Industry’s MVNO efforts could spur deal-making once scale is reached
6/05/2017 8:00 AM Eastern
Cable’s latest attempt to crack the wireless code — the multiple virtual network operator agreements Comcast and Charter Communications have struck with Verizon Communications — could provide the economic basis for a successful run in what has been an elusive market for the industry. But as the service matures, those same economics could push the companies toward a deal with a wireless company in the next several years, according to some analysts. Both Comcast and Charter Communications have activated MVNO agreements with Verizon, with Comcast expected to launch its Xfinity Mobile product across its footprint this month. Charter is expected to launch its wireless offering in 2018. In a research note, UBS telecom analyst John Hodulik wrote that the U.S. track record for MVNOs is mixed: The most successful, American Movil’s Tracfone, has attracted 25 million customers over the past two decades, but its margins are razor-thin. In Europe, cable operators have had better success, with Liberty Global’s Telenet wireless offering, launched in 2006, attracting nearly 10% of the market. Telenet, the largest cable operator in Belgium, has an MVNO with Orange, that nation’s biggest wireless carrier. But Orange has benefitted most from regulatory changes that shortened the duration of wireless contracts from 24 months to six months. With more customers up for grabs, Telenet was able to attract a large chunk of subscribers mainly through discount pricing — it offers service for 20% to 30% less than incumbents. MVNOs Don’t Scale Well But Telenet eventually hit a wall. As data usage climbed, it became economically feasible to own the infrastructure, and Telenet acquired wireless carrier BASE in 2015. “Telenet ultimately acquired BASE in order to control its own wireless destiny as growing data usage made it more attractive to own mobile infrastructure,” Hodulik wrote. “As we have said previously, we believe MVNO economics get more challenging as the business scales and data traffic grows, suggesting Comcast and Charter could pursue a similar approach in time.” According to Hodulik, Comcast and Charter have the potential of taking a significant chunk of the wireless business — a combined 10% by the end of 2020 — also largely on price discounting. Comcast announced its Xfinity Mobile product in April and initially tested the service with employees. It is scheduled to be offered to all Comcast customers in its footprint this month. Xfinity Mobile is mainly about flexibility, both with plans and with pricing. Customers can choose unlimited data or pay-as-you-go plans, and pricing ranges from $45 per month per line for its top-of-the-line X1 platform subscribers to $65 per month per line for any customer who buys any package that includes Xfinity Internet. Even at the top of the range Comcast beats AT&T’s initial price of $90 for the first line and Verizon’s $80. At those prices, Hodulik believes Comcast can take a serious piece of the wireless market. He estimated the MSO could attract nearly 3.5 million wireless subscribers by 2020, with Charter snagging 2.5 million. “Assuming similar market growth, we estimate gains at Comcast and Charter will pressure phone net adds at the existing players in 2018, pushing AT&T and Verizon further into the red while crimping growth at T-Mobile and Sprint,” Hodulik wrote. Wireless growth has already been slowing but the UBS analyst sees AT&T’s wireless customers actually declining from 77.8 million in 2016 to about 76 million by 2018 while Verizon wireless customers dip from 108.8 million in 2016 to 107.8 million in 2018. For T-Mobile and Sprint, which have had a bit of a growth spurt in the past two years — T-Mobile added more than 7 million customers between 2014 and 2016 and Sprint added 1.8 million — that pace will slow. Hodulik expects T-Mobile to end 2018 with 40.2 million customers (up 5 million from 2016) and Sprint to end 2018 with nearly 32 million customers, up by about 300,000 customers from 2016. Retention Aid, Not Cash Cow Pivotal Research Group CEO and senior media analyst Jeff Wlodarczak said those levels of wireless subscribers are reasonable, but added that he believes for Comcast and Charter the wireless offering is more of a retention tool. That, he said, should help lower subscriber churn, and in the event the quad play, becomes more important domestically, should give them early experience with the product. But MVNO economics don’t necessarily lend themselves to big profits, he added. Low profit expectations have been a trend in the wireless business for the past few years. According to Hodulik, EBITDA growth peaked in the sector in 2015 at 23%, falling to 1% growth in the first quarter of this year. Margins have been strong — overall, about 37.7% in 2016, a level that is expected to be maintained in 2017 — but are expected to slow going forward as capital expenditures, on the decline for the past three years, begin to tick up. Whether Comcast or Charter would acquire a wireless carrier in the future is unclear. For now, the two have agreed, under a wireless partnership to share platforms and equipment reached in April, not to make a large wireless purchase without the other’s permission for at least a year. That doesn’t preclude a joint purchase, but most analysts take it to mean the two will sit out any M&A for the next 12 months. Dish Spectrum in Sights? With Sprint and T-Mobile possibly off the table, that leaves Dish Network. Dish has wireless spectrum, and the need for a partner to help build it out. According to its FCC license agreements, it has to build out 70% of the country by 2020. Hooking up with a large cable operator could help. Wlodarczak said any deals are probably well off in the future. And he doesn’t believe there is any need to rush. “I am actually not convinced cable needs to do a wireless deal, but if they are serious about getting into wireless, I think it would better to buy [T-Mobile] now,” Wlodarczak said.