The entire pay television industry has been shrinking.
Cord cutting, the concept where people drop their cable or satellite subscription in favor of using streaming services, has increased in every year since 2012. Most pay-television providers have been able to offset those losses by adding internet customers.
Frontier Communications (FTR +0.00%), however, has not been able to do that. Since it became a very minor force in the cable industry by spending $10.54 billion to buy Verizon's (VZ +0.73%) wireline business in California, Texas, and Florida (CTF) in April 2016 it has lost both video and internet customers each quarter.
That's very bad news for shareholders and there is little reason to believe the company has any chance of turning things around. Analysts have, of course, been predicting an acceleration in cord cutting, but data now shows that what was once a trickle has become, perhaps not a flood, but more of a stream.
| Year | Pay TV gains/losses | Internet gains |
|---|---|---|
| 2012 | 170,000 | 2,000,000 |
| 2013 | -105,000 | 2,600,000 |
| 2014 | -125,000 | 3,000,000 |
| 2015 | -385,000 | 3,100,000 |
| 2016 | -795,000 | 2,700,000 |
| 2017 (through two quarters) | -1,065,000 | 1,190,000 |
Data source: Leichtman Research Group.
Why is this bad for Frontier?
When it comes to delivering broadband, Frontier operates like a telephone company. That's bad news because the overall consumer trend has shown cable companies adding internet customers while telephone companies are losing them.
"Cable companies added about 3.1 million broadband subscribers over the past year, while Telcos had net losses of about 550,000 broadband subscribers," said Leichtman Research Group President Bruce Leichtman in a Q2 press release. "At the end 2Q 2017, cable had a 64% market share vs. 36% for Telcos. The broadband market share for cable is now at the highest level it has been since the first quarter of 2004."
Frontier has actually been hit harder by that trend than much bigger rivals like Verizon. In fact in Q2, Forntier lost 101,000 internet customers of the combined 233,000 lost by all telcos. The first quarter was even worse with Frontier losing 107,000 internet subscribers, which was more than double the total losses for all telcos at 44,577 (AT&T gained 90,000 broadband users in Q1).
Basically, broadband is the cure for cord cutting, but it won't work for Frontier.
Losing video customers is to be expected, but dropping broadband subscribers goes against industry trends. Image source: Getty Images.
It's too late to catch up
While Frontier's handling of the Verizon switch-over may have accelerated its problems, the root of its broadband woes are tied to technology. Cable companies have a wider array of broadband choices, including faster options. That's something that's only going to get worse for top-tier players like AT&T and Verizon as well as smaller incumbent local exchange carriers (ILECs) as cable providers continue to migrate to the improved DOCSIS 3.1 standard.
"The time to play catch up has passed, given the time to market advantage that cable has, and we expect continued pressures from cable as DOCSIS 3.1 steps up the speed advantage that cable already enjoys," wrote Jeffries in a a report written about by FierceTelecom. "In our view, it is far too late for the ILECs to ramp spend to compete, particularly given high leverage and the significant cost required to expeditiously play catch up."
Two tough trends
Frontier isn't an ILEC in every market it operates in (in Connecticut, it's a CLEC, a company set up to compete with the established local carriers). It does, however, use telephone-based technology to deliver it services in all its markets.
That puts the company in a tough position. Its going to lose video subscribers as cord cutting grows and there's very little reason to believe it could buck that trend. And, unlike some of the bigger cable companies, it won't be able to offset those losses with broadband gains because, in many cases, its customers will have better options.
Call that a double whammy or a 1-2 punch of bad news, but these are trends Frontier likely can't change. The company has been moving in the wrong direction since the Verizon deal, and cord cutting plus broadband customers leaving for its competitors makes a turnaround nearly impossible.
