The cable industry faces elevated competition from wireless carriers offering in-home broadband via fixed wireless access (FWA). In response, many cable operators offer their own mobile products using wholesale mobile virtual network operator (MVNO) agreements with wireless carriers.

We believe the net impact of this value transfer is negative for the cable industry as a whole for the next 2-3 years. However, Charter Communications Inc. and Comcast Corp. are better positioned than their cable peers in this shifting competitive landscape due to the unique characteristics of their wireless service. Furthermore, we believe wireless economics will improve over time so mobile can meaningfully contribute to the two large operators' EBITDA growth longer term.

Wireless Convergence Is A Net Negative For The Cable Industry

The earnings shift from cable operators will persist for the next 2-3 years.   Wireless carriers have taken the lion's share of in-home broadband customer additions across for the past two years via FWA. In response, cable operators such as Charter and Comcast are bundling their own wireless offerings with in-home broadband and have taken significant share in the postpaid mobile wireless market. We view this as an unfavorable trade-off given high in-home broadband margins and modest mobile wireless margins.

Therefore, the value lost from customers using alternative FWA service is greater than the earnings contributions from new mobile wireless subscribers (Chart 1). We use these simplifying assumptions in an attempt to quantify this impact to cable operators:

• FWA customers would have generated about $400 million in EBITDA per year had they subscribed to cable. This assumes lower-speed tier average revenue per user (ARPU) of about $50 and 65% EBITDA margins on high-speed data revenue;
• 50% of FWA customers come from markets without fiber-to-the-home (FTTH), with cable the only alternative, so we assume they would otherwise be cable customers;
• 50% of FWA customers are in competitive markets where we assume that cable splits the market with fiber, and 50% of these would otherwise be cable customers;
• Cable's mobile products have very low margins initially as they incur subscriber acquisition costs (SAC) associated with growth; and
• Average cable EBITDA margins gradually approach about 13% by 2026.

Chart 1

Charter And Comcast MVNO Is Different

The wireless service offered by Charter and Comcast is a key differentiator with cable peers.   We believe there are several reasons that make it stand out:

• The economics in the perpetual wholesale agreement with Verizon Communications Inc. are reportedly favorable due in part to scale benefits and the origins of the agreements, which date to a 2011 spectrum sale, although the terms and conditions are private.
• They can offload more traffic than a typical wholesale agreement would allow. These operators have partnered to develop and design back-end systems and technology, which includes their combined Wi-Fi footprint for each other's MVNO customers, combined covering most of the U.S. Customers will seamlessly and immediately transfer to a Wi-Fi hotspot whenever available to reduce the variable costs paid to Verizon.
• They both own their own Citizens Broadband Radio Service (CBRS) spectrum licenses purchased in 2020 that could allow them to offload more traffic onto their own networks over time.
• These operators launched service years ago, when broadband revenue and earnings were soaring, providing cover to absorb start-up losses and SAC.

We do not believe that smaller cable operators have the scale or negotiating leverage to develop wireless service with such strength. Many small operators are launching wireless services through an agreement with Reach Broadband, negotiated by the National Content & Technology Cooperative. We do not believe the economics will be very attractive, and the traffic offload opportunity is more modest.

We believe the hybrid model of owners' and renters' economics is powerful for Charter and Comcast.  To this point, the traffic offload has been on Wi-Fi networks both in and out of the home. For example, Charter has stated that it offloads 88% of its mobile traffic onto Wi-Fi. Comcast is even higher at about 90%, according to management. This compares with other MVNOs' estimated typical average of about 75%-80%. This enables potentially better margins than the average MVNO operator that utilizes a wholesale agreement.

Charter and Comcast are in the initial stages of deploying 3.5 gigahertz CBRS spectrum via strand-mounted small cells to their existing facilities. They recently launched in select markets. This will enable these operators to offload more traffic onto their networks in dense areas and avoid paying Verizon for usage. For example, Comcast has stated that 3% of its footprint represents 60% of its mobile traffic. This would enable even more pricing flexibility and/or better profitability. Still, to be clear, these cable operators cannot fully offload all the urban traffic because they do not have deep spectrum portfolios. Furthermore, the pace of CBRS deployment will be gradual given other higher-priority network upgrade plans over the next two years.

We believe the ability to offload traffic in high-density areas presents an interesting and unique opportunity. In these more urban areas, it is capital efficient to use a facilities-based approach and uneconomical to build wireless networks in more rural markets. Therefore, we view favorably the ability to utilize Verizon's high-quality network for coverage in rural markets while enjoying some benefit of owner's economics in more urban areas.

This advantage is magnified if the variable rates paid to Verizon are based on average cost to serve. Averages skew toward urban usage, with lower cost to serve. If these operators utilize the wholesale MVNO agreement more heavily in rural areas where the cost to build is high, they could capture an arbitrage and take advantage of favorable pricing dynamics.

Mobile Is Primarily Defensive

Mobile service is an effective defensive tool when competing with bundled FTTH and FWA offers.   We believe cable operators' primary goal is to retain profitable broadband subscribers, using wireless as tool to price more competitively when customers bundle telecom services. We believe Charter and Comcast, in particular, have these advantages against competing bundled offers:

• The capital-light nature of cable wireless provides more pricing flexibility against telecom companies aiming to add broadband customers using FTTH technology bundled with wireless services. The competing full-fledged facilities-based wireless network and FTTH network are both capital-intensive with higher return hurdles.
• Charter and Comcast are not running wireless to maximize stand-alone wireless profits. Average wireless spending is about 3x spending for in-home broadband for families. This allows the large cable operators to offer a lower overall bundled broadband bill than the telecom competitor by significantly discounting wireless.
• Marginal cost advantage of deploying strand-mounted small cells using owned CBRS spectrum to their ground facilities. This requires only a modest capital investment whereas competing wireless and FTTH bundles utilize networks that are largely separate. There is little marginal benefit from a wireless operator, such as AT&T Inc. (AT&T Fiber) or Verizon (Fios), deploying an FTTH network because most of the cost is at the last-mile edge of the network.
• Charter and Comcast enjoy the benefits of mobile across their entire footprints whereas mobile operators can only bundle wired in-home broadband in a portion of theirs.

