The USA’s MNOs need to fear cableco’s inside-out strategy

In 5G, the four US MNOs will not just be competing with one another. They will also have to face rising mobile and quad play strength among the largest cablecos. This is likely to be a justification for approving the proposed merger of Sprint and T-Mobile, but that enlarged third player may be less concerning to Verizon and AT&T than the combination of Charter and Comcast.

The two biggest cable operators have both launched mobile services, via MVNO deals with Verizon, on top of their existing large base of WiFi hotspots and homespots. The latter enable them, like disruptors such as Free Mobile in France, to reduce their MVNO fees and other mobile network costs by offering WiFi-first deals to users, and backhauling indoor routers and cellular small cells, with their existing broadband lines.

This readymade infrastructure will come into its own in 5G, where the cablecos plan an ‘inside-out’ strategy of deploying indoor small cells in homes and businesses, to create a dense 5G network in areas of high usage. This could be in their own spectrum, if they invest in the upcoming millimeter wave auctions, or in shared bands such as 3.5 GHz CBRS, which the cablecos have been testing enthusiastically.

This strategy will allow them to participate in 5G services at low cost – with no coverage commitments, they will target high value locations such as cities and enterprises, as well as the low hanging fruit of their own home subscribers, selling them up to a quad play bundle. They will be able to combine WiFi and unlicensed 4G or 5G to create meshes or ‘sub-nets’, increasingly turning to their MVNO partners only for national coverage and roaming. They may even start to build some wide area 5G if they secure the right spectrum (Comcast already invested in the 600 MHz auction).

As part of its preparations for ‘inside-out’ densification relying on both cellular and WiFi, Charter has introduced a router supporting pre-standard specs for the latest WiFi version, 802. This promises to support multi-gigabit speeds and high device density in the 5 GHz band, while the 802.11ay, coming a year or so later, will do the same in the 60 GHz band. The cableco also announced plans for a residential small cell supporting both advanced WiFi and LTE.

Charter did not name the chip or equipment supplier of its 11ax product, but said it would be the basis of a new whole-home WiFi offering. It will allow users to connect up to 64 devices simultaneously. Meanwhile, the ‘converged wireless router’ will launch next year, supporting licensed and unlicensed spectrum and including IoT radios as well as 4G.

In its second quarter results announcement, Charter hinted at the investment it is making to become a mobile player. It said it spent $116m during the quarter on mobile technology, including $33m in opex and $53m in capex. In the first quarter, it had invested mobile opex of $8m and capex of $17m, so the spend is clearly ramping up now Spectrum Mobile is live (it went commercial in June).

“We now offer mobile service to both new and existing Spectrum customers at highly attractive prices,” CEO Tom Rutledge said during the earnings call. “The launch has gone very well and we’re scaling the operation, which is intentionally generating relatively small order volume at the moment as we ramp up features and marketing throughout the summer.”

He added: “In the next few months, we’ll expand our mobile capabilities, offer a wider array of mobile devices and give customer the ability to transfer their existing handsets. We’ll also expand our mobile sales channel, including offering our new service in a greater number of retail locations … Our intention is to use mobility as a feature of our overall customer relationship creation process.”

The CEO said there had been discussions with Sprint about an MVNO deal, but not with T-Mobile, before Charter decided to go with the Verizon agreement it had inherited when it acquired Time Warner Cable and BrightHouse Networks.

He highlighted the benefits that cable infrastructure brings to the economics of building a dense network, saying: “We have advantages in our network infrastructure that will allow us to build an inside-out strategy in wireless that we think doesn’t require any kind of immediate mobile relationship other than an MVNO. It doesn’t mean that some time in the future mobile assets might be priced right and that natural convergence would occur. But there’s nothing in our near term horizon that dictates that we go that path.”

“Charter burned $116m in the June quarter due to start-up costs from mobile,” wrote BTIG analyst Walter Piecyk in a blog post. “They cited $33m of opex and $53m of capex. The remaining $30m is presumably the build in phone inventory, which implies ~50,000 smartphones likely now in inventory. In comparison, we estimate Comcast’s cash burn from mobile was $254m in Q2. However, Charter provided more detail than Comcast, which likely indicates that Comcast’s cumulative cash burn is even higher than our $1.2bn estimate.”

Meanwhile, Altice USA, the autonomous subsidiary of France’s cable giant and the USA’s fourth cableco, is lining up various activities for 2019, to boost its financial performance, including mobile and quad play services.

Altice has been quiet about mobile services, compared to the big two, but now has a multiyear MVNO deal with Sprint and intends to launch commercially in early 2019. In its earnings report, Altice USA said its “connection to Sprint microsites to support Sprint’s network densification … is currently running well ahead of schedule”.

Altice has signed up for a ‘full’ or ‘heavy’ MVNO, which gives it flexibility in how it chooses to use the Sprint network, and the right to build and run its own core network and back office systems. The cableco said in its announcement that it would “have control over the Altice USA mobile features, functionality, and customer experience”.

