Things are getting tight for US telecom network operators

Slowing growth in the market for telecom services appears to be putting additional pressure on network operators in the US. Mergers and acquisitions are on the rise. Layoffs appear to be accelerating. Some US government subsidies are coming to an end.

The future is uncertain. What will happen next is anyone's guess. But it's clear that worries abound.

At least, that's one of the takeaways from recent first quarter earnings reports from the likes of Charter Communications, T-Mobile, Comcast and Verizon.

"The quarter is proving that Cable and Wireless are in the throes of market maturity, both facing a smaller pool with churn at historically low levels," wrote the financial analysts at TD Cowen in a recent note to investors.

Other US telecom providers, including Dish Network's EchoStar, UScellular and Frontier Communications, are scheduled to report their own quarterly results in the coming days.

Sluggish growth

"During the first quarter, our Internet customer growth remained challenged by a low move and generally low activity environment, coupled with continued elevated competition at least in the short term and a small impact from fewer low income connects due to discontinued ACP availability," explained Charter CEO Chris Winfrey during his company's quarterly conference call, according to Seeking Alpha.

According to the financial analysts at TD Cowen, big cable companies like Charter and Comcast collectively lost 186,000 customers in the first quarter, ahead of their estimates of 141,000.

"Cable has lost subscribers for a fourth consecutive quarter and [it's] getting worse," the analysts wrote. "The Broadband market is clearly maturing and churn is at historic lows, meaning there are less [customer] adds to go around. Therefore, even with FWA [fixed wireless access] adds trending lower, Cable will continue to struggle to grow subscribers in the near-to-mid-term."

The situation is somewhat similar on the mobile side of the US telecom industry. Although AT&T, Verizon and T-Mobile collectively reported more postpaid phone growth than expected, the TD Cowen analysts noted their gross customer additions were "light across the board."

At T-Mobile specifically, some analysts worried that growth appears increasingly hard to generate in general. For example, the financial analysts at MoffettNathanson wrote that T-Mobile's figures during the first quarter "were met only after adopting a dramatically sweetened free-iPhone offer in the waning days of the quarter. That offer was pulled as soon as the quarter ended."

Continued the analysts: "Industry growth is slowing, Cable is taking share (and threatens re-pricing the industry lower in the process), and the ever-lengthening upgrade cycles for handsets have to reverse eventually. None of that is terrifying. But it is worrying."

The M&A

All that competition may be pushing operators to seek more financial security. For example, according to Bloomberg, Uniti Group is preparing to reunite with Windstream in a $15 billion merger.

"The capital markets are becoming more favorable, further opening up the possibility for M&A," wrote the financial analysts at TD Cowen of the news.

Indeed, Uniti and Windstream aren't alone. For example, Bloomberg reported that European satellite operators SES and Intelsat have also restarted merger negotiations.

Meanwhile, in the US, T-Mobile now expects to close its $1.3 billion purchase of MVNO Mint Mobile in the coming days. The company also recently inked a $1.5 billion plan to invest into fiber operator Lumos.

Others are pursuing fresh financing or cost cuts. For example, Lumen Technologies recently announced it would cut almost 1,000 positions, or 7% of its workforce, to "right-size our business through automation and AI." AT&T and Verizon have been shedding jobs too.

Meanwhile, Cogent is raising around $200 million with some of its IPv4 Internet addresses.

It's unclear when the next big M&A transaction might arrive in the telecom industry. There are plenty of assets up for sale, including UScellular's mobile business and Crown Castle's fiber and small cell operations.

Questions over subsidies

Hovering over all of this is the apparent end of the US government's Affordable Connectivity Program (ACP). That program currently provides up to $30 per month to 23 million US households for their telecom services, money that ultimately runs into the coffers of network operators.

"We're expecting that the program funding is going to end," said T-Mobile's Michael Katz during his company's quarterly conference call.

Katz said T-Mobile counts "a couple hundred thousand" prepaid customers on the program. But he suggested that the end of ACP might help funnel some customers to T-Mobile's cheaper offerings, including its new Mint Mobile brand.

Meanwhile, other US subsidies are scheduled to hit the US broadband market in the coming months and years. For example, money from the Biden administration's $42.5 billion Broadband Equity Access and Deployment (BEAD) program is expected to begin running through US states starting next year. That money will arrive in the form of grants for the construction of networks in rural areas.

It's unclear how that shifting subsidy landscape will affect a US broadband market that's showing signs of slowing.

"We now have confidence that industry [customer] adds will land at a little more than 400,000, down from a normal pace of 700-800,000," wrote the financial analysts at New Street Research in a note to investors following the release of Charter's earnings. "If we annualize this, based on normal seasonality, we land at a little more than 1 million adds for the year, down from a normal pace of ~2.5 million."

The analysts explained that growth in the US broadband market is generally keeping pace with the formation of new households, which is also slower than normal.

"The big question: have we hit saturation for the broadband market or are there temporary pressures impacting growth," wrote the analysts. "If it is the former, then this is the new normal. If the latter, growth should reaccelerate at some point."