Keep Americans Connected Costs Mounting, May Ultimately Be Manageable

Some telecom companies taking part in the FCC Keep Americans Connected pledge are warning of mounting KAC costs -- hundreds of millions of dollars so far -- from not disconnecting subscribers for unpaid bills during the pandemic. Analysts said in interviews this month they don't expect expenses to be material -- for now. Chairman Ajit Pai asked telecom providers to extend their pledges through June (see 2004300044).

Internet and phone service is typically high margin and low cost, so keeping a customer who otherwise would be disconnected doesn't have a big cash impact, said S&P analyst Chris Mooney. A bigger issue would be customers permanently disconnecting, which puts more pressure on subscriber metrics and profitability, he said. At least short term, KAC has “a manageable impact,” he said. NCTA and USTelecom didn't comment Tuesday.

Given the importance of broadband, it's likely one of the last services a consumer will cut, Mooney said, as analysts and executives often said pre-coronavirus. He said unemployment benefits could help limit churn for cable operators, though telecom operators offering slower DSL could lose share. Cable operators will try to recoup KAC costs through payment plans, Mooney said. He wouldn't expect ISPs to allow people to remain connected for six or nine months without some payment or government reimbursement: “They're not going to be altruistic forever.”

“Keeping Americans connected is the Commission’s top priority during the pandemic, and Chairman Pai is pleased that over 700 telephone and Internet service providers have signed the Pledge and many have gone above and beyond their Pledge commitments," the FCC emailed. Pai "understands that there are costs associated with the Pledge as well as these additional commitments and appreciates that so many companies have nonetheless stepped up to the plate to do the right thing for their customers and the country during this national emergency," it said. "The Commission continues to work with stakeholders on ways to ensure that families and small businesses can remain connected.”

Bad debt “will be a significant issue for every company,” but it's not clear how big an issue it will be due to too many unknowns, emailed Craig Moffett of MoffettNathanson. The unknowns include the speed at which unemployment subsides, the effectiveness of federal stimulus/remediation, and when a vaccine will be available. "Even the companies themselves concede they are simply guessing when they announce their bad debt reserves," he said.

KAC costs will be "material and non material," emailed New Street Research's Jonathan Chaplin. "Material in that it will be hundreds of millions of dollars. Not material in that it will be [seen] by investors as a one-time expense."

Providers gave some detail. Some Q1 reports warned expenses could be notable.

Charter Communications had 140,000 residential customers March 31 who requested disconnection protection under KAC, 1,000 of whom would already have been disconnected for nonpayment under normal policies, the company said. By April's end, 36,000 were current on their balances and almost 70,000 had made partial or full payments since entering disconnection protection, it said: Another 67,000 ended April with past-due balances beyond where they normally would have been cut off.

Waived late fees and non-disconnects resulting in more retail customer delinquencies had Verizon increasing credit loss allowance $228 million to cover anticipated payment relief requests. "If the current levels of delinquencies ... continue or grow, additional provisions to our allowance for credit losses may be required, which could be significant," it said. AT&T said it's setting aside a $250 million reserve for COVID-19-related bad debt to cover such costs as 40,000 postpaid voice customers still receiving service though counted as disconnects. Chief Financial Officer John Stephens told analysts the 40,000 is expected to grow, and it has similar broadband and video numbers. But, he said, "I think we're in a manageable state."

Altice ended Q1 with 6,000 customers who hadn't been disconnected, which accelerated going into April, it said. CenturyLink, Comcast, Cox Communications, Frontier Communications and Windstream didn't break out KAC specifics and/or didn't comment.

TDS told us about 3,000 customers signed up for its 60-day KAC offer. It reported KAC "resulted in reduced service revenues and incremental bad debts expense" in Q1, and its subsidiary U.S. Cellular's extended pledge through June 30 "is expected to result in additional defections and negative impacts." T-Mobile expects post-pandemic to have up to $125 million in KAC bad debt on top of normal rates (see 2005110035).