oc Copal arts Lc Capital eid Markets Etgunmartgveconcom RBCH town an Jonathan athin@ beam com Patrick aeson Associate) January 24,2022 (646) 618-6563, Cable: Not as Easy to Love, but Too Good to Hate- Assessing Competitive Threats Across Broadband ‘ur View: Following a strong multi-year run, cable stocks lke ATUS, CHTR, and CMCSA are now down between 19-50% since August as sentiment has quickly turned negative driven by a slowdown in broadband subscriber growth and fears that competitive intensity against telco fiber and fixed wireless will increasingly challenge fundamentals. These pressures are not new — we had highlighted them in ‘our deep dive from 2019 Cable Cowboys — Wanted: Dead or Alive (ink) as eventually posing risk to cable broadband subscriber growth. While we were too early with our cautious stance, these risks have now become too real for the market to ignore and have weighed on sentiment. Now, based on our analysis of these threats we believe the Street's negativity has become too draconian. In this report, we: (1) outline our expectations for the telco fiber threat (including propriety subscriber butlds); (2) argue that fiber builds will likely accelerate DSL subscriber losses and also hinder the long-term growth of fixed wireless access; (3) provide detailed estimates for the US. broadband market, including share shifts and ‘our concerns over rising market penetration; and (4) update our estimates for ATUS, CTHR, CMCSA, 'TMUS, and VZ. We upgrade CHTR and CMCSA to Outperform. ae G ac ¢ am Yn we faa > = =) fo} ire} Right-sizing the telco fiber threat. Nearly every major public and private telco operator has outlined Initiatives to expand their fiber footprints. Looking at our sample of telco operators, we expect total telco fiber homes passed will grow from 41mm in 2021 to 71mm in 2025. To help frame the competitive impact, we put together a proprietary analysis where we estimate broadband subscribers for each cohort of new fiber homes passed in each quarter from 1020-4025 for each operator based on a set penetration schedule, Putting it ll together, we expect telco fiber broadband subs to grow from 15mm. in 2021 to 26mm in 2025. While clearly negative to cable, itis well below the roughly 28-38m range we often hear from bearish cable investors that assume telco operators will build to 70-75mm homes and achieve 40:50% penetration in short order. To us, this ignores the reality that it wll take years for penetration in new fiber markets to ramp a dynamic that is even more critical when build plans are ‘meant to ramp over time (e.g, Frontier) since the actual sub growth from the later vintages would be realized even further out. We see blended penetration exiting 2025 at 36.5%. Therefore, we believe concerns over the near- to medium-term subscriber growth have been overblown. Telco fiber builds will ikely drive accelerated DSL subscriber declines. We expect most fiber footprint expansions will be upgrades of legacy copper networks. Therefore, we see a meaningful portion of telco fiber sub growth sourced by declines across each telco’s own DSL subscriber base as opposed to directly from cable. The pace of declines across DSL is particularly critical when thinking through the Street's concern that US. broadband penetration is reaching saturation. Further, we think itis fair to assume that fiber expansions will occurin areas where the telco operators can justify returns around it, whether itis because of positive demographic trends (e.g., high population growth, high income) or favorable competitive dynamics, For the latter, this would include markets with relatively weak competition as ‘opposed to scaled players like Charter or Comcast, which we expect will have an increasingly compelling value proposition with mobile offerings. We do not see fixed wireless access scaling. We expect solid FWA subscriber growth across Starry, T-Mobile, and Verizon over the next few years, expanding from 161k in 2020 to 831k in 2021, 2.3mm in 2022, and 3.8mm in 2023. However, we expect net adds will decelerate from ~1.5mm in 2022/2023 to ~900k in 2024-25 as the subscriber growth prospects quickly shift from the low-hanging fruit in underserved rural and select suburban areas towards cable/fiber footprints where we expect competitive intensity will only continue to increase in the coming years. (Continued on page two)Capital Markets RBC January 24, 2022 Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband While continued FWA network expansion in 2024-25 could pose some tisk (particularly from Verizon}, we believe growing consumer demand for high download/upload speeds will eventually limit subscriber growth ~ particularly as the services will be mostly powered by mi band spectrum. We model 2.6mm total home internet customers in 2026 for TMUS (below uidance of 7-8mm) and 2.9mm in 2025 for Verizon (<5.8% penetration vs. management suggesting a potential path to 