Cable Operators

Wireless War

Can Comcast sustain a new battlefront against cutthroat competitors — for tiny margins? 4/10/2017 8:00 AM Eastern
Comcast unveiled its mobility play, dubbed Xfinity Mobile, at a big press event in New York.
Comcast photo
TakeAway

Comcast is banking on its latest mobile product to plant an elusive flag on the wireless customer map.

After several failed attempts to succeed in the one transport medium it has so far failed to conquer — wireless — the cable industry is gearing up for battle, using pricing and its superior broadband products to slice market share from entrenched incumbent providers.

Comcast fired the first shot with the unveiling of its Xfinity Mobile product last week, a 4G and WiFi hybrid that appears to compete primarily on price. But unlike other failed attempts at breaking into the wireless market, Xfinity Mobile appears to be more of a defensive play than an offensive one, geared toward reducing churn and preserving the existing business as much as gaining new customers.

Comcast scored big with consumers with the elegant navigation of its X1 platform, currently available to more than 50% of its footprint and one of the reasons it was able to grow basic video subscribers last year for the first time in a decade. X1 customers are less likely to churn than other video subscribers and use more services.

With Xfinity Mobile, the nation’s largest cable operator appears to be extending the X1 concept to the wireless business, offering competitive pricing as well as a few bells and whistles, such as the ability to text customer support and authenticate all of a customer’s Xfinity apps in one swoop.

Telsey Advisory Group media analyst Tom Eagan said Xfinity Mobile has some compelling features — he particularly liked the flexible packages and the ability to text customer service — but he doesn’t believe the intention is to offer, at least initially, a state-of-the-art product.

“I don’t think what they’re offering here is head-and-shoulders above the rest, feature-wise,” Eagan said. “But what we’ve seen is it tends to lower churn. The fact they are committing to the [mobile virtual network operator] means that this is going to be an economically accretive event.”

Eagan also doesn’t believe, despite the price, that Comcast is starting a price war.

“I don’t think this is a major price war — Comcast isn’t coming in with a price of $20 per line,” Eagan said. “To me, it’s about the benefit of the overall business.”

He pointed to Liberty Global’s Virgin Media, which has been offering a quad play since 2014. What Virgin Media found is wireless makes the bundle extremely sticky — churn for its quad play was about 0.7%. That compares with 2%-3% and higher for some U.S. cable companies.

“The story makes sense because of what we saw with X1,” Eagan said. “I think Comcast customers have a positive experience. That should help [the MSO] in terms of deeper penetration.”

DIFFERENCE OF OPINION
To the more skeptical, Xfinity Mobile appears to be what has sunk previous ventures into the space — a cellular phone service whose only differentiator is its name. But in a briefing with analysts last week, Comcast executives tried hard to drive home the point that they indeed had something different on their hands.

What seems to be the most different is the price — Comcast is offering unlimited data plans with no access fees for $45 per month for its X1 platform customers and $65 per month for the rest of its base. The wireless offering can only be purchased as part of a Comcast bundle — either voice, video or high-speed data — but customers also can opt for a pay-as-you-go plan that charges $12 per Gigabyte of data.

“This will be designed to support the core cable business,” Comcast Cable CEO Dave Watson said at the launch event in New York last week. “We do have confidence in our ability to compete in a crowded marketplace.”

Comcast’s presentation was chock full of data. Watson, who spent years in Comcast’s former cellular division before becoming chief operating officer in 2010, touted the size of the potential market.

Of all the cable operators in the country, Comcast has the greatest scale — 22.5 million basic video customers, 24.7 million broadband customers and 11.7 million digital telephone subscribers. In all, it has 28.6 million customer relationships. But that scale is dwarfed by the size of Verizon Communications’s and AT&T’s wireless bases, at 114 million and 110 million customers, respectively. Even No. 3 wireless provider T-Mobile USA has 71.5 million customers and No. 4 Sprint has 59.5 million. From the outset, Comcast will be a distant No. 5 in a five-player market.

Scale is essential in the wireless market: It is the main difference between Verizon’s wireless margins of 14% and Sprint’s -5.6% margins.

“It’s a fixed-cost business,” Moody’s Investors Service vice president and senior credit officer Mark Stodden said. “So it becomes a money loser if you’re operating below a certain scale, because there is a certain standard of network coverage they need to have as table stakes. It is a curious time to get into the wireless business.”

At the same time, the wireless players are encroaching on the video business. AT&T purchased DirecTV in 2015 for $48.7 billion and in December launched its DirecTV Now over-the-top service, utilizing wireline and wireless transport. Last year, the carrier said DirecTV Now customers that were also customers of AT&T Wireless service would not be subject to data limits when watching the video service on its network.

