1、North America Equity Research11 July 2019 Cable and Telecom ServicesCable in Wireless 2019:Impact on MSOs and Wireless Industry as Cable Efforts ScaleTelecom Services/Cable&SatellitePhilip Cusick,CFA AC(1-212)622-Bloomberg JPMA CUSICK Sebastiano C Petti(1-212)622-Richard Choe(1-212)622-Reed Kern(1-2
2、12)622-J.P.Morgan Securities LLCSee page 46 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivit
3、y of this report.Investors should consider this report as only a single factor in making their investment Cable began offering wireless service in 2017 with Comcasts MVNO launch,followed by Charter in 2018 and Altice coming soon.Today cable has 1.7m customers(1%of the postpaid market),but took 41%of
4、 industry net adds in 1Q19,up from 24%in 1Q18.Cable wireless offers include a combination of their own WiFi networks and a wholesale cellular agreement,which hampers their ability to drive high margins.While we do not expect cable to buy a wireless carrier,over the next few years we could see some c
5、able operators buy or lease spectrum to insource cellular data in high-traffic areas and drive margin higher.Our base case assumes that in 2026 cable has 14m customers,6%of industry postpaid voice customers,and 20%stand-alone wireless margins.We estimate wireless NPV of$2.3b for Comcast,$2.7b for Ch
6、arter,and$728m for Altice In this report we update our view on cables wireless business models as well as provide MVNO models for Comcast,Charter,and Altice.MVNO reliance limits Comcast/Charter ability to undercut wireless pricing,but can still reach 20%margin in terminal year.Today we estimate that
7、 Comcast and Charter pay Verizon$3-4/GB of capacity used,compared to the$1/GB that it costs Verizon to create the average GB on its network.While cable will push as much traffic off to WiFi networks as possible,most mobile customers already offload much of their data usage,68%according to Cisco.We e
8、stimate that cable companies will have 4-8 percentage points more offload over time than wireless carriers due to their ownership of home broadband and WiFi,but getting customers off cellular when they are outside of home or work will remain a challenge.We estimate that the average cable unlimited c
9、ustomer uses 12-14 GB,and$/GB customers use 2 GB,resulting in our estimate that Comcast and Charter are paying$23-27 of their$33-35 ARPU to Verizon.As volumes scale and WiFi offload increases we estimate Comcast and Charter will break even in wireless on a stand-alone basis in 2023,and long term wil
10、l reach a 20%EBITDA margin.When adding in the potential savings from lower cable churn,Comcast and Charter could increase 2025 cable EBITDA by 3%.Altices deeper relationship with Sprint offers lower costs,more flexibility.Altice deployed 19k strand mount small cells for Sprint across its footprint,a
11、nd provides ongoing power and backhaul to those cells.This as well as Sprints lower retail yield underlie our estimate that Altice will pay Sprint$2.33/GB at launch,allowing the company to price unlimited closer to the$35 range when it launches service.We estimate long term margin of 19%at Altice,wh
12、ich could be higher if Altice deploys its own cellular capacity in high-traffic areas.If Sprint and T-Mobile merge we expect Altices deal to include the T-Mobile network and potentially extend beyond the current 2024 expiration.Wireless carriers benefit initially from MVNOs,but long term rates will
13、likely be negotiated down.We estimate Verizon will earn$618m in revenue from Comcast/Charter MVNOs this year at an 80-90%incremental margin a positive vs the 40%of those customers who may have otherwise been Verizon customers.Over time though,as traffic offload increases and cable MVNOs gain scale,t
14、hey will likely look to leverage that into lower prices at other carriers,a clear negative to wireless industry economics over time.Cable companies could also invest in Dish and help it to build a 5G network over time,in exchange for lower wireless pricing than is available from traditional carriers
15、.2North America Equity Research11 July 2019Philip Cusick,CFA(1-212)622- Table of ContentsCable in Wireless:Executive Summary.3Industry Discussion.7Why Wireless Makes Sense for Cable.7Quick Background of Cable MVNOs.10Wireless Industry Overview.11Cable Wireless Strategies.16Cable/Wireless M&A Conside
16、rations.20Comcast in Wireless.22Strategy Overview.22Comcast Wireless Drivers.25Charter in Wireless.31Strategy Overview.31Charter Wireless Drivers.33Altice USA.38Background.38Views on Product and Long-Term Strategy.39Spectrum strategy.40Altice MVNO Model Drivers.413North America Equity Research11 Jul
17、y 2019Philip Cusick,CFA(1-212)622- Cable in Wireless:Executive Summary20 years ago cable and telecom companies were different business models,and when AT&T cobbled together long distance,enterprise,wireless,and a big cable asset under one roof in the mid-90s there wasnt much overlap between the cabl
