Comcast Wireless 2.0: This time it could actually work.

Image of cell phone with video playing
Mobile Video by Comcast
Implications for TowerCos and Construction Companies

Tickers: CMCSA, COMM, MTZ, DY, CCI, AMT, SBAC

Tags: Ken Schmidt, Wireless infrastructure

Background:

Analysts have been speculating about the winners of the FCC spectrum auction and the implications of those wins for the better part of a year. With the auction coming to a close and an announcement expected in the coming weeks, we took a look at the implications of Comcast’s (Nasdaq: CMCSA) expected entry into the wireless market.

On 4/6/2017, Comcast announced their Xfinity Wireless plans.  Much has been written on the details of those plans so we will not rehash them here other than to say that Comcast doesn't appear to be building its own network and that the plans are primarily intended to prevent Comcast customers from churning to AT&T or Verizon.   

Timing:

The FCC’s broadcast incentive auction was finalized on March 30, 2017. The FCC is expected to publicly announce the winning bidders sometime in the latter half of April. 

Expectations:

We expect that Comcast bid on and will win spectrum in the auction. CMCSA’s Q3 2016 cash flow statement, which was released publicly on Oct. 26, 2016, includes a $1.8B line item listed as a “deposit”; presumably an auction deposit by CMCSA to the FCC. Some analysts have suggested that CMCSA plans to acquire 30MHz of spectrum on a nationwide basis.  We believe that the more likely scenario is that CMCSA will win at least 10MHz of 600MHz spectrum in areas where CMCSA already has fiber/coax infrastructure, as shown on the map below.   Alternatively, if CMCSA does win nationwide licenses, we believe they will focus any buildout of equipment in just their current markets they serve now, at least until a compelling business case is developed otherwise.   

Map showing the areas of the US where Comcast provides Cable and Broadband Services
Comcast Availability Map
Source: www.cabletv.com/xfinity/availability-map

CMCSA’s Likely Strategy:

If we are correct and CMCSA wins spectrum in existing service areas, Comcast will use this spectrum to provide both mobile and fixed wireless services primarily to augment their cable services and reduce churn from wireless service providers’ forays into OTT video.  We see their plans as an extension of the recently announced Xfinity Wireless strategy.

Buildout Details

We anticipate that CMCSA will utilize a combination of WIFI and unlicensed spectrum to provide indoor and outdoor coverage and capacity, while using 600 MHz licensed spectrum for wide area coverage.   This will enable CMCSA to reduce payments to Verizon under their MVNO relationship and allow them to provide mobile video to customers without incurring per GB charges from Verizon which are reputed to be in the range of $7/GB. 

Competitive Dynamics

CMCSA’s product won’t attempt to compete with either Verizon or AT&T in terms of breadth of coverage. However, its product will be attractive to existing CMCSA cable subscribers who aren’t highly mobile and who don't require 20GB or more of data.  CMCSA's Xfinity Wireless is set at a competitive price point, particularly to existing customers via a “quad” package.

Marginal Positives for Infrastructure Players

Companies like COMM, MTZ, and DY should benefit marginally from increased need for CMCSA fiber and coax to the premise to accommodate additional bandwidth (inside and outside the premise). However, near-term expectations should be tempered as broadcasters have up to 39 months to relinquish the spectrum.

Implications for the TowerCos

The impact on TowerCos should be muted for two reasons.  First, broadcasters have up to 39 months to “repack” and return the spectrum to the winning bidders, so any tower lease revenue from CMCSA won’t materialize immediately. Secondly, we suspect CMCSA will attempt to control OPEX going forward by limiting the number of collocations on public tower company towers and by emphasizing small cells especially those that are attached on-strand to Comcast's existing fiber and coaxial cable runs in public right of ways.   Ironically, if the Wireless Industry Association is successful in pushing the FCC to override local zoning oversight and fee structures for small cells, they could be enabling competitors to their own constituent wireless carrier and TowerCo members. Nevertheless, there could be a small bump to TowerCos once the FCC announces the auction winners and the winners include entities that don’t currently lease tower space. The possibility of another potential customer could increase investor interest in TowerCos.