20% eventually). Broadband penetration remains a concern. Broadband penetration of residential homes in the USS. has increased meaningfully from ~80.0% pre-COVID to ~85.6% today, and our subscriber build across cable, telco fiber, telco non-fiber, fixed wireless, and satellite suggests penetration will surpass 93% in 2025. As a result, subscriber growth for the entire industry will become increasingly dificult and dependent on share gains, potentially posing downside risk to cable broadband subscriber growth, pricing power, and potentially FCF as operators ramp up opex/, capex to better compete. Upgrading CHTR and CMCSA both from Sector Perform to Outperform. We continue to believe the recent moderation of broadband subscriber trends is being misattributed by the Street to elevated competitive intensity and fueling terminal growth concerns. Both Charter and Comcast have seen record-low churn, and noted the sub net add pressure has instead been from fewer selling opportunities from subdued market activity. We acknowledge that sentiment may not shift until underlying macro trends normalize and there is greater visibility into an improving sub trajectory In the meantime however, we see consensus subscriber estimates as now largely de-risked, while strong trends across ARPU and margins remain overlooked. Over the last few “soft” net add quarters, we believe both Charter and Comcast have provided a sneak-peak Into the long-term underlying EBITDA/FCF growth profiles of their cable businesses when sub growth does eventually moderate, suggesting terminal growth may be even more attractive than previously anticipated despite the modest broadband subscriber volatility, We view valuation as attractive for both CHTR/CMCSA at 9.1%/7.9x 2022 EV/EBITDA vs. 11.0x/9.3x:in early August and ‘our PT's implying 10.0x/9.0x.Capital Markets Li:te Table of contents January 24, 2022 Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband Right-sizing the fiber threat. Telco fiber builds wil likely drive accel ing DSL subscriber declines We do not see fixed wireless scaling Share shifts across the U.S. broadband market . Estimate changes. Altice USA. ATT. Charter Comcast. TMobile VerizonCapital Markets RBC Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband Right-sizing the fiber threat January 24, 2022 Fiber build activity from telco operators is ramping Initial fiber build efforts from the majors included Verizon's Fios expansion (roughly 2005- 2010) and ATT (2015 to mid-2019 as part its FCC commitments related to the DIRECTV acquisition). Fiber footprint expansion for the overall industry has decelerated since then, also reflecting stable or minimal build from other key players like Lumen and Frontier (which was constrained ahead of its bankruptcy in 2020). ‘Now, the vast majority of public and private telco operators have been embolden by growing consumer demand for gigabit speeds (vs. more of a niche product a decade ago), lower cost to build (previously ~$1.0-1.5k per home vs. now roughly $500-1,000 depending on population density, terrain, ec.), and improved access to capital (particularly from strategics), and have ‘outlined initiatives to ramp up their fiber builds over the coming years. Looking at announced fiber footprint build initiatives: ‘© AT&T plans to grow from 15mm residential fiber homes passed currently to 30mm in 2025; ‘= Brightspeed (the asset Apollo is acquiring from Lumen, covered by RBC Capital Markets ‘analyst Bora Lee) plans to grow from “0.2mm to 3mm over the next five years; © Consolidated Communications (not covered) expects to grow from ~0.Smm to “1.9mm in 2025; Frontier (not covered) expects to grow from 4mm to +10mm in 2025; Lumen management sees its retained footprint growing from 2.5mm towards its TAM of 12mm; ‘© Verizon management commentary suggests to us it plans to grow its footprint from ~16.5mm today to +18mm in 2025; and ‘+ Windstream plans to grow from 0.8mm to +2mm locations in 2025. Rolling al ofthese up, we expect total fiber homes from telco operators will row from 41mm in 2021 to 71mm in 2025. Of this “30mm increase over the next four years, we expect AT&T to account for 43%, 19% from Lumen (retained asset), and 18% from Frontier — Le. the top three operators amount for ~80% of our assumed fiber footprint expansion. Note that build plans announced by smaller operators e.g, Brightspeed, Windstream, Consolidated Communications, TDS, Shentel, ec) in aggregate also reflect a notable source of market growth.Capital Markets Kits Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband Exhibit 1 - Telco residential fiber homes passed a 339 a aaa Residential fiber hhomes passed (mm) ae = = | 1 166 a ase : 78 a 2o24e 20216 20236 20256 mater Verizon ‘= Frontier Lumen (post divestitures) m Brightspeed = Windstream January 24, 2022 Impact to cable Growing fiber footprints are a clear negative for cable operators given rising competitive intensity