18、e(video)and wireless businesses.Since then though,the importance of broadband and the ease of using broadband networks to deliver legacy services has brought these two industries crashing together.Cable companies have attacked telecom in voice and data for consumers and enterprise,while telecom comp
19、anies entered the video business more than 10 years ago and have 32%/11%share today(w/and w/o DTV),and broadband was a battleground from the beginning,with both industries skirmishing for share over time(estimated 66%/32%for cable/telco today).Inwireless,while Comcast has been involved in a limited
20、way for nearly 25 years since being one of the original investors in Sprint,it never really found a good way into the market or reason to be there.Recently though,the combination of Comcasts 2011 spectrum sale to Verizon and the perpetual MVNO deal that it brought,and the increasingly data-focused a
21、nd high quality wireless industry seem to finally have brought Comcast,and other MSOs,into the market in a real way.Mobile Virtual Network Operators(MVNO)deals support cable entry into wirelessEuropean cable companies got into wireless in the 2000s and took substantial share of subscribers at their
22、peak,selling essentially undifferentiated wireless voice minutes and SMS at the lowest marginal cost to consumers.Their MVNO deals were initially created by regulators,but eventually prices were driven down by competition between network owners for traffic.Those businesses started to fade as consume
23、rs began to expect real 4G data speeds and carriers held on to capacity for their own subscribers.Similar to Europe we see the 4G MVNO deal that Comcast and Charter have with Verizon as providing them capacity that is today essentially no different from that offered by Verizon,and since cable alread
24、y has a relationship with the customer,sending them a bill and dealing with customer service,there is little marginal cost of adding them as wireless customers aside from handset costs and the per-GB data fees.Since their deal with Verizon offers Comcast and Charter a retail-minus pricing structure,
25、their wholesale cost should float down as Verizons,and the industrys,usage goes higher,preserving at least their current economics.We believe that Altices wholesale rates are more driven by its own volume triggers,but its Sprint MVNO deal starts at a substantially lower rate than that paid by Comcas
26、t and Charter to Verizon.but also limit long-term flexibilityThe MVNO deals enable cable to enter the wireless space,but they are also somewhat constraining.First,while Comcast and Charter have a perpetual MVNO deal with Verizon,Altices deal with Sprint is only for 5 years and the company will need
27、either an extended contract,or another relationship,to maintain service beyond that.Second,paying a carrier on a$/GB basis,even if it falls over time,will be limiting vs having the scale of owners economics.Our understanding is that Comcast/Charters wholesale rate with Verizon floats down with Veriz
28、ons per-GB retail price,meaning that as Verizons usage has gone up in the last year(an estimated 6.6 GB/month today,up 18%y/y),and its estimated postpaid voice ARPU remains flat around$52/year,the per-GB price has fallen 14%.The choice of partner matters as well Wireless is just the latest battlefie
29、ld in a 20-year war between telecom and cable companies;Cable has the high groundWe estimate Comcast pays Verizon$3-4/GB and Altice will pay Sprint$2.33/GB this year4North America Equity Research11 July 2019Philip Cusick,CFA(1-212)622- while the float-down structure is great for cable in isolation,w
30、e believe that Verizons usage is lower,and its pace of increase is slower,than smaller competitors Sprint and T-Mobile.The result is that,despite falling input costs,cable will actually find it difficult to compete for certain types of customers in an unlimited market,and instead may prefer to sell
31、plans on a$/GB basis despite the naturally low ARPU of those plans.As cable scales,each company will likely look for other carrier relationships,like with Sprint or AT&T,as negotiating leverage against Verizon to drive better economics and flexibility.Finally,Comcast and Charters deal with Verizon i
32、s very limiting in that they are essentially reselling the entire Verizon network and have very little control over the customer experience.Altices deal with Sprint allows it to use its own core network and maintain the Home Location Register(HLR),the central database that contains details of each s
33、ubscriber authorized to use the network.Conversely Comcast and Charter rely on Verizon for the core and HLR,which we believe could limit their ability over time to move customers across networks.Cable Could Take 40%of Industry Adds by 2021Cables wireless offers should be attractive to two large grou
34、ps of customers,1)in homes where there are 1-3 unlimited users in the home,or 2)homes where some of the customers are fairly low data users and can pay$/GB.The service should be less attractive in homes with 3-4 unlimited users,because at 3x$45 or$135 is close to the$145-150 level where AT&T and Ver
