Is the broadband industry approaching mutally assured destruction, also known as a “Convergence Apocalypse”? It’s a question explored in a new research note from MoffettNathanson Research.
According to advocates of the Convergence Apocalypse theory, telcos’ increasingly ambitious fiber deployments pose a big threat to major cable companies at the same time that cable companies’ increasing success in offering mobile service poses a big threat to the major telcos.
Both threats are real, the researchers argue, but they don’t see the threats as symmetrical. Instead, they see cable companies having the advantage.
Important Broadband Industry Trends
MoffettNathanson offers several data points to illustrate the threat that telco fiber deployments pose to cable companies. Collectively, the major telcos have targeted 5 million homes for fiber overbuilds this year, or about 4% of the U.S. Next year the target is 7 million homes or an additional 5%. By the researchers’ estimate, that means that the cable plant overbuilt by fiber will rise from about 40% or so today to about 55% over the next decade or so.
The threat that cable company wireless poses to the telcos is more immediate, the researchers argue. Charter’s recently announced pricing of $29.99 per line for two or more lines should be particularly worrisome to the telcos, whose prices are considerably higher, according to MoffettNathanson.
Concerns about the profitability of cable company wireless offerings have proven to be unfounded, according to the researchers. Those offerings rely on a combination of Wi-Fi and a resale agreement with Verizon and according to the researchers, “Cable is much better at offloading traffic onto Wi-Fi than the telcos.”
While Verizon customers, on average, send about 75% of their traffic to Wi-Fi, the cable companies send an average of 93% of their traffic over Wi-Fi, using the Verizon network for only 7% of their data usage.
The upshot is that while researchers initially thought the cable wireless business had “passable” margins, that business is actually dramatically more profitable. And that means the cable companies are well positioned to use wireless as a “flanker” offering to retain broadband customers that might be tempted to switch to telco broadband as the telcos build out their fiber networks.
That strategy could have the added impact of starving the telcos of cash, and potentially driving them to scale back their fiber deployments, MoffettNathanson observes. The researchers also note that the telcos’ fiber investment has a payback period of six to 10 years and if prices or take rates drop, the payback period grows longer or becomes unsustainable.
Geography also favors the cable companies, the researchers argue.
“Cable can bundle wireless and broadband everywhere in their footprint; their broadband service availability is ubiquitous in footprint and their wireless service is national,” the research note about the broadband industry observes. “The telcos, by contrast, can bundle wireless and fiber-based broadband only where they have fiber-based broadband. For Verizon, that’s only about two thirds of their footprint, or about 11% of the U.S. For AT&T, it’s only about a third of their footprint, or about 13% of the U.S. T-Mobile has no fiber at all.”
The researchers add, though, that T-Mobile’s prices are comparable to the latest wireless plans from Charter and Comcast, which means that T-Mobile can easily compete against cable or telco bundles.
“A synthetic bundle of T-Mobile and telco broadband is advantaged versus the telcos, and a synthetic bundle of T-Mobile and cable broadband is neutral versus cable,” the researchers observed.