that will diminish subscriber growth and pricing power while necessitating greater network investments that risk rising capex and weigh on FCF and capital return. Telco fiber typically garners 40-50% terminal penetration in a footprint gh download/upload speeds and low latency. Asa result, cable investors have increasingly become concerned that telco fiber broadband subs wil grow from roughly ~15mm in 2021 to 28-38mm_ in 2025 (assuming 2 40-50% penetration rate of an estimated 70-75mm homes passed). While we fully agree that growth in telco fiber is an indisputable headwind for cable fundamentals and stocks, we also believe concems over the near- to medium-term subscriber growth have been overblown given that it will ikely take years for penetration in new fiber markets to ramp. For example, AT&T management has recently discussed achieving 40-50% penetration in four to five years (note, back in 2017-18 management had suggested it was seeing “50% penetration in two or three years, suggesting sub growth is not always straightforward). While Frontier has a target of 45% terminal penetration, it expects its 2020 builds will hit 15-20% penetration over the first 12 months. Consolidated Communications’ fiber penetration targets by cohort are 14% in 12 months, 24% in 2 months, 33% in 36 months, and low-40% over a five-year horizon. This dynamic is even more critical to be mindful of for telco operators whose fiber build plans are meant to ramp over time (eg, Frontier, which expects to add 1.0mm in 2022 and 1.6mm in 2023 vs. 1.7mm in each of 2024 and 2025}, asthe actual subscriber growth from these builds will most likely be realized further out. To better gauge the potential subscriber growth associated with telco fiber builds, we have pput together illustrative subscriber estimates for each cohort of new homes passed in every {quarter from 1020-4025 for each operator based on a set level of ramp in penetration (partly inspired by Frontier and WideOpenWest's disclosures).5 _ ee Competive Threats Acros Broadband larkets RBC We provide a condensed version of our ATS build to illustrate our framework. For example, we estimate that AT&T grew its footprint by 300k in 1021. For its new fiber builds, we assume AT&T will have a 2.0% penetration in the first quarter, 17.5% in the first year, and eventually reach 45% penetration five years later. Therefore, we expect AT&T's subscribers attributable to the 1021 new builds are 6k in 1021, 53k in 4021, and 135k in 4025, Exhibit 2 - Condensed AT&T fiber subscriber build to illustrate our framework Ser ae ae gg eee re re ar ee i ge ne tae ae ae ae ae Pee esata oe enna aceon) Below we outline the estimated cadence of fiber broadband penetration for new builds by operator that we used in our analysis. Our estimates for AT8T, Frontier, and Verizon are the same, and assume a 45% terminal penetration. We assume a 40% terminal penetration rate for most other operators pending greater visibility in their execution across legacy or new builds. Cincinnati Bel’s penetration (excluding Hawaiian Telcom) was already at 49.7% in 2021 (the last quarter ahead of going private), giving us more comfort assuming it can drive penetration closer to 55% longer term. January 24, 2022 6: _ ee Competive Threats Acros Broadband larkets RBC Exhibit 3 - Estimated cadence of fiber broadband penetration following a new build (Our full residential fiber broadband subscriber forecasts for the eight telco operators in our sample are laid out at the end of this section starting with Exhibit 8. Note that for fiber passings, where possible we have used residential locations. Certain operators only disclose total fiber passings, which include customer/commercial locations. In these cases, we have estimated residential passings assuming they represent roughly 90-95% ofall fiber passings. Putting ital together, we expect residential telco fiber broadband subs to grow from 15mm in 2021 to 26mm in 2025. OF this “11mm increase over the next four years, we expect AT&T to account for 49%, Frontier for 15%, and Lumen (the retained asset) for 15% ~ i.e. the top three operators account for ~79% of our assumed fiber footprint expansion. Exhibit 4 - Telco residential fiber broadband subscribers 260 no 8 4 ae na a 1.8 73 —_— — m n 2019 2020 20216 2one 20236 24 Residential fiber broadband = AT&T Verizon sa Feontier subscribers (mm) Lumen (postavestitures) _m Brightspeed sm Windstream January 24, 2022 7Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Capital ‘Competitive Threats Across Broadband Markets LTS We expect annual net adds to ramp from 1.8mm in 2021 to 3.0-3.1mm in 2024-25. Exhibit 5 - Telco residential fiber broadband net adds 3,036 323 am = = =e «| rs 2 x a =e ee = Residerta her broadband mAreT ton o Seo ieee Some tedrean This growth is meaningful, particularly considering that residential broadband penetration across the U.S. is already fairly elevated at “88% exiting 