35、izon offer their low-end unlimited service for three customers and above that of Sprint and T-Mobile,and 4x$45 or$180 is solidly in-line with AT&T and Verizon and above Sprint/T-Mobile.Today we believe that roughly 60%of the plans Comcast sells are$/GB plans,while Charter is a little more evenly spl
36、it with unlimited.Those$/GB plans,$12/GB at Comcast and$14/GB at Charter,are attractive to customers who use little data or have high WiFi offload levels,and are something that existing carriers are unlikely to want to offer on their main brands so we dont expect Comcast and Charter to reduce those$
37、/GB prices.Figure 1:Wireless Unlimited Plan PricingSource:Wave7 Research.Note:As of June 30th,2019;Assumes Autopay;AT&T and U.S.Cellular pricing also assumes paperless billing.In the next year we expect cable share of new customers to increase,with potentially lower prices than today,as Altice launc
38、hes with Sprint(we estimate$35/month for unlimited and some kind of$/GB plan),and Charters sales efficiency improves.1 line2 lines3 lines4 linesHotspotHD video?Verizon Above Unlimited$95$180$210$240 20GB720pVerizon Beyond Unlimited$85$160$180$200 15GB720pVerizon Go Unlimited$75$130$150$160 Unlim but
39、 600KNoAT&T Unlimited&More Premium$80$150$170$190 15GBYesAT&T Unlimited&More$70$125$145$160 NoNoSprint Unlimited Premium$90$160$210$260 100GB,3G afterYesSprint Unlimited Plus$70$120$150$180 50GB,3G afterYesSprint Unlimited Basic$60$100$120$140 500MB,3G afterNoMagenta Plus plan$85$140$150$180 20GBYes
40、Magenta plan$70$120$140$160 3G onlyNoEssentials$60$90$105$120 3G onlyNoU.S.Cellular$65$120$150$160 10GBNoXfinity Mobile$45$90$135$180 IncludedNoSpectrum Mobile$45$90$135$180 IncludedNoAltice could launch its consumer wireless offer in August after a short employee beta trial which recently startedCa
41、ble offers differentiated pricing vs traditional wireless5North America Equity Research11 July 2019Philip Cusick,CFA(1-212)622- Cable is likely to focus on service prices,particularly its$/GB advantage,while carriers will remain focused on handset promotions and BOGO offers as we dont think that cab
42、le wants to be in the position of heavily subsidizing phones.Despite cables rise,we see the competitive environment as fairly stable due to capacity constraints across the industry relative to 2014-17 when service-level pricing was more the focus.As 2019 and 2020 unfold,we would not be surprised to
43、see Big-4 growth trends weaken in favor of cable which is largely reflected within our Big-4 estimates,though much of that weakness is taken up by Sprint which is struggling.We currently estimate 3.6m postpaid voice adds for the Big-4 carriers in 2019 vs 4.5m in 2018 while cable ramps from 990k in 2
44、018 to 1.67m in 2019.Figure 2:Estimated Postpaid Voice Net Adds-Big-4 vs CableSource:J.P.Morgan estimates,Company data.While cable represents just 1%of total postpaid voice subs today,Charter and Comcast were able to capture 41%of incremental net add growth in 1Q19(up from 18%in 1Q18).Over the next
45、several years we believe cable is well positioned for ramping subscriber gains which is currently reflected in our Big-4 wireless models.Through 2022,we model the combination of Comcast,Charter,and Altice capturing 34%of industry net adds.This could prove conservative as efforts scale and MSOs pivot
46、 to leveraging wireless as an acquisition tool through bundling alongside broadband.Cable looks less likely as a buyer of wireless assets near term Several years ago we thought that cable operators could look to acquire a wireless operator.Following the 600 MHz auction,and change in Presidential adm
47、inistration,there was an abundance of headlines suggesting potential wireless-to-wireless and/or cable-to-wireless M&A.Over the long-term,we believe wireless will be an integral part of cable businesses as evident in Comcast and Charters successful experience to date,but in the medium-term look for
48、MSOs to focus efforts on eachs respective MVNO rather than look to buy themselves into the space.Messaging from MSO management teams differs slightly as it pertains to direct network ownership or targeted deployments,but each has been clear in its lack of interest in acquiring major wireless assets.
49、If cable is able to take share in wireless and damage profitability or subscriber trends for incumbents,eventually each could be well-positioned to acquire an asset at cheaper prices than today.Impact on our covered companies As we outline above,we believe that entry into wireless will provide cable
50、 with long-term growth opportunities beyond the traditional business lines at the expense of -500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,00020182019E2020E2021EBig-4 Voice Net AddsCable Voice Net Adds6North America Equity Research11 July 2019Philip Cusick,CFA(1-212)622- near-term margin he
