When cablecos Comcast and Charter began offering mobile service via MVNO agreements with Verizon, many people in the telecom industry questioned how profitable those offerings would be. Those doubters were wrong, according to a new research note from financial analysts at MoffettNathanson.
Traditionally, the margins on MVNO connectivity are slim. But that’s not true for the two cable companies – and there’s an easy explanation why, the analysts said.
It’s been over 10 years since Verizon signed its MVNO agreement with Comcast and with two other cable companies that ultimately were acquired by Charter. When the agreement was made, “it’s a safe bet that no one on either side of the table was thinking about the radical differences in the cost to serve dense urban markets and sparse rural ones,” MoffettNathanson notes.
MVNOs typically pay for wholesale services on a price per minute and price per gigabyte basis, the analysts said.
“In effect, the Verizon deal, just like every other MVNO, was based on the mean average price per minute and the mean average price per gigabyte,” the research note continues.
At that time, MVNOs had no infrastructure of their own, which meant that MVNOs’ usage patterns largely matched those of the network operators.
Comcast and Charter overturned that model.
“Uniquely among MVNOs, Comcast and Charter have their own ground facilities, allowing them to selectively offload traffic,” said MoffettNathanson. “And where will they offload traffic? Why, in the dense urban areas, of course, where cost to serve is low. They’ll leave the high-cost areas to Verizon.”
That means it may be a problem for Verizon but it’s a benefit for the cable companies.
The researchers referenced a comment from Comcast CEO Brian Robert stating that just 3% of that company’s footprint represents 60% of the mobile traffic, measured by square mileage.
The impact is magnified by the fact that the marginal cost of adding strand-mounted small cells required to offload traffic onto pre-existing facilities is just a small fraction of what overbuilding the 3% of the network would cost.
In other words, the cablecos’ own wireless infrastructure may be less costly to build in comparison with what it would cost other mobile providers.
“It is not inconceivable that Comcast and Charter will eventually be able to offload more than 60% of their wireless traffic onto their own networks with only incremental investment, boosting their already-high margins to as much as 85%,” the analysts said.
The analysts didn’t say when the companies’ deal with Verizon ends, though. And whenever it does and assuming the analysts’ analysis of the current cost structure is correct, I suspect Verizon will ask for new terms, which could lower the cablecos’ MVNO margin.