Risks and Unknowns:

The risks to this note include:

  1. CMCSA could be outbid / fail to acquire spectrum
  2. CMCSA could be acquired by or merge with an entity that owns spectrum already, and therefore would not need to acquire spectrum or build it out
  3. CMCSA’s near-term WiFi-First/MVNO-second wireless strategy could prove to be unsuccessful and/or discontinued, causing CMCSA to divest this spectrum prior to it being made available from the broadcasters.

Important Disclosures

This report is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, instrument or investment product. Our research for this report is based on current information obtained from public sources that we consider reliable, but we do not represent that the research or the report is accurate or complete, and it should not be relied on as such. Opinions and estimates expressed herein constitute judgments as of the date appearing on the report and are subject to change without notice.  Any reproduction or other distribution of this material in whole or in part without the prior written consent of Steel in the Air, Inc. is prohibited.  Any projections, forecasts, and estimates contained in this report are necessarily speculative in nature and are based upon certain assumptions. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results.  Steel in the Air, Inc. accepts no responsibility for any loss or damage suffered by any person or entity as a result of any such person or entity's reliance on the information presented. 

Verizon’s Unlimited Plan- Short Term Pain vs Long Term Gain

Don't misread Verizon's about-face on unlimited plans solely as a sign of network confidence.

Tickers: VZ, T, S, TMUS, AMT, CCI, SBAC, COMM, DY, ZAYO

 

Contrary to their previous explicit direction otherwise, Verizon announced on February 12th, 2017 that they would be offering an unlimited voice and data plan at rates slightly higher than comparable offerings from T-Mobile (TMUS) and Sprint (S). Not coincidentally, in its earnings call on Feb 14th, 2017, TMUS indicated that they were porting Verizon subscribers to TMUS at a 2.8:1 ratio to subscribers ported from TMUS to V. This plan is clearly slated to reduce the churn of postpaid customers from VZ to S and TMUS and we believe that it is a very compelling service offering.

 

Analysts were quick to choose sides: the first posited that this was a sign of VZ's confidence in their network upgrades and capacity, while the second group believes that the network will show signs of strain under the added capacity. We believe that both groups are partially correct and that infrastructure related entities are the ones that stand to gain the most.

 

Back in last January, we applauded VZ for their densification efforts in our note Verizon (VZ) positioning for a range of 5G futures. The premise was simple- Verizon's efforts to add fiber and small cells to their network give them a marked advantage over other wireless service providers in the race for 5G. That premise hasn't changed and further research since that note continues to suggest that VZ still has a 1-2-year first-mover advantage from a US wireless infrastructure perspective.

 

Street light small cell
Small Cell In Boston, MA
Nonetheless, it is our opinion that VZ's densification efforts, while industry setting, are not sufficiently complete to provide seamless and reliable service across all urban areas, especially in the near term. Verizon's densification is based on a three-prong approach: carrier aggregation, dark fiber, and rapid deployment of small cells. On the first prong, VZ has actively deployed 2 and 3 carrier aggregation across most of the nation. On the last two prongs, while they have been leading the market in both efforts, there still are areas where their efforts have been slowed due to factors outside their controls. Based on our on-the-ground level visibility, VZ has a hefty lead in dark fiber and small cells actively deployed or in development.

 

In our previous note, we suggested that the next 12 to 18 months will be tough for Verizon as the impact from their investments will take time to materialize. For urban markets where VZ has encountered delays due to local zoning or permitting for deployment of small cells, there will be a reduction in reliability and data speeds. These issues will be more pronounced in markets where Verizon is relying upon two carrier aggregation.

