For the last 25 years or so, Comcast (NASDAQ:CMCSA) has been expressing interest in the wireless space. Recently, the cable giant activated its mobile virtual network operator (MVNO) agreement with Verizon (NYSE: VZ) and announced that it would participate in the Federal Communications Commission's upcoming incentive spectrum auction. The prospects for Comcast entering the wireless market have never been better.
But it's important to understand the strategic motivation behind Comcast's decision to enter the wireless market. Competition in wireless is fierce, which would make it difficult for a smaller carrier to make a profit. Even with the potential to bundle the service with Comcast's 28 million or so existing customers' subscriptions, profitably competing would be difficult.
All about the main business
Speaking at a recent JPMorgan Chase investor conference, CFO Mike Cavanagh indicated that entering the wireless business is something the company is exploring. "We have triggered our MVNO rights with Verizon," he said, "to work on seeing if there's a commercial product that can serve the purpose of satisfying a churn reducing offering for our existing business."
The main purpose behind developing a wireless offering for Comcast is to reduce the amount of churn from its cable and internet businesses. Cord-cutting is causing pay-TV providers to compete for a bigger share of a smaller market. Comcast had been losing hundreds of thousands of subscribers, but last year it started adding customers again as the telcos Verizon and AT&T (NYSE: T) slowed the expansion of their high-speed internet services, FiOS and U-Verse, respectively.
AT&T now owns DirecTV, and it has started offering its TV subscribers an exclusive unlimited wireless data plan. Speaking at a Deutsche Bank conference earlier this year, AT&T CFO John Stephens said the unlimited data offer will "reduce churn and improve overall stickiness of our products." He said over 2 million customers have already signed on. The company ended the first quarter with over 25 million video customers.
During the first quarter, AT&T still lost 54,000 video subscribers. U-Verse lost 382,000 subscribers, as the company focused more on satellite. DirecTV added 328,000 net subscribers.
Comparatively, Verizon added 36,000 net subscribers to its FiOS video service. Verizon is also slowing its investment in FiOS like AT&T has done with U-Verse, but it's not offering any special promotions to its video customers other than standard bundling discounts. In light of its competitors' results, it's unclear that AT&T's efforts have reduced customer churn all that much.
Comcast won't spend too much to compete
Comcast doesn't seem interested in spending a lot to get into the wireless market. As mentioned, the competition is fierce, so it would be hard for Comcast to see a big impact on its bottom line.
During the company's fourth-quarter earnings call, CEO Brian Roberts said it's going to participate in the incentive auction "to see if there's an opportunity for the Company to be rewarded in that auction with something that we think has strategic value." Cavanagh mentioned the company is only going to buy spectrum "if the price is right."
Comcast already has an MVNO agreement in place with Verizon that will allow it to tap into Verizon's network within its cable footprint. So it doesn't need to own any spectrum in order to test the waters with a wireless service. The MVNO route also means that Comcast can offer wireless service at a lower price than if it had to make capital expenditures to build out a wireless network.
Creating a quadruple play bundle will theoretically improve the stickiness of customers who take Comcast up on its offer. And Comcast isn't shy about offering services exclusively to its existing customers, as it's done with Stream, its over-the-top video service. Exclusive low-priced wireless service for existing subscribers would be an interesting offer if it ever comes to market, but Comcast investors shouldn't expect it to be a driver for profit growth on its own. Furthermore, AT&T's recent results show that theoretical improvements don't necessarily play out as expected in practice.
Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.