Verizon and cable companies Charter and Comcast could see a major win/win if they were to adopt a wireless infrastructure model similar to the one that Sprint and cable operator Altice have adopted, said financial analysts at Moffett Nathanson today. “The model for convergence may be Altice USA’s clever 2017 MVNO [mobile virtual network operator] deal with Sprint,” the researchers wrote in a research note advocating a hypothetical Verizon/Comcast/ Charter deal.
The Sprint/Altice agreement, inked in late 2017, enables Sprint to use Altice’s fiber network for small cell backhaul for free in exchange for allowing Altice to use the part of the Sprint mobile network that uses those small cells for free to support a wireless offering. According to the researchers, the arrangement is “a rather elegant solution” because the benefits become greater as network construction continues and the two players become more enmeshed.
The deal is limited in scope, however. According to the researchers, almost all the wireless infrastructure that Sprint has deployed on Altice fiber is in the New York metropolitan area.
To the researchers, that raises the question “What if a major wireless carrier – let’s assume Verizon – did the same thing, but with Comcast and Charter instead, on a truly national scale and with best-in-class networks?”
A Hypothetical Verizon/Comcast/Charter Deal
Comcast and Charter are the primary cable providers in the majority of major U.S. markets and have avoided competing directly with one another. The researchers see a Sprint/Altice-style deal with Verizon as Comcast’s and Charter’s best shot at gaining a profitable wireless offering. According to the researchers, the cable companies are not making much, if any, money on their current wireless offerings.
The Comcast and Charter mobile offerings were intended to rely as much as possible on the cable companies’ own Wi-Fi infrastructure and to fall back on Verizon’s cellular network when Wi-Fi isn’t available, but according to Moffett Nathanson, the decision whether or not a connection uses Wi-Fi is controlled by Verizon, not the cable companies, and the cable Wi-Fi infrastructure is not as extensive as it should be.
If, instead, the cable companies were to adopt a Sprint/Altice style deal with Verizon, the cable companies’ mobile network costs would decrease over time. Meanwhile, Verizon could save considerably on its mobile infrastructure costs by using the cable companies’ fiber rather than deploying its own, the researchers argue.
The researchers see this scenario as a more workable alternative to a cable company/ wireless carrier merger, which might not be approved by regulators and might not be financially viable.
A Lopsided Deal?
It seems to me that the hypothetical Verizon/Comcast/Charter deal would be more beneficial to the cable companies than to Verizon, however. The cable companies feel the need for a mobile offering, as video content increasingly is consumed on mobile devices. But with four major national mobile carriers already in the market, and with one of them (Sprint) struggling to compete and with subscribership having reached a saturation point, it doesn’t make sense for the cable companies to build their own mobile network. And while traditional MVNO deals have been notoriously unprofitable for the virtual operator, a Sprint/Altice-style deal seems like it could be a way to change that.
From Verizon’s point of view, though, I don’t see such a compelling case for the hypothetical Verizon/Comcast/Charter deal.
Moffett Nathanson speculated in a previous note that the economics of Verizon’s millimeter wave fixed 5G deployments are challenging, and they view the hypothetical Verizon/Comcast/Charter deal as “a more realistic path to a true 5G infrastructure.”
The researchers painted such a negative picture of Verizon fixed 5G economics, though, that I would have to question whether simply using cable company fiber would be enough to fix it.
Another question is how important fixed 5G is to Verizon strategically, and I think the answer is “not tremendously.” The carrier initially said it saw a potential market of 30 million homes for a fixed 5G offering, including areas of its own local service territory where it has not deployed fiber-to-the-home (FTTH), as well as areas outside its local service territory.
Deploying faster broadband is clearly important in Verizon’s own local service footprint, where the company already has lost internet customers to faster cable offerings and stands to lose more business moving forward, but it’s less important outside the company’s own local service turf. And if fixed 5G economics don’t pan out, it would seem that the company has other options for increasing broadband speed. Even if FTTH is too costly, perhaps fiber-to-the-node or fixed wireless in a lower-frequency spectrum band would be an option.
Perhaps a Verizon/Comcast/Charter deal could indeed benefit both parties, but I think the benefits are lopsided, with the cable companies having more to gain. Perhaps there is a middle ground, in which Verizon uses the cable company infrastructure in some areas and the cable companies don’t get to use the new Verizon wireless infrastructure for free but instead get better wholesale pricing on Verizon wireless than they do today.