 

Fortunately for VZ, these issues are surmountable and addressable, but it will take some time to rectify them. Expect to see an acceleration of densification in specific troublesome markets. Verizon will need to rely more on outside fiber and small cell providers like CCI and ZAYO. TowerCos (AMT, CCI, SBAC) should also experience continued and possibly accelerated macrocell modification activity and possibly new macrocell deployment from VZ and TMUS in their efforts to meet the pending needs of video downloads (remember that video accounted for 60% of mobile data use in 2016 and VZ and TMUS now include zero-rated HD video in their unlimited plans). Lastly, we would not be surprised to see T extend their unlimited plans beyond DirecTV subscribers, thereby further increasing densification.  (Editor's note- subsuquent to this being written, T did extend its unlimited plans beyond DirecTV subscribers.)

 

Risks to this note: The perception of VZ network superiority declines at a faster rate than expected, causing subscribers to question whether they should spend the additional money on VZ's unlimited plans before VZ's network investments reverse those issues. VZ could reverse their strategy of using outside fiber and vendors in order to control their fate by increasing CapEx towards the development of owned dark fiber assets, thereby reducing ZAYO and CCI opportunities.

 

(Author's note: This research note was published first on 2/20/17. If you are interested in gaining access to our research on a timelier basis or have a discussion on this note or other wireless industry topics, please contact us.)

 

 

AT&T Shifting Capex into Small Cells

Implications: T, S, ZAYO, CCI, AIRO, COMM, DY, ERIC, NOK  (Disclosure- author holds position in ZAYO)

Looks like T's finally cutting over to small-cell investment as S continues to under invest.

Carrier capex budgets for 2017 and forecasts for 2018 aren't out yet, but our checks indicate that AT&T, which has to-date been a relative holdout on small cells, is finally shifting investment share in this direction.

Back in June, T highlighted that 90% of its next-5-year macrocell infrastructure was already in place, but only 5-10% of the small cell infrastructure for this same period had been built.

Checks now show that T is beginning to reassign real estate department personnel to work on small cells. Furthermore, some subcontractors are reporting increased requests from AT&T to do site walks for small cells.

Notably, we are not yet seeing increased municipal permitting / leasing. Given 9-12 month lead times, this suggests that small cell ramps will occur toward the middle of 2017 with a likely acceleration into 2018.

We anticipate that T will focus its small cell efforts in Wireline markets where the company already owns existing fiber and has access to Right of Ways and Franchise Agreements. T will best be able to control costs in these areas where it is already considered a wireline utility and has existing infrastructure in place. These markets include most of the Southeast and Midwest as well as a few markets in California.

Map showing the states in which AT&T has wireline service
AT&T -Landline Markets before CT was sold (Image from AT&T)

Implications

 We see this shift as an incremental positive for fiber providers and small cell operators like ZAYO, CCI and CSAL; although the effect is likely to be muted to the extent that their metro fiber overlaps with AT&T's. It's a likely positive for OEMs like AIRO and COMM that provide small cell equipment and antennas but don't have exposure to the decline in macro cell equipment.  Implications will likely be mixed for DY, NOK and ERIC. They should benefit from increased small cell work but are already seeing reduced capex allocated to macro cells.

Sprint Follow-up

Related to our past comments on Sprint, (see 10/26 – Sprint (S) still behind small cell 8-ball), we continue to see additional data points supporting our thesis.

Sprint confirmed during their last earnings call that last year’s Capex was lower than their previous guidance to the market by $2B ($2.3B actual vs $5B guidance).  Sprint has been talking up its plans for years with relatively little to show for it, and recognition seems to be building throughout the marketplace, and the investor community, that the Mobilitie relationship has yielded far fewer small cells than were anticipated.  Sprint is giving lip service to 2017 being a better year for permits and capex, but its hopes seem to be predicated on FCC leadership changes and possible rulemaking to remove impediments to small-cell deployment in right of ways.  In fact, Mobilitie seems to have pinned a significant amount of hope on a Petition to the FCC for Relief.

We think Sprint's capex will increase in 2017 off of an ultra-low 2016 number, but the service provider continues to struggle to deploy capex dollars.  We wouldn't be surprised to see major revisions to the strategy as well as Street expectations.