Telecom stocks have shown some signs of life recently after suffering amid a brutal price war. This isn't the time for optimism.
The partnership between Comcast and Charter Communications announced last month gives the cable operators a better chance to succeed in the wireless business by giving them scale in technology, procurement, logistics and billing. Investors should take the risk to wireless carriers more seriously. Shares of AT&T, Verizon, T-Mobile US and Sprint are either flat or up since the deal's announcement.
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Comcast is already selling wireless service and Charter is set to launch its own in 2018, both of which will run on Verizon Communications' network. Together, the two will be able to market to roughly 97% of the U.S. wireless market, UBS estimates. Even though they are only selling to their existing video and broadband customers, their low pricing could help them attract a meaningful subscriber base.
In addition to a per-gigabyte plan, Comcast offers unlimited wireless service for $45 a month per line to households that buy its top X1 video package, of which there are currently 2.9 million. At one line, that represents a 50% discount to AT&T and is cheaper than all four major wireless carriers. The cable company also offers a $65 a month per line unlimited service to any of its Xfinity internet customers, a 28% discount versus AT&T for a single line.
Assuming Comcast attracts about 5% of the subscribers on the best X1 package and about 2% of other subscribers, it would get about 1.5 million wireless subscribers by the end of 2018, UBS projects. Combine that with the bank's expectations for Charter, and cable should have more than two million wireless subscribers by the end of next year, climbing to six million by the end of 2020.
For U.S. wireless carriers, that might seem like a manageable risk. Six million people is only 3% of the U.S. wireless market. But that more than accounts for the industry's annual growth. Cable could accelerate subscriber losses at AT&T and Verizon and could curb growth at T-Mobile and Sprint.
Between the two giants, AT&T would feel more pain because the impact on Verizon would be offset by the high-margin fees Comcast and Charter pay for the use of its network. Every 500,000 cable subscribers adds $120 million to Verizon's annual earnings before interest, taxes, depreciation and amortization, UBS estimates.
The cable operators could fail to hit those subscriber estimates if the technology, which also incorporates the cable companies' Wi-Fi hot spots, proves unreliable. Cable lacks the extensive store network of major wireless carriers, and Comcast doesn't yet allow customers to bring their own devices. The economics of renting airwaves could also curb cable's growth.
Until then, wireless investors should curb their enthusiasm.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
June 06, 2017 13:03 ET (17:03 GMT)