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Investors in Wireless Can't Ignore Comcast

By Adam Levy - Jan 28, 2020 at 10:00AM

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It's both a threat and opportunity.

Comcast (CMCSA -0.02%) added 261,000 subscribers to its Xfinity mobile service in the fourth quarter, and it now counts over 2 million total customers. That represents its highest net addition number of any quarter since launching the service in 2017, and reverses a trend of declining net addition growth seen in the first three quarters of the year.

Comcast's size and growth as an MVNO -- a virtual network operator that relies on another wireless company's network -- has become too big for investors in the big wireless companies to ignore. Not only does Comcast represent a competitor in the industry, stealing customers away from Verizon (VZ 0.88%), AT&T (T 0.94%), T-Mobile (TMUS 0.13%), and Sprint (S), but it could represent a sizable customer for wholesaling network capacity.

A smartphone displaying the Xfinity Mobile logo.

Image source: Comcast.

Comcast can stay strong when the industry is weak

Comcast was a beneficiary of higher churn in the fourth quarter. When T-Mobile provided a pre-release of its fourth-quarter earnings at the start of January, it noted an increase in its own postpaid phone subscriber churn for the first time in nearly four years. CFO Braxton Carter said industry churn was higher across the board at an investors conference the day of the release.

Carter, for one, welcomed the higher switching rates in the industry. He sees T-Mobile as a share taker from AT&T and Verizon, and it's easy to grow gross additions when customers are making a switching decision.

T-Mobile remains one of the stronger wireless companies in the industry, growing its phone subscribers at a much better pace than AT&T and Verizon. It's also smaller than the two wireless giants, so it has fewer customers to lose to Comcast. It's likely the bulk of Xfinity Mobile subscribers are coming from Verizon and AT&T.

Comcast's able to leverage its 31.5 million existing customer relationships to attract new subscribers with relatively low customer acquisition costs. By comparison, a competitive environment may lead the bigger competitors to offer significant promotional discounts on devices or service to attract new customers. 

If Comcast wants to increase subscriber growth, as management's commentary on its fourth-quarter earnings call suggests, it could increase promotional activities. That would be an extremely effective strategy in an environment where industry churn is elevated already. AT&T and Verizon would likely see greater impact on net additions than the smaller T-Mobile or Sprint.

A wholesale opportunity

Comcast currently relies on Verizon's wireless network as well as its WiFi network to support Xfinity Mobile. But the terms of Verizon's deal aren't great. Even with the expectation for faster subscriber growth in 2020, management only expects Xfinity Mobile to reach EBITDA breakeven in 2021.

Comcast may be able to accelerate that timeline by renegotiating the deal with Verizon (the original contract is from 2011 and was amended in 2015) or striking new deals with AT&T or T-Mobile. To the degree Comcast might acquire more wireless spectrum and build out its own network capacity, management said, "We'll be opportunistic on any spectrum opportunity, but we like our capital-light MVNO approach today."

AT&T's management said it's open to working with Comcast and other cable MVNOs as a wholesaler of its network capacity. "We've got a lot of capacity now in this network, and we're at the point of evolution in this industry where we ask, 'How do you monetize most efficiently?'," CEO Randall Stephenson said on the company's third-quarter earnings call.

Winning a contract with Comcast could offset some of the pressure Xfinity Mobile's growth puts on AT&T's retail wireless business. And with excess capacity from its FirstNet contract buildout, wholesaling could be an efficient means of boosting its returns on the capital invested in the first-responder network.

As Comcast's wireless subscriber base grows, the wholesale opportunity becomes more attractive, but Comcast's negotiating power increases. As such, investors could see AT&T or Verizon move to negotiate a contract in the next couple years before the wireless business turns profitable for Comcast.

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Stocks Mentioned

Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$42.01 (-0.02%) $0.01
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$49.53 (0.88%) $0.43
Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.40 (0.94%) $0.19
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$126.04 (0.13%) $0.16

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