2021. That said, we believe it’s still less than what many bearish cable investors expect given their view of a much more accelerated ~ and we believe unrealistic ~ penetration ramp after these operators enter into new areas, Based on our build, we see blended penetration exiting 2025 at 36.5%. Exhibit 6 - Telco residential fiber broadband penetration 150% x6 00% wom -_ 365% 729% 200% ee le 250% 200% coos soe toe FESS ISIS FS OOOO IS IIIS SIE EEE ES nar —vervon Residential fiber broadband penetration —— eter omen (pest dvesttures) === Blended tral Our quarterly estimates are laid out below. January 24, 2022 8Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Capital Broadband Markets. Lis , Exhibit 7 - Telco residential fiber broadband market estimates for key operators January 24, 2022 9; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets January 24, 2022 10; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 9 - Brightspeed residential fiber estimates January 24, 2022 n; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 10 - Cincinnati Bell residential fiber estimates (excl. Hawaiian Telcom) * January 24, 2022 v7; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 11 - Consolidated Communications residential fiber estimates E January 24, 2022 3Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Capital oe petve Treats Across Broadband Markets RBC Exhibit 12 - Frontier residential fiber estimates January 24, 2022 “; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 13 - Lumen residential fiber estimates (excl. assets being divested) January 24, 2022 15; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 14 - Verizon residential fiber estimates January 24, 2022 16; able: Nota Easy to Lave, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 15 - Windstream residential fiber estimates January 24, 2022 7Capital Markets Kits Telco fiber builds will Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband likely drive accelerating DSL subscriber declines We estimate that our sample of major telco providers had ~30mm residential broadband subscribers atthe end of 2021, with “15mm fiber and “15 non-fber subscribers. While expectations for meaningful fiber subscriver growth over the next few years have come up, we believe some are overlooking the fac that most of the fier footprint will be uogrades of Tegacy copper networks Therefore, the majority ofthe tlc fiber sub growth willbe sourced by declines across thei own OSL subscriber bases Exhibit 16 - Residential telco broadband subscriber mix and growth estimates Residential telco broadband subscriber mi 30,000 25,000 20,000 15,000 10,000 5,000 i Residential telco broudband subscriber growth 20.0% 608 100% 5.0% 05 “50% 10.0% 15.0% 200% 25.0% 30.0% SISEFISISISES ESP ISSISIS S Residential telco broadband Residential telco broadband —Toto! subscribers (000) Fiber a Non-fiber Fiber subscriber growth . non fiber January 24, 2022 We are not suggesting that this is a net positive ~ ultimately this still suggests cable operators will see higher competition and lower penetration in their existing footprint and future builds. However, the pace of declines of DSL subs is critical when thinking through market concerns that US. broadband penetration is reaching saturation. Further, we think iti fair to assume that fiber expansions will occur in areas where the telco operators can justify returns around it, whether itis because of positive demographic trends (e.g., high population growth, high income) or favorable competitive dynamics. For the latter, this would include markets with relatively weak competition as opposed to scaled players like Charter or Comcast, which we expect will have an increasingly compelling value proposition with mobile Given Charter and Comcast's relative size (58mm residential broadband subs in 2021), there will of course be many footprints where the two will see incremental fiber competition, but all else being equal, we believe it's likely that a telco operator would choose to target the other ~19mm residential cable broadband subscribers in the U.S. 18; Cable: Not a5 E450 Love, but Too Good to Hate~ Assessing Copital Competive Threats Acros Broadband \arkets RBCR Exhibit 17 - Residential telco broadband net adds 3200 1,000 |We believe concerns over pressures from accelerating fiber net adds are well-placed... 