Policy

Mobile Mashup

12/12/2011 12:01 AM Eastern

The cable guys have run the wireless numbers, and it’s a
business they simply can’t afford to be in.

Instead of owning and operating 3G and 4G networks (or, when it happens,
5G) themselves, the biggest cable operators instead plan to deliver wireless to
customers by teaming with incumbent carriers and providing relatively cheap
Wi-Fi in targeted areas.

The strategy leaves a multibillion-dollar question hanging in the air: Will that be
enough to keep cable subscribers happy, as wireless becomes an even more essential
part of people’s lives?Cover_Story_Image_12/12

This month, in a landmark deal, Comcast, Time Warner Cable and Bright House Networks
sold a nationwide swath of Advanced Wireless Services spectrum to Verizon Wireless for $3.6
billion (see “Operators Cash In Wireless Chips,” Dec. 5, 2011).

In a significant shift in industry dynamics, as part of the deal, the MSOs will become marketing
partners with Verizon Wireless — the No. 1 mobile operator in the U.S., with about
108 million subscribers.

The operators will exclusively offer its wireless packages to cable subscribers. Verizon Wireless,
in turn, will push triple-play bundles of the cable partners. By 2015, the MSOs have the
option to deliver Verizon Wireless-powered mobile services under their own brands.

According to the cable triumvirate, the deal provides a path to wireless in perpetuity —
without having to fork out billions. “We don’t have to invest in building a wireless network.
We aren’t going to acquire a wireless network,” Comcast chief financial officer Michael Angelakis
said at the UBS Media & Entertainment conference in New York last week.

Were cable operators ever going to write the humongous checks to turn into facilities-based
wireless carriers? It was an open question for Comcast and Time Warner Cable — and
indeed, Cox Communications chose that strategy before deciding to pull the plug on building
3G towers earlier this year.

“Cox had tried to beat Verizon and AT&T at their own game. They were doomed to fail,”
Sanford Bernstein senior analyst Craig Moffett wrote in a research note. Cox couldn’t get
the scale to compete with the mobile giants.

In that light, the Verizon Wireless deal “definitively puts to rest any lingering concerns
that the cable industry would divert significant capital to a wireless venture, and brings
back a fair value for their AWS assets,” Moffett said.

The Federal Communications Commission must still bless the AWS deal, and the companies
expect regulatory approvals will take up to a year. “When the applications come
before us, the FCC will undertake a thorough, fair and fact-based review of the proposed
transaction,” an agency spokesman said.

Industry analysts predict that the FCC will jump at the chance to show the spectrum
will finally be deployed. “It has been an embarrassment for the FCC that the cable industry
has not yet deployed assets to support the block, and getting that spectrum into use
expeditiously would be a clear win for the FCC,” according to Moffett.

‘FRENEMY’ MINE

The three cable operators and Verizon Wireless may spin the deal as a win-win. But by hitching
their wagon to Verizon Wireless’ star, the MSOs are at the mercy of their “frenemy,” whose
strategic goals and investment priorities may not forever be aligned with theirs.

Comcast, TWC and Bright House will form a Philadelphia-based “innovation-technology
joint venture” with Verizon Wireless to develop new applications that integrate wireless
and wireline applications. But “what kind of cooperation, and what kind of rates they’ll pay
for wholesale, was not made entirely clear,” ISI Group analysts Vijay Jayant and Judah Rifkin
wrote in a note.

Remember that those same operators, along with Cox, have run this idea up the flagpole
before — in the form of the Pivot joint venture with Sprint Nextel — and it failed spectacularly.

Pivot was supposed to give cable operators the same advantages
they’re touting with the Verizon Wireless deal: national
reach without a hefty network investment. But Pivot,
formed as a 20-year JV, never got off the ground, with the
partners blaming operational glitches and inflexible wholesale
terms for the fiasco.

The bad taste left over from Pivot convinced Cox that it
should go it alone. It intended to — but ended up relying completely
on Sprint again. Last month, Cox said it would cease
service altogether by March 2012.

