I’ve written about cable a lot on this blog, and Charter represents, by far, my largest position (which I’m long through GLIBA / LBRDA), so it’s no surprise that a lot of the inbound contacts / questions I get relate to cable (I sometimes worry that I live in a cable bull echo chamber, since most of the people I talk to consistently tend to be similarly bullish, but that’s a worry for another time). Over the past few weeks (likely driven by the continued roll out of Verizon’s fixed wireless product), a lot of people have circled back with questions on 5G / fixed wireless’s competitive impact on cable, so I figured I’d put some more structured thoughts up on a blog post.
I’ll start with the bottom line here: I continue to think that wireless companies have more to fear from cable companies than cable companies do from wireless companies.
I think the 5G / fixed wireless concerns can be broken into two separate concerns:
While I think the later concern is much more relevant / interesting, let’s start with the first concern (Verizon’s 5G fixed wireless product), because it’s easiest to address. I think there are plenty of signs that the impact of this fixed wireless rollout is going to be pretty limited. The biggest clues that the rollout isn’t going great come from Verizon. Yesterday Verizon presented at SCWS; I’m just going to quote three “announcements” they made there.
Here’s the takeaway from those “announcements”. Verizon literally launched their 5G fixed wireless service two months ago. They already are planning to double the speeds they offer, declining to rollout the service to new cities until they get new equipment on a different standard (likely ~a year away), and slowly walking back their plans to hit thirty million households with the product. Maybe I’m looking at this too much through my “cable bull” lens, but to me it looks like the initial response to the product has been way below Verizon’s expectations and in response they are planning a speed increase (increasing speeds while keeping cost constant is a stealth price cut) while slowing plans for further expansion.
If you look around, you can find plenty of other signs that Verizon isn’t thrilled with how the product rollout is going. For example, here’s their CFO at a conference in late November. When the response to a question on how a product launch is going is that “it’s great to have a product out there” and “there’s been a lot of good learning”, you can probably guess the product is deeply in the red / not performing that well.
So that’s a Verizon specific perspective. But maybe they’re just being humble / cautious on how the product is performing. Verizon’s fixed wireless product has been in the market for ~two months, so you’d expect their competitors (mainly the cable guys, but also other wireless companies who would have some interest in how the product performs / if it’s a viable product for them to consider) to have some idea on how the roll out is going. If Verizon’s product was performing well / taking any share, I’d expect the competitors would be a bit guarded in how they talked about competing against it. But none of them have been guarded; across the board, the reaction to Verizon’s product has been absolutely savage*.
Anyway, most of the questions I get tend to be on the risk from Verizon’s fixed rollout. And everywhere I look, there are signs that the chances of Verizon’s current product being a long-term threat are pretty low (one last thing here: I’ve linked to this before, but this article highlights how, after a customer shows interest in Verizon’s product, a technician needs to go out to people’s houses to determine if they get a strong enough signal to subscribe. For a whole host of reasons, that process is an absolute disaster and would never work on a sustainable / national basis).
The more interesting / pertinent risk to cable is if 5G poses a longer-term risk to cable, whether from increased wireless substitution (people dropping their broadband completely and just using their phone / wireless for everything) or because 5G enables a truly competitive fixed wireless product (which T-Mobile is promising to roll out if their Sprint deal is approved).
I think the odds of wireless substitution in the form I described (dropping your broadband completely) is pretty low longer term outside of some lower income consumers. Yes, phone speeds in a 5G world will allow you to play video games or stream movies without a problem… but people’s homes are getting more and more connected (the cable players note that most homes have 10-20 connected devices in them), and they’re not going to be able to connect all of those devices all of the time simply by using their wireless device.
Note that saying wireless substitution isn’t a big risk is interesting to think about over time as it shows just how big cable’s infrastructure advantage is. Around 80% of monthly data usage comes from Wifi, not cellular data. Let’s say that both cable companies and wireless companies want to be responsible for 100% of your data usage overtime (and charge you for it). If you’re a cable company, you currently deliver that 80% through wifi connected to your network, and there are plenty of options for you to handle that other 20%: you can partner with a wireless company to offer an MVNO, you can build a ton of wireless hot spots to reduce the 20% by as much as you can, etc. But if you’re a wireless company looking to eat into that 80%, really the only way to do it is to go and overbuild your cable competitors (either from a fiber to the home overbuild or a fixed wireless overbuild), as I’m not aware of any cable company that will rent out their broadband relationships (Altice is lending some of their infrastructure to Sprint as part of their MVNO deal, as I’ll mention in a second, but they’re not letting Sprint grab the actual broadband customer relationship).
So I think wireless substitution isn’t a huge risk; to me, the more relevant risk is the risk 5G enables competitive fixed wireless products to launch. While Verizon’s current product will almost certainly fail, the next gen of fixed wireless products looms large. Starry’s service, for example, seems to be working well and is set to expand to 16 cities, and both the T-Mobile / Sprint merger and the FCC’s focus on freeing up new spectrum (in particular, the C-Band is perfectly suited for 5g and could come into play in the next few years) could lead to new and actually competitive fixed wireless services in the next few years.
When thinking about these risks, the first thing to note is that the risk is not new. Wireless players have unsuccessfully been targeting home broadband for years (see, for example, AT&T WiMax in 2006 or Verizon Fixed LTE in 2011). Building a successful wireless broadband product is tough! First, you need to get a signal strong enough to penetrate the house and deliver sufficient speed, and then you need to go win consumers one by one until you have enough to justify the huge fixed costs of having built that network. None of that is as easy as it sounds for multiple reasons, including:
Anyway, there are lots of ways to frame the product / risk, and the competitive gives and takes vary depending on what market we’re talking about (i.e. urban, suburban, or rural market), but every time I really back out and think about fixed wireless I think the worst case (from a cable perspective) is that fixed wireless is a competitive product (similar to FTTH overbuilds) that can take some share but doesn’t kill cable. In all likelihood though, cable broadband is a superior product to wherever fixed wireless ends up and the 5G fixed wireless rollouts go the same way as the 3G and 4G fixed wireless efforts. (PS- it’s worth noting that AT&T has continually said they’re not interested in fixed wireless 5G after testing it in 2017).
One more thing before I wrap this up: Sprint was at a conference recently and talked about how much their Altice partnership has helped them. As a cable bull, that’s an incredibly encouraging quote. First, it shows just how large the synergies between a wireless company and a cable company are: Sprint, widely regarded as the nation’s worst network, gets access to Altice’s infrastructure and suddenly has best network in their area. When John Malone talked about turning down Verizon’s Charter bid and said that the synergies would still be there (and may be even greater) in a few years, this type of network performance / improvement is exactly what he was talking about. Second, it further reinforces just how strong cable’s infrastructure is and how well suited it is to supporting next gen wireless products. Finally, it suggests cable’s infrastructure will provide them with significant optionality going forward (i.e. they can either use their infrastructure to support wireless players and get paid for it, or they can use their infrastructure to launch advantaged wireless products of their own).
Anyway, this post is a little long and a little rambling (I tend to get that way when talking about cable), but I wanted to put some thoughts to paper because I get tons of questions on the risk from Verizon’s 5G product and I think there’s a bit too much focus on the Verizon rollout (which I think is a dude) and too little focus on the longer term 5G threat (which I think is a real possible threat but more than manageable).
As always, I welcome comments / feedback / criticism!
*Note that the current reactions to Verizon’s fixed ambitions are not new. Just cherry picking from AT&T and T-Mobile, here are some of their earlier reactions to Verizon’s plans