00 | 400 200 ° | (200) (400) (600) (600) (2,000) (0.209) FI PIF ISIE S SS SSIES EEIIIP ISS Residential telco broadband net adds (000) Fiber mM Nonfiber =Total but the Street is overlooking that most of this wil likly be offset by a commensu ease in the pace of net losses from DSL telco subscribers ur quarterly estimates are laid out below. January 24, 2022 19Capital Markets Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband January 24, 2022 2Capital Markets RBC Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing Competitive Threats Across Broadband We do not see fixed wireless scaling January 24, 2022 Backdrop Under fixed wireless access, an operator provides broadband service in fixed locations through wireless technology ~ the “Iast-mile” connection to the home comes from an indoor or ‘outdoor receiver transmitting signals to a nearby small cel, for example, as opposed to coming from the coax cable or fiber. Proponents argue that FWA is: (1) less capital intensive to deploy compared to cable/fiber with lower installation, repair, and upgrade costs; and (2) can provide broadband services to underserved rural areas. The competitive threat from FWA to Cable's broadband subscriber opportunity has been on the market's radar for years, particularly following Verizon formally announcing plans to launch a wireless residential broadband service all the way back in November 2017. These concerns cooled down somewhat as Verizon’s 56 Home rollout took longer than initially expected and management at one point seemed to talk down how long it might take to go after its initial 30mm household opportunity, Further, there was clear skepticism in the ability to scale the service using mmWave spectrum, More recently, at its March 2021 investor day Verizon highlighted that the acquisition of C- Band will bea key component in its SG broadband strategy across 5G Home and 5G Business Internet asit accelerates fixed wireless access adoption. atthe time of its investor day, Verizon expected to cover nearly 15mm homes with its home broadband product by YE-2021 (roughly 63%/37% 5G/4G; note that while coverage had hit 11.6mm atthe end of 3021, we suspect the timing to hit 15mm might shift a touch given delays with C-band deployment), 30mm by YE- 2023 190% 5G), and SOmm by YE-2025 (100% 5G), While management did not provide explicit guidance for subscriers, it did indicate that it saw a path to potentially achieving a ~20% penetration rate, suggesting “10mm subs using the YE-2025 coverage target Elsewhere, one of the tenets of T-Mobile and Sprint's arguments in seeking regulatory approval of their proposed merger was that the New T-Mobile would provide a “bona fide alternative to traditional broadband providers.” Prior to the merger, the companies noted the New T-Mobile could have the network capacity to support 9.5mm households with its service by 2026, Following the merger, at its March 2021 analyst day T-Mobile outlined plans to have 500k home. broadband subs at YE-2021 (it ended up outperforming at 646K), a significant ramp in 2022-23, {as more capacity becomes available, and eventually reach 7-8mm customers in 2026, RBC estimates We expect solid FWA subscriber growth across Starry, T-Mobile, and Verizon over the next few years, expanding from 161k in 2020 to 831k in 2021, 2.3mm in 2022, and 3.8mm in 2023. However, we expect net adds to decelerate from ~1.Smm in 2022/2023 to ~900k in 2024-25 as the subscriber growth prospects quickly shift from the low-hanging fruit in underserved rural and select suburban areas to cable/fiber footprints where we expect competition will conly continue to inerease in the coming years. aA Cable: Notas Easy to Love, but Too Good to Hate ~ Assessing ee Competitive Threats Across Broadband \arkets RBC Exhibit 19 - Fixed wireless broadband subscriber estimates (000) Residential “ota residential + commercial (as reported) 5.569 6351 2O9E 20206 2021 © 2022E2023E © 2024E © 2025E © «2019E 20202021 2022F 2023 «2024E-2025E me Verizon mmm T-Mobile mm Starry —O—Net adds mmm Verizon tm T-Mobile mm Starry —O—Net adds While continued FWA network expansion, particularly from Verizon, in 2024-25 could pose some risk, we believe growing consumer demand for high download/upload speeds will eventually limit subscriber growth — particulary asthe services wil be mostly powered by mid- band spectrum. Speeds currently marketed by Verizon and T-Mobile are as follows: ‘© Verizon's SG Home Internet (which uses mid-band spectrum] using @SG Internet Gateway Router offers download speeds of up to 300 Mbps and typical upload speeds of around ‘50 Mbps while its 5G Home Internet Plus (with mmWave spectrum) has download speeds ‘of 300-1,000 Mbps and typical upload speeds of ~50 Mbps (note speeds are slower with 2 Verizon Internet Gateway); and ‘© T-Mobile's Home Internet download speeds are typically between 35-115 Mbps and upload speeds are between 8-24 Mbps. Note, as T-Mobile expands its “Ultra Capacity 56” network (mid-band & mmWave), itis seeing speeds north of 400 Mbps, though we expect that capacity will primarily be dedicated to mobile only. Just as telco fiber expansion plans have driven expectations for cable broadband subscribers 2 leg down, we believe medium. to long-term fixed wireless growth prospects are now also ower. We model 2.6mm total home internet customers in 2026 for TMUS (below guidance of 78mm) and 2.9mm in 2025 for Verizon (<5.8% penetration vs. management suggesting a potential path to 20% eventually). January 24, 2022 2