With the two biggest telecom companies entering the pay-TV market in recent years, Comcast (NASDAQ:CMCSA) has tried to fight back several times. The company attempted to launch a mobile virtual network operator, or MVNO, business, but it quickly folded. Now Comcast may launch another attempt soon, using a contract in place with Verizon (NYSE:VZ) established in 2011. The company has a similar deal in place with Sprint (NYSE:S) as well.
Verizon told investors that Comcast intends to exercise its option on the 2011 contract. Comcast could also explore its options in the upcoming spectrum auction and test the market for an acquisition in the wireless space, presumably T-Mobile (NASDAQ:TMUS).
Comcast does enjoy one big advantage it didn't have when it first attempted to launch an MVNO. It now has a huge number of Wi-Fi hotspots. Over the past few years, Comcast has been replacing Wi-Fi routers in its customers' homes with new ones that double as public hotspots. To date, the company has installed more than 10 million such routers.
That sets up Comcast to provide better coverage, faster speeds, and cheaper access to phone service than other MVNOs. It's an approach Google is taking with its Fi service, which launched earlier this year on Sprint and T-Mobile's networks.
Carriers themselves have taken to using Wi-Fi routers for making regular phone calls. T-Mobile led the way, offering customers a free router already optimized for Wi-Fi calling. Verizon recently started seeking approval from the FCC to allow Wi-Fi calling. Comcast could do the same to reduce wholesale fees from Verizon or Sprint and improve indoor coverage.
Getting its hands on some spectrum
Comcast's plans to launch a wireless service could have a major impact on the dynamics of the upcoming spectrum auction. The FCC has reserved 30 MHz of spectrum in every region for companies with minimal amounts of low-band spectrum in those areas. With Sprint dropping out of the bidding early, T-Mobile is expected to be able to get whatever it needs in every region. If Comcast enters the bidding, that could throw a wrench in T-Mobile's plans.
T-Mobile's CFO recently said he believes he could buy all the spectrum the company needs for about $1 billion. Another bidder in the form of Comcast could cause T-Mobile to spend more than that. T-Mobile is capable of spending up to $10 billion on spectrum, but less is always better.
It's unlikely Comcast would look to deploy any spectrum it bought at auction, however. More likely, it would negotiate a deal with one of the four major carriers to license the spectrum in exchange for favorable wholesale terms for its MVNO.
Why not just buy T-Mobile?
If Comcast really wants to compete in wireless, however, an acquisition may be its strongest move. T-Mobile's parent company, Deutsche Telekom, has expressed interest in being part of a merger or acquisition.
T-Mobile has been able to grow its wireless phone customers consistently amid intense competition in the wireless industry. A lot of that growth has come from aggressive pricing and promotions to attract customers from the larger carriers. T-Mobile has also spent heavily to expand its LTE network and deploy more of its spectrum holdings. It's spending at a rate that probably can't be sustained.
An acquisition from Comcast could help it maintain those aggressive growth ambitions with the financial backing of its huge pay-TV and Internet service business. T-Mobile's market cap is about $31 billion, which is manageable for Comcast to pay with debt and equity. Remember, it was fully prepared to pay $55 billion for another cable company.
Overall, investors can expect Comcast to start testing a wireless service within a year, but look for further developments as Comcast enters the bidding for next year's spectrum auction or considers other major M&A deals.
Adam Levy has no position in any stocks mentioned. The Motley Fool 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.