Xfinity Mobile is only the start of Comcast’s assault on the MNOs

The initial response to Comcast’s announcement of its first cellular service, the upcoming Xfinity Mobile, was generally flat to neutral. However, with time for reflection, some observers are taking a more positive view of the cableco’s ability to disrupt the US market, especially now it has $1.7bn worth of 600 MHz spectrum to strengthen its hand and reduce its reliance on its Verizon MVNO deal (see separate item). And in the five-year timescale, the cableco has a significant opportunity to disrupt the US market, especially now it has its own spectrum, and if it forms alliances with  other cable/WiFi players and potentially makes a bid for T-Mobile.

Comcast’s return to spectrum ownership comes after six years – along with other cablecos, it sold its previous AWS assets to Verizon in 2011, a deal which also resulted in the MVNO agreement which underpins Xfinity Mobile. Building out in 600 MHz, whose propagation qualities enable affordable wide coverage, could reduce the fees it has to pay Verizon and help it emulate the shock tactics of other cablecos round the world. The most notable example, of course, is Iliad’s Free Mobile in France, which harnessed its broadband lines, WiFi hotspots and homespots, its own spectrum and an MVNO/roaming pact, to undercut existing operators and seize significant market share. Comcast now has all those elements in place too, and may look to extend Xfinity Mobile beyond its own cable customer base in time.

Even if it sticks to its own subscribers, to support multiplay offerings, Wireless Watch’s sister service, Faultline – which analyzes digital video markets including cable – believes Comcast could steal 8m-10m lines from MNOs within a few years.

Also taking an optimistic view on Comcast’s moves, even before the auction results were announced, was New Street Research, which believes the cableco’s proposition will particularly appeal to subscribers who use less than 5GB of wireless data a month. “Comcast’s metered data plan will be extremely appealing to low-usage subs,” said analyst Jonathan Chaplin in a client note. “For anyone consuming 3GB per month or less, this will be the best offer in the market for a premium wireless service. We will show that this is a bigger portion of the market than some realize.”

This reflects the current norm in the US market, especially for Verizon and AT&T customers – that single-line tariffs are relatively expensive, and the best value comes from multi-device or family/group deals. But there is a significant share of the population which falls outside the categories primarily addressed by the premium services of the big two. Chaplin calculates that 66% of current mobile subscribers would find Xfinity Mobile cheaper than current tariff options, and most of those consume less than 5GB a month (of course, as long as Comcast confines its mobile offer to its own cable users, some of these will not be able to choose Xfinity).

“For single-line accounts, Xfinity is cheaper than all alternatives at all usage levels for those eligible for $45 unlimited, and it is cheaper than AT&T and Verizon but comparable to TMUS above 5GB of usage for those eligible for $65 unlimited,” Chaplin said. “For four-line family plans, Xfinity is cheaper up to 4GB of usage but more expensive thereafter. Two- and three-line accounts fall somewhere in between.”

On this basis, some subscribers will be unprofitable for Comcast, but that may well be justified by their spending on cable and video services, and much of their traffic is likely to be offloaded to Comcast’s extensive network of WiFi hotspots and homespots, increasing their profit margin. Chaplin estimates that, at current WiFi usage levels, Comcast would make a pre-tax margin of 18% on Xfinity Mobile if “all voice goes over cellular and Comcast doesn’t offload any incremental data traffic to WiFi”. However, “if Comcast moves to 100% VoIP, we estimate margins would increase to 29%, and if Comcast can shift just an incremental 5% of traffic to WiFi, margins would increase to 43%. Some of the successful WiFi centric MVNO providers like FreedomPop and Republic Wireless have been able to shift over 90% of data traffic to WiFi (and they don’t own infrastructure like Comcast does).”

The analyst predicts Comcast will achieve market penetration of about 16% in five years, which at ARPU of $39 would translate to revenues of $6bn after five years.