This is the future of MVNOs, especially when vertical industries start to harness sub-nets to support specialized wireless needs. It is also how Liberty Global CEO Mike Fries advised cablecos to negotiate MVNO deals, when he said, at a recent conference: “What we’ve learned is if you’re going to go MVNO… you need a full MVNO. You need a thick MVNO. You need to control the customer experience, core network.”

“We are excited to bring our global expertise to the US to enhance and strengthen our offerings,” said Dexter Goei, CEO of Altice USA, in a statement. “Working together we will be able to capitalize on Sprint’s vast mobile network, which fits well alongside Altice USA’s deep WiFi network, and leverage Altice’s global mobile experience to deliver greater value, more benefits and seamless connectivity for our US customers

Sprint CEO Marcelo Claure said in a statement at the time of the announcement: “As content and connectivity continue to converge, we believe this approach will be a model for future strategic arrangements across multiple industries including cable, tech and others.”

The cableco is also preparing to install a new BSS/OSS – an essential prerequisite for making the most of fiber and 5G efficiencies; is deploying advanced WiFi routers and mini-repeaters in broadband homes; and is planning to launch a new Smart WiFi service by the end of the year.

For its second quarter, it reported slightly higher than expected losses on slightly lower than expected revenues, but gained new broadband subscribers and reduced video user churn (it now has 4.9m customers in the USA). It also announced healthy increases in commercial services and advertising revenues. In Q2, it lost about 24,000 video customers, fewer than the 37,000 video subs which churned a year earlier. It added 10,000 broadband customers, up from 2,000 a year ago, thanks largely to gains at the former Suddenlink unit. Revenue was up 1.8% year-on-year to $2.4bn in the quarter, with a 3% rise at Suddenlink unit. The former Cablevision (Optimum) unit reported a 1.6% revenue increase.

Next year, Altice believes its new home entertainment hub, Altice One, will start to impact results significantly. It support seamless navigation across traditional video content, over-the-top video apps, whole-home WiFi and other services, and has now been deployed across the New York footprint of Cablevision , which Altice acquired along with Suddenlink to build its US base. The company plans to complete the roll-out of Altice One to the former Suddenlink base by the end of September.

It is also now providing symmetrical 1Gbps service in 73% of the old Suddenlink base and starting to offer the same in the former Cablevision areas, while building a new fiber-to-the-home network in the New York area.

Meanwhile, the third cableco, Cox Communications, has dabbled in the past with buying spectrum and planning its own cellular build-out, only to step back from the brink. Along with Time Warner Cable and BrightHouse (both now part of Charter), as well as Comcast, Cox was part of the Spectrumco and Pivot MVNO and spectrum partnerships with Sprint early in the century, which fell apart when the members transferred their allegiance to Verizon and sold off their airwaves.

But early this year, Cox made a new deal with Sprint, mirroring the one the MNO had announced with Altice a couple of months before. In both cases, Sprint gets to leverage the cablecos’ fixed lines to backhaul its own small cells and accelerate densification, especially indoors (Sprint is a major customer of Airspan’s innovative Magic Box small cell).

“This is another opportunity to work with a strategic partner to accelerate our densification plans to improve our network performance and experience for Sprint customers throughout Cox’s national territory,” said Sprint’s CTO John Saw at the time.

Sprint, more than the other operators, is focusing on densifying its 4G network, using its plentiful supply of 2.5 GHz spectrum, in order to boost capacity without having to wait for 5G, while also laying infrastructure foundations for the next generation RAN (it is conducting trials with Ericsson, Nokia and Samsung). But it has been hampered by challenges in securing sites and backhaul at affordable cost for its cells.

The Cox agreement also put an end to a patent infringement battle between the two firms, but there has bee no mention so far of the cableco using Sprint’s wireless network (and Cox, like Comcast, has the right to activate a Verizon MVNO). But Saw hinted at a broader agreement to come, saying: “Moving forward, we will continue to look for new opportunities to work with Cox in ways that are mutually beneficial.”

Cox operates six cable networks which span 18 states (Arizona, Arkansas, California, Connecticut, Florida, Georgia, Idaho, Iowa, Kansas, Louisiana, Massachusetts, Nebraska, Nevada, North Carolina, Ohio, Oklahoma, Rhode Island and Virginia). It is the US’s third largest cableco, after Comcast and Charter, and services about 6m homes. Its network passes around 10m homes or 8% of US households.

The deal, like the previous one with Altice, will help Sprint with its “neighborhood expansion” efforts, said Wells Fargo analyst Jennifer Fritzsche in a research note. She wrote: “Given the majority of S’s spectrum assets are high band (S has 160 MHz of 2.5 GHz in the Top 100 US markets) this fiber access is critical in the backhaul part of the network (which often is the most expensive part of any network build).”

Saw said: “We obviously have the option of running dedicated fiber, but I think to get it out fast and to leverage what is already there, I think we’ll manage to use what is already there, to use the DOCSIS backhaul that we have with Altice.”