Why a Cable Deal is Bad for the Phone Industry--Heard on the Street

By Miriam GottfriedFeaturesDow Jones Newswires

The first wireless deal after a government-imposed hiatus is bad news for the biggest carriers and could scramble the likely outcomes of other anticipated combinations.

Cable operators Comcast and Charter Communications said Monday they would form a year-long partnership to expand their wireless offerings. The deal signals the two companies are serious about expanding into the industry. It also ensures that the two biggest cable companies will work together -- and not bid against one another -- when it comes to wireless deals.

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For Comcast and Charter, which are more peers than rivals because their coverage areas don't overlap, teaming up makes sense. It will allow them to integrate their networks of Wi-Fi hot spots, which cover about 80% of the country, according to New Street Research. This should help them offer better service to subscribers and considerably lower the cost of running wireless networks on Verizon Communications' airwaves.

The partnership could also signal a desire for a deeper relationship between the two cable giants -- even possibly a merger down the line. The Obama administration rejected Comcast's deal to buy Time Warner Cable, later allowing Charter to buy it. By proposing to team up in one business area, Comcast and Charter could be trying to gauge the reactions of Trump administration regulators to the idea of further consolidation.

Deal making in the wireless industry has been suspended for more than a year as companies bid in a government auction of spectrum. The suspension ended last month. The Comcast-Charter Communications agreement is the first of what could be a wave of mergers that could reshape the industry.

The success of the venture would make things much worse for the industry's two giants, Verizon and AT&T, which are already losing subscribers to T-Mobile US and Sprint amid a bruising price war. Given the steep fixed costs of the wireless business, additional pressures on subscriber growth would hit margins hard.

The agreement also could reduce the prospects for a bidding war as two of the biggest players would likely be working together. It also likely takes one of the most speculated-about deals, a Verizon-Charter merger, off the table.

For Sprint and T-Mobile, more competition would stifle their growth. But legitimate wireless competition from cable could also strengthen their case with regulators for a merger. Many analysts and investors expect Sprint to try again soon to buy T-Mobile. If a deal is approved, Comcast and Charter might be interested in purchasing the combined entity. If it is rejected, they may team up to buy one company or each purchase one after the end of their wireless agreement.

Meanwhile, the cable companies may try to strike more network-sharing deals -- such as the ones between the cable companies and Verizon -- with other wireless carriers, helping them improve their chances of going it alone in wireless.

Wireless investors can no longer ignore cable's call.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

(END) Dow Jones Newswires

May 08, 2017 13:35 ET (17:35 GMT)