report, Craig Moffett, a chief analyst at MoffettNathanson (a unit of SVB Securities), pointed out that growth in rural regions is much more predictable than growth in more competitive urban and suburban markets because the operator “faces little or no terrestrial broadband competition” in the rural areas. He also noted that Charter’s aggressive rural edge-out strategy offers some cushion against lagging broadband subscriber growth in its legacy regions.
As a result, he concluded, Charter’s rural expansion strategy is “a clear positive” for the company. “Upon reflection, Charter’s estimate of ‘mid-to-high tens’ IRRs [internal rates of return] sounded pretty good.”
So, as you can see, both Altice and Charter offer lessons on what cable operators of different shapes and sizes can achieve with fiber. It will be interesting to see how quickly other cablecos follow their examples.
Gary Bolton is president and CEO of the Fiber Broadband Association.