Mobile Can Contribute Meaningfully To Long-Term EBITDA

We project healthy mobile subscriber growth.   We believe the formula of low prices and high network quality will continue to gain traction. So far, we believe many subscribers have come from pre-paid defections and customers that bring their own devices. These operators will likely need to offer equipment installment plans and potentially handset subsidies to compete for higher-value subscribers. We believe penetration up-market is achievable with offers such as contract buyouts that target families and phone upgrade promotions.

We believe attractive pricing will be the most powerful incentive to attract new customers. Given the nature of mobile wireless as primarily a broadband customer retention tool combined with improving economies of scale, Comcast and Charter can continue to expand their customer bases (Chart 2).

Chart 2

More specifically, Charter has indicated that about 13% of its broadband subscribers take mobile and Comcast says 11% of its subscribers do so. We believe these numbers could roughly double in the coming years, supported by a marginal mobile attach rate of about 25% in Charter's new rural markets. This could indicate the long-term potential market share (Chart 3).

Chart 3

We expect wireless economics to gradually improve for Charter and Comcast, supporting EBITDA growth.   We expect that earnings growth will come from two sources: traffic offload and scale. We believe these factors could enable higher profit margins than those of many other MVNOs. However, both Charter and Comcast stopped reporting complete mobile financials, which makes forecasting difficult.

Although their EBITDA margins are depressed today as SAC weigh on profitability, we estimate that Comcast and Charter could generate EBITDA margins approaching 15%-20% over time based on these factors:

• Boost Mobile, a good proxy for a scaled MVNO with public financials, achieved EBITDA of about $500 million on EBITDA margins of about 10% with ARPU of about $39 on about 8.5 million prepaid lines in 2021. This was without the more extensive traffic offload that Charter and Comcast enjoy.
• Consumer Cellular generates EBITDA margins above 20% using purely an MVNO business model. However, the customer base tends to skew older with lower-than-average data consumption habits which benefits margins that we do not expect cable to reach.
• Charter's management has indicated that mobile margins (excluding SAC) are about 20% (before CBRS traffic offload) with gross service margins of roughly 70%. We believe these margins can improve with more traffic offload as strand-mounted small cells become more widely available in high usage areas.
• Economies of scale will aid these operators because they can spread marketing and overhead costs over a larger revenue base as they expand.

Charter is more focused on volume growth.   It has adopted a more aggressive strategy focused on volume growth by using low-priced promotions to attract new customers. Therefore, its margins are lower than Comcast, which has been more disciplined with pricing. We also estimate that Charter's zero-margin device sales represent about 45% of its total mobile revenue in 2023 because it is expanding its customer base. However, we project that Charter's EBITDA margin profile will improve more rapidly over time as device sales represent a lower percentage of overall revenue and a greater portion of their customer base rolls off promotions. This is a similar strategy to AT&T's. In our forecast below, we assume that Charter's EBITDA margins increase to about 13%-15% by 2027 on a larger revenue base compared with Comcast's margins of about 18%-20% by 2027.

We view this strategy favorably because a high-quality service, when bundled with broadband, creates a stickier customer. We believe these aggressive tactics will raise brand awareness, which is a good strategy. We also view the post-promotion churn risk as low given that the stepped-up price is likely to remain well below the three major wireless carriers.

Comcast is more focused on profitability.   It has prioritized increasing wireless profitability through higher monthly ARPU and less on new subscriber growth. Thus far, Comcast has not offered low-priced promotions broadly, or handset subsidies. As a result, we believe its wireless service is more profitable, with overall margins well ahead of Charter's. Recently, Comcast started more aggressive targeted promotions, such as a free second line, multifamily offerings, and a prepaid service, which could temper stand-alone wireless profitability but help retain high margin broadband subscribers. We forecast that domestic wireless revenues will increase at a mid-teens percentage for the next few years, exceeding $6 billion by 2027. We estimate that wireless penetration of broadcast customers, about 11% in 2023, will expand to 20% by 2027.

Chart 4

Long-Term Upside For Cable

We believe the shift in value may sway toward cable.   Cable operators may gradually close the gap between lost EBITDA to FWA and EBITDA gained from their mobile offerings. When the trends reverse will depend on when FWA spare capacity is exhausted on wireless networks and how quickly cable operators can improve mobile margins. Assuming that FWA cannot continue to expand at the current pace long term, we project that by 2027 the net change in EBITDA gained from mobile will approximate the net loss in EBITDA to FWA (Chart 5).

Long term, we believe cable has the potential to increase its mobile base significantly. This ability is not limited by network capacity constraints, and the MVNO with Verizon is perpetual. Charter and Comcast could have a marginal cost advantage by offloading traffic onto networks using a combination of Wi-Fi hotspots and CBRS spectrum in high-traffic areas, which creates pricing flexibility.

However, that is several years away with significant uncertainty around long-term market trends that depend on FWA capacity available for sale and the terms and conditions of the MVNOs that Charter and Comcast have with Verizon, which are unknown. Until then, wireless players have the advantage over cable providers when capacity is available for FWA given the marginal cost advantage of bundling services on one network, which is likely to persist for at least the next 2-3 years.

Chart 5