Verizon, which launched its wireline Fios TV service more than a decade ago, introduced a free mobile video service go90 in 2015 (which is currently undergoing an overhaul). And last month it revealed a new corporate structure aimed in part to make it easier to launch its own mobile over-the-top service. The wireless business is clearly going video.

MOBILE INTENTIONS
Mobility is obviously the future, but until recently the cable business was content to provide the content and the fiber backbone that made that possible. While that has changed, merely stapling a wireless service onto an existing bundle hasn’t worked before and won’t likely work again.

But Stodden added that the growing adoption of mobile video is forcing pay TV distributors to at least look toward wireless platforms.

“You need to assess whether you need to own that mobile distribution platform to continue to play in that space,” Stodden said. While that could eventually mean buying a wireless carrier, he believes the safest route is an MVNO.

“Purchasing a wireless company could be potentially damaging in some areas because there would be areas where they would be wireless-only,” Stodden said. “Those would be money-losing areas. Within their wireline footprint they could have a pretty good cost structure because they have a lot of network capacity and they have a very dense footprint.

The MVNO architecture gives them a lot of flexibility to target only their wireline footprint.” Other cable operators’ plans for wireless ventures remain uncertain. Charter Communications activated its Verizon MVNO last year and has said it will release a product sometime next year. Chairman and CEO Tom Rutledge has kept the company’s wireless plans close to the vest, but he has hinted that the Stamford, Conn.-based operator will lean more toward 5G. Charter had no comment on Comcast’s Xfinity Mobile plans.

“We have no additional information regarding our wireless plans at this time,” Charter said in a statement.

Xfinity Mobile is Comcast’s cautious approach to the wireless business, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said.

“They are dipping their toes in the water and seem to be taking a go-slow approach,” Wlodarczak said, adding that the most compelling aspect of the service is its ability to automatically hand off calls and data between its WiFi and 4G LTE networks.

And though Comcast likely can build a formidable wireless business, he said, Wlodarczak doesn’t see any cause for the bigger players to panic just yet.

“Maybe five years from now you can have a $1 billion, low-margin business that helps reduce overall churn,” Wlodarczak said. “I don’t think the existing wireless players are quaking in their boots from this initial foray.”

UNLIMITED BATTLE FOR SUBS
Over the past several months the top wireless players have upped the ante in their own battles for customers, with Verizon, AT&T, Sprint and T-Mobile all offering unlimited data plans. Verizon has been particularly aggressive, offering unlimited data for $45 per month for a four-line family plan service, a free iPhone 7 and offering to buy out the customer’s existing wireless contract. In a research note in February after that Verizon plan was unveiled, MoffettNathanson principal and senior analyst Craig Moffett estimated that Verizon could potentially spend $6,000 to acquire a family of five’s business.

Xfinity Mobile isn’t spending nearly that much. Comcast estimated it would spend about $200 million to $300 million for the first year of the service and said at the launch event that it would be profitable.

Wireless has been an elusive target for the cable industry for decades. From the PCS (short for Personal Communications Services) partnerships with Sprint in the 1990s, to joint ventures in the 2000s with Sprint again that were supposed to usher in the age of mobile video, cable has spent years and billions of dollars to pair its superior wireline network with wireless. It came close in 2005 with the Pivot joint venture with Sprint that was abandoned in 2008. Later that year, it invested in WiMax pioneer Clearwire, but ended up selling its interests to, you guessed it, Sprint in 2012, some at substantial discounts.

Not every cable wireless venture went bust. Its investments in WiFi have proven to be a major customer retention tool, ironically as a way to offset high wireless data charges from Sprint and other carriers.

Cable appeared to throw in the towel in 2011 when the SpectrumCo consortium, a group of Comcast, Time Warner Cable and Bright House Networks, sold its wireless spectrum licenses to Verizon for $3.9 billion. That deal included a provision that allowed the parties to activate an MVNO agreement, which Comcast did in October 2016. Charter, which purchased Time Warner Cable and Bright House in May, inherited that MVNO agreement as well.

Comcast and the rest of the cable business are attacking the wireless business at a time when margins are at an all-time low, customer growth has peaked and the two largest players, Verizon and AT&T, have essentially started a price war that will eventually suck in every participant, including cable. Just how long cable would be able to stomach a lengthy price battle — it has vehemently avoided them in the past — is the big question.

Whether this product will be a gateway toward 5G, the newest wireless technology that promises to deliver ultra-fast broadband speeds over short distances, remains to be seen. But for the time being there appears to be some wiggle room, as Comcast will initially test the service with employees and fully roll it out to its footprint by the end of the current quarter. That gives it time to work out any kinks in the service and add any features.

And as is the case with most technological endeavors, there are likely to be kinks. It will be up to Comcast and the rest of the cable industry to make sure those kinks don’t end up strangling what could finally be a lucrative wireless opportunity.

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