Fitch Ratings believes that revenue and earnings growth for U.S. telecommunications and cable operators will slow in 2009, but that overall aggregate capital spending will likely be flat compared to 2008.

 

As a result, free cash flow will weaken in 2009 for the industry.

 

Weak new-home growth and high broadband access penetration is resulting in slowing high-speed data growth. This home trend is expected to continue in 2009 and Fitch believes it will in part result in even greater erosion for switched access lines and basic video subscribers for ILECs and cable operators.

 

Keep in mind that a secular erosion of telco voice lines and basic cable subscriptions has been in process since before the onset of the recession, both trends fueled in large part by market share shifts. Additionally, there is a secular decrease in demand for voice lines. Neither of those trends is caused by the recession.

 

In the business services segment, Fitch Ratings estimates that as unemployment rises, companies will reduce or groom their business service requirements, leading to lower demand.

 

In the small business segment, Fitch expects that incumbent telcos could see flat to negative growth of aggregate business service revenue in 2009. Likewise, small office and home office commercial service revenue, which has been a new source of growth for the larger cable companies, should materially slow in 2009.

 

Higher unemployment rates will also likely have an impact on wireless operators as it relates to net additions and bad debt. Fitch estimates that net additions will fall in excess of 20 percent in 2008 compared to 2007. Rising unemployment will likely accelerate this trend in 2009 and result in net additions reaching a level that is nearly half the rate of 2007.

 

Aggressive marketing and retention campaigns will likely be a focus in 2009 for operators as they compete for market share in a segment that will experience flat growth or even a slight contraction in 2009.

 

Cord-cutting of wireline voice services and substitution with wireless could accelerate as well, says Fitch.  The company estimates that wireless-only households reached approximately 20 percent in 2008 and that this will continue to grow in 2009, potentially at a higher rate as some retail consumers look to reduce duplicate services in an effort to save money.

 

Switched access line erosion, which Fitch estimates at nine percent in 2008, will grow to 10 percent or 11 percent for the industry in 2009.

 

Likewise, the success of ILEC network-based video offerings, which reached approximately 2.4 million customers at third-quarter 2008, a nine-month increase of 1.2 million, will continue and, along with economic pressure and satellite competition will lead to an increase in basic subscriber  losses for cable companies, to one percent to 1.5 percent of the total subscriber base in 2009.

 

In the wireless segment, Fitch expects to see margin erosion, as carriers offer promotions.

 

Overall, Fitch expects that revenue and EBITDA for wireline services will experience a low-single-digit negative growth rate in 2009. In contrast, Fitch expects that wireless and cable service revenue and EBITDA will grow in the 5 to 7 percent range in 2009.