Analyst Makes Case for Wireless

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A wireless-phone option in cable’s marketing bundle could result in a 5% to 10% return on investment, according to a new report by Salomon Smith Barney analyst Niraj Gupta.

Even though those margins are low, compared to video or data, Gupta wrote, “We believe wireless resale partnerships could enrich cable’s product bundle and help reduce overall subscriber churn.”

Gupta pointed to a number of events that seem to indicate that cable could be in the wireless market by next year.

First, he said, Sprint Corp. announced a five-year deal to wholesale its wireless network to AT&T Corp., which will retail a wireless service under the AT&T brand name.

“We believe Sprint’s aggressive move to lease excess capacity on its network foreshadows possible deals with cable MSOs,” Gupta wrote.

Time Warner Cable already uses Sprint for some voice-over-Internet protocol interconnection and backbone services. Cablevision Systems Corp. and Comcast Corp. have voiced public interest in wireless, according to Gupta.

Charter Communications Corp. and Cox Communications Inc. executives have also said they are looking at wireless options.

The costs would be manageable, in Gupta’s view. They’d center on billing, technology provisioning items, training and sales and marketing costs.

Gupta estimates cable’s cost per wireless gross addition would be lower than today’s average of $400, with half attributable to marketing costs.

The analyst said cable could leverage cross-channel avails and bill stuffers to existing subscribers, thus reducing some marketing outlays.

Currently, Sprint gets $60 a month per subscriber, on average, at 900 minutes of usage, Gupta wrote. Industry churn is 2.7% a month and wholesale costs per minute are between 45 and 50 cents. Assuming $300 per subscriber acquisition costs, pre-marketing earnings before interest, taxes, debt and amortization (EBITDA) could be 20% to 25%.

“Based on these assumptions, we estimate wireless resale deals could generate after-tax IRRs of approximately 5% to 10%, in line with the cost of capital,” he wrote.

Gupta believes Sprint would be the most likely reseller to cable, but that Nextel and T-Mobile also could enter the picture.

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