Telcos “not dead yet” – Comcast not acquiring mobile subs fast enough

Back in May 2017 when Comcast launched Xfinity Wireless, we suggested something outrageous – that Comcast and Charter might, over time, do so well in wireless and Verizon so badly, that the changing share prices may make Verizon open to being acquired or partly acquired by the two collectively.

As long as Comcast does not shoot its share price in the foot, as it has threatened to lately, offering to buy Sky from under the nose of 21st Century Fox, which has temporarily taken a full $23 billion off its market capitalization, then it can still end up doing this. We think it is far healthier for Comcast to acquire a cellular business in the US, than a DTH player outside the US.

What will go some way to making this possible is if some “smart alec” publishes estimates of Xfinity Wireless additions on the high side – enter New Street Research stage left, which this week has said Comcast will have over 3 million wireless subscribers by the end of next year. New Street has been bullish on cable for some time, and has research teams in the UK, Singapore and the US, but is headquartered in the UK.

New Street has built a reputation for contrarian views on established Communications stocks – but it tends to beat the same drum on multiple occasions. It said as early as 2016 that US cable firms would reach 10% of the cellphone market by 2020 and 20% by 2021. Given that this is a year or so away, and that the US market is something close to 270 million subscribers, then 10% is 27 million and 20% some 54 million. Clearly saying that the leading cable player will only reach 3 million by the end of 2019, suggesting a run rate that will take it to just 5 or 6 million by 2020, means that New Street has completely revised down its estimate of the ability of cable to steal the MNO lunch.

At Faultline Online Reporter, we largely agree with the sentiment, and we are forced to agree with the latest New Street Research numbers – things do change dramatically and disruptively, but not quite so fast as New Street has suggested in the past. This reduced rate is much closer to the mark, and cable will continue to accelerate as it gets the hang of working in the cellular market. This has been a pattern for cable all over the world.

The other two major themes that New Street has been pushing is that cable in the US will raise broadband prices aggressively as pay TV revenues fall, and that eventually T-Mobile and Sprint must merge. We don’t disagree with either of those scenarios, pay TV revenues have not yet turned downwards, and so far cable has seen no need to raise prices and no tendency to as yet – its broadband ARPU has gone both up and down at different times – but that may happen in the future – again more slowly than New Street has stated. As for T-Mobile and Sprint, the rumor this week is that they are back talking to one another, given that since their last talks, which failed because Softbank wanted to control the combined management, Sprint’s share price has plummeted, while T-Mobile’s has been stable. Chances are that if they ever do merge, the T-Mobile management will come out on top and Deutsche Telekom will command the largest shareholding.

This is all easy to see when you realize that fixed lines are a rising tide, and wireless is about to go commodity – which is why all the talk about Verizon buying Charter last year we saw as so much hot air. Verizon is desperately short on fixed line capacity, and that was one way to deal with it.

The Wall Street Journal has been keen to air the forecasts of New Street, and it has taken it as news that Comcast may add 2 million customers each year. New Street was quoted as saying, “We expect Comcast’s wireless net adds to remain sluggish in the first half of 2018, and then to ramp sharply in the second half of the year,” and that it expects Charter to match this growth once it launches its own Spectrum Mobile MVNO service later in the year.

Now New Street is saying that US cable will acquire up to 15% of all postpaid customers in their target footprints by 2020, which is a very different statement from before, what they mean is that cable, in the areas they are operating in, will get 15% of all the new mobile adds which are collectively brought in by all MNOs. In a semi-saturated market like the US where only a few million a year are added to the MNO totals, this is not such an ambitious target.

And as for the gradual failure of Verizon in the MNO space, this seems to have been averted, when last quarter it brought in a net increase of 1.2 million retail postpaid connections and net phone additions of 431,000, led by wearables and cars. And for all of 2017 it had postpaid additions of 2.1 million, back to the kind of numbers from a few years ago. Verizon remains weak in broadband and in fixed lines generally, but not entirely moribund.