That penetration would be just below what Free has achieved in France to date (18%). And casting an eye over the water, there are hints of the market devastation which may come to pass in the US. Comcast has a reputation for poor customer service, but nevertheless, it has low broadband and TV churn, and is better at marketing to its existing customer base than either AT&T or Verizon has shown themselves to be in the past.

There was a moment when it looked as though Iliad was about to buy T-Mobile USA, but it would have had insufficient WiFi in place for it to put offload at the heart of its strategy and therefore repeat its French trick (it now faces the same challenge in Italy). But for Comcast the numbers are just about right to emulate what Free did in France.

Free secured first a 3G, then a 4G licence in France, built out a minimal amount of base stations and roamed with Orange, while offloading some 70% of its traffic to WiFi. With just 5m home broadband lines Iliad managed to gain 13m cellular customers in a market of around 72m mobile users, some 18%. In that time its broadband base rose to 6.4m lines and its cellular uptake is still growing faster than any other operators in France.

To do exactly the same in the US, Comcast would need 20m broadband lines which terminate in WiFi, and then if all other conditions were the same, inside two years it might take 39m mobile customers. Well it has 16m hotspots, so perhaps just about enough to cause this amount of disruption and it can get to 20m in two more years.

In France, within a year, second-placed MNO SFR was put up for sale, and along with Orange and Bouygues, had to start offering free WiFi offload inside a year. It was these moves which have made France the most WiFi-driven cellular market in the world with 70% plus of all traffic offloaded.

The offload distinction here is really important. This is not the consumer voluntarily electing to use WiFi at home or in a bar or at work. This is the operator effecting a seamless transition to WiFi for all data apps, virtually undetected, wherever WiFi is in reach. Within the Comcast footprint it has virtually contiguous WiFi across metropolitan and suburban regions. No other operator in the US, with the possible exception of one of the other cablecos like Cablevision, could be sure that 80% of data traffic will be carried by existing WiFi. Other cable providers are almost certain to extend their WiFi footprint, upgrade their AAA servers and build out Trusted Wireless Access Gateways in their WiFi core, over the coming year or two, and may join in with this Comcast effort to market a US-wide WiFi-first MNO to mirror the huge Cable WiFi Alliance national hotspot roaming agreement.

At some critical point in the future Comcast and others may make a move for T-Mobile so they can put the cellular end of the equation more firmly under their own control – Comcast’s purchase of 600 MHz spectrum looks like a first step in that direction.

Charter is known to be building out WiFi, and using its membership of the Cable WiFi Alliance to bolster broadband benefits, and Altice and its assets are sure to follow. It has already signed up 1.8m hotspots in its more limited territory.

In the end the telcos, AT&T and in particular Verizon, will struggle with a lack of WiFi coverage in the US which will put them both at a disadvantage offering similar services.

However, this will not be plain sailing for Comcast. The price difference is not as marked in the US as Free made it in France – despite a few loss leaders, Comcast is trying to preserve margin as much as it can. And at present the cableco has not implemented voice over WiFi, so all voice traffic will have to go over Verizon’s network for now.

Our expectation is that Comcast will plug away for a few years, making gentle inroads at the rate of 4m to 5m lines a year, starting with a few million in the second half of this year, and then partner with other cable operators which also have MVNO options with Verizon, to extend the service to both sets of WiFi hotspots, and then finally to add another 70m plus customers by buying T-Mobile US, to build a 100m connection network in under five years).

This type of approach would keep down the cost of getting into cellular and eat perhaps 30m subscribers from AT&T, Verizon and Sprint at the same time, something that T-Mobile USA has almost done on its own in the past five years (20m).

To do all this Comcast would have to capture 30m customers at the rate of around 1m to 1.25m a quarter. And to do that the remaining operators would be forced to acquire as few as 1m each quarter between them, and the bulk of these would almost certainly all go to T-Mobile. That would limit growth in the remainder of the market to IoT connections and connected cars, just as these companies are expecting to fund capex for 5G.