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It was just a little more than a year ago when Comcast (NASDAQ: CMCSA) was the largest U.S. pay-TV provider. And it wasn't even close. But after AT&T (NYSE: T) merged with DirecTV, it took over the top spot. Now, AT&T's rival telecom company, Verizon (NYSE: VZ), is reportedly considering a megamerger of its own with Charter Communications (NASDAQ: CHTR). The move would put the combined company's total video subscriber count very close to Comcast's.
The potential merger points to a big hole in Comcast's service offerings -- its lack of wireless service. If customers can save money by bundling their TV, internet, and wireless bills together with its competitors, Comcast stands to lose customers. But Comcast's management and investors shouldn't lose sleep over the possibility that its two biggest competitors offer wireless service.
What's so great about wireless, anyway?
The wireless industry has become increasingly competitive in recent years, putting immense pressure on revenue growth and profit margins. In fact, after Verizon's disappointing fourth-quarter results, MoffettNathanson analyst Craig Moffett wrote, "In what is a remarkable turn of events, Verizon's wireless business is now a bigger drag on growth than is the wireline business."
AT&T and Verizon are looking for ways to differentiate their products, and that means making big deals such as AT&T's DirecTV merger. AT&T is leveraging its new business by offering unlimited data plans exclusively to DirecTV customers, and it doesn't count DirecTV Now -- its new over-the-top TV streaming service -- against its own customers' data caps.
Meanwhile, lower-end competitor T-Mobile (NASDAQ: TMUS) has focused on offering more value to its customers without relying on big mergers with media companies. And while T-Mobile is managing to increase its prices, AT&T and Verizon are seeing many of its customers switch to lower-priced, or at least higher-value, plans -- if not switching carriers altogether.
The value of combining wireless and a pay-TV operator is in the potential for bundling. Indeed, that's exactly what Comcast CEO Brian Roberts said on the company's fourth-quarter earnings call, telling analysts he sees bundling wireless service with video and internet as a way to "add value to our customers, improve retention, and ultimately benefit lifetime customer economics."
Comcast's low-cost entry into wireless
Importantly, Comcast does have a plan to enter the wireless market that won't cost it nearly as much as an acquisition. While many analysts have posited Comcast could buy T-Mobile to enter the wireless market, it doesn't have to. It already plans to exercise an MVNO agreement it made with Verizon five years ago to launch its own wireless service by mid-year. The MVNO agreement allows Comcast to offer its own branded wireless service while piggybacking on Verizon's network.
Last year, Comcast told analysts it was entering the incentive spectrum auction and could potentially bid on spectrum. While we're still awaiting the close of the auction, the lackluster bidding indicates that Comcast probably didn't participate heavily. Additionally, Roberts' comments that "we are hoping [the MVNO agreement] is an end-stage strategy and that it's sustainable" indicate that it's not too interested in buying and deploying spectrum itself.
The backup plan
Comcast does have a viable backup plan. If the telecoms start cutting into its business and the MVNO agreement isn't enough to attract a significant subscriber base, it could break out its wallet and acquire T-Mobile. If the Verizon-Charter merger comes to fruition, it would eliminate a potential competing bid for T-Mobile, as analysts have speculated Charter could be interested in T-Mobile.
The scenario isn't ideal, which iswhy investors should consider it the backup plan. Roberts' comments on the earnings call add credence to the idea that Comcast going to give the MVNO option a real shot.
With Comcast's current options to enter wireless, a merger between Charter and Verizon isn't a big worry for the company. It's executing well with its core cable and television businesses, and it has a plan to fight back already without dedicating a lot of cash to wireless. Ultimately, Comcast's management is well positioned to navigate the competitive waters, whatever the future may bring.
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