Both Comcast (NASDAQ: CMCSA) and Charter Communications (NASDAQ: CHTR) have deals in place with Verizon (NYSE: VZ) to support the wireless services they want to offer. Comcast launched Xfinity Mobile earlier this year, and Charter plans to launch a similar service soon. Both services will rely on Verizon's network for service in what's called an MVNO agreement, where the cable companies operate a virtual network.
But the cable giants are now in exclusive talks with Sprint (NYSE: S) to get some sort of deal done. The details are unclear, but it certainly puts a hold on talks between Sprint and T-Mobile (NASDAQ: TMUS) to come to a merger agreement.
With deals already in place with Verizon, what do Comcast and Charter want with Sprint?
Investing in a network for better or worse
Sprint has lagged the rest of the industry in network quality for some time now. Verizon's network, meanwhile, has consistently outperformed the competition in terms of reliability and coverage. Comcast and Charter will bolster the network performance by using WiFi hotspots where available.
The cable companies could be looking to invest capital in Sprint to help it build out and improve its network coverage, bringing it closer in quality to Verizon's. As part of the agreement, they could have cheap access to the network for their MVNOs. Additionally, Comcast may be able to supplement Sprint's build out with the 600 MHz spectrum licenses it bought at auction earlier this year.
It's important to note Xfinity Mobile doesn't allow customers to bring their own device. Comcast works with hardware providers to set up software on devices to automatically connect to its Wi-Fi hotspots.
As such, it could use that constraint to also allow devices to switch between Sprint and Verizon's network based on signal strength, similar to how Google Fi uses both T-Mobile and Sprint's networks. That way the MVNOs can capitalize on the low price of using Sprint's network without sacrificing the network quality of Verizon.
Is a capital investment even necessary?
It's unclear whether Sprint will be able to raise capital from the cable companies. While more money will help it build out its network, the company is so desperate for customers, it's willing to give away its service. Comcast and Charter may be able to walk away with a simple MVNO agreement without putting any money down up front.
That would be a huge win for both companies, as the wireless services they're working on are still in early experimental stages. Putting down a bunch of money on something that's yet to show real customer interest in the form of subscriptions is a big risk. And both companies certainly have the cash to spend -- it might serve shareholders better if they hang on to it for now.
The terms of an MVNO agreement may not be as great without an up-front investment and Sprint's network will take longer to improve, but it saves a lot of second-guessing should things not work out as planned.
Bad for Verizon and T-Mobile
Any deal between Sprint, Comcast, and Charter is bad news for both Verizon and T-Mobile. Verizon will lose some modest revenue from its MVNO agreements if it has to split coverage with Sprint. What's more, an agreement with Sprint could allow Comcast and Charter to completely undercut Verizon's pricing while offering the same network reliability as the wireless leader. That would go a long way toward reducing churn and keeping its internet and video subscribers happy.
T-Mobile stands to lose much more. It could lose significant leverage with potential acquirers or merger partners as a deal takes three big companies off the table: Sprint, Comcast, and Charter. Even if Comcast and Charter do look to make a deal with T-Mobile, the agreement with Sprint counter-levers any potential for competing buyers. Either way you look at it, T-Mobile's position at the negotiating table gets worse if the cable companies reach a deal with Sprint.
That said, T-Mobile is still well positioned to keep growing its share of the wireless market, and it's sure to compete with any services from Comcast and Charter as long as it remains an independent company.
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