Cox isn’t saying what it plans to do with the wireless spectrum
it still owns: “The recent proposed deal [between Verizon
Wireless and the MSOs] has no impact on our spectrum
holdings and … we remain in full compliance with FCC spectrum
requirements,” Cox director of media relations Todd
Smith said.

Both Pivot and the recent travails of Cox raise the question
of whether customers really want a wireless product
from their cable provider.

Moffett has long been a skeptic: “[E]ven if customers did
want to buy wireless from the same company that sells them
wired broadband, it would only be sensible to oblige if cable
companies had a marginal cost advantage in delivering it,”
he said in a note about Cox’s wireless exit.

In reselling Verizon Wireless service, Comcast, TWC and
Bright House obviously will not be able to offer the product
more cheaply than the carrier can on its own.

Nevertheless, Comcast for one is eager to get cracking with
Verizon Wireless. The MSO plans to start rolling out various
packages with the carrier in four markets early next year.

“The teams are already engaged; they are great commercial
arrangements, and we think we’ve put together great
packages that combine the best of the various bundles,”
Comcast Cable CEO Neil Smit said at the UBS conference.
“It offers us a couple of different combination plays and ultimately
more choice for the consumer.”

With Verizon Wireless as cable’s new BFF, Charter Communications
is interested in getting its foot in the door, too.
CEO Mike Lovett, also at the UBS conference, noted that 60%
of Charter’s footprint overlaps AT&T: “We [Charter and Verizon
Wireless] have kind of a common objective there.”

WI-FI FACTOR

On another vector, cable operators are hoping to secure a
foothold with Wi-Fi, a much more cost-effective way to deliver
out-of-home broadband in localized areas, like commuter
rail stations and public parks.

Cablevision Systems started the Wi-Fi ball rolling, announcing
in 2008 that it would spend around $300 million
to dot its New York-area service area with hotspots. The Optimum
Wi-Fi network is offered free to Cablevision’s broadband
users: a “good enough” service to keep subscribers from
fleeing to a telco’s bundle.

Since then, Cablevision has inked pacts with Comcast and
Time Warner Cable to let their respective customers hop on
their Wi-Fi access points. Together, they now have deployed
20,000 hotspots stretching from Philadelphia to New York.
And, according to Cablevision, it has spent less than $300
million on the project so far.

But that’s not a substitute for the type of mobile service
customers would expect from AT&T or Verizon Wireless.
Walk a block away from Madison Square Park in Manhattan,
for example, and you’ll lose Time Warner Cable Wi-Fi.

In the end, as much as cable operators might have wanted
to become wireless-infrastructure players, the cover charge
to get into the club was just too exorbitant.

“We do not believe it is feasible to enter the wireless market
as a freestanding new entrant,” Time Warner Cable CEO
Glenn Britt wrote in Q&A message sent to employees about
the Verizon Wireless deal.

The turbulent history of Clearwire underscores the enormous
expense of building a wireless broadband business
from scratch.

The publicly-held company, majority owned by Sprint and
backed by Comcast, TWC, Bright House and others, has been
running dangerously low on cash. Clearwire was bailed out
this month by Sprint, which pledged up to $1.6 billion in additional
funds over four years. Meanwhile, Clearwire last week
said it will offer up to $350 million in stock to fund its ongoing
buildout plans.

Until the Verizon Wireless deal last week, Clearwire was
the strategic wireless partner for Comcast, TWC and Bright
House, which had wholesale deals to offer WiMax, an earlier
generation of 4G wireless technology, under their own
brands. That’s ending with the Verizon Wireless partnership.
(Smit last week said Comcast will continue to hold its
minority 9% equity interest in Clearwire for the “foreseeable
future.”)

Will cable’s latest wireless bets pay off ? In the short term,
Comcast, TWC and Bright House should get a $1.4 billion
windfall from the Verizon Wireless deal. The bigger issue
is long-term, as incumbent carriers may grow stronger and
MSOs realize they haven’t had much of a choice about what
mobile hand they can play.


Mike Farrell contributed to this report.
September