Greetings from Austin and Dallas, where high school football playoffs are underway (this week’s lead picture is of the Jesuit College Prep Rangers and Rockwall Yellowjackets). Jesuit won by 20, and Martha and I are becoming football parents like we never dreamed before. There is nothing like Texas high school football, especially during the playoffs. It’s a cultural phenomenon.
Before we begin our two-part discussion of several important trends that will impact the telecommunications landscape over the next year, I want to respond to several questions posed by you on the cable consolidation rumors that surfaced this week.
As we saw with wireless consolidation and spectrum trading in 2012 and 2013 (T-Mobile + Metro PCS; Sprint + Softbank; AT&T + ATNI + Leap, US Cellular spectrum and/or customer sales to T-Mobile and Sprint), there is a logical time in any industry where a re-clustering of assets makes sense. The drivers of this change have been varied – government mandate, capital requirements, unique distribution capabilities of the acquired company. The result: Greater efficiency and broader coverage driven by economies of scale. Greater competition has made an impact on the wireless industry in 2013. The boldness of T-Mobile, which we have written about in several Sunday Briefs, would not have had as great an impact without MetroPCS.
The cable industry has not been caught up in the waves of wireless change, with the possible exception of Clearwire. There has been talk for years about who would acquire Cablevision and what valuation premium would be assigned. The possible combination of Suddenlink and Mediacom (two large 2nd and 3rd tier cable providers) surfaces every six months and then is quickly squashed. Now, the focus is on Charter and Liberty Media’s plans to acquire part or all of Time Warner Cable, perhaps with some help from Comcast.
This story has all of the drama of many of the programs broadcast over Charter and TWC’s networks. A legendary CEO, afflicted with cancer, announces his retirement, signaling an end to his reign over a decade of impressive transformation and value creation (which was accomplished as a previously failed merger was being unwound).
The acquiring company is smaller, but is in the midst of its own legendary turnaround. While growth is slowing in much of the industry, Charter has several quarters of growth left to catch up to the penetration rates of the industry leaders, including TWC and Comcast. Charter’s stock has skyrocketed since they emerged from bankruptcy in late 2009 (CHTR began to trade in Jan 2010), delivering a 41% compounded annual return to shareholders during that period.
On top of this, the CEO of the acquiring company (Charter), used to run one of the largest divisions of the potentially acquired company. While there is a degree of collegiality between cable companies, the Rutledge/ Britt relationship has been cool if not wintery. Even though the cable industry has changed, the personalities (Dolan, Roberts, Britt, Malone, Miron, Cox, Kent, Commisso) have not. It’s familial, if not downright family, and, as we know, there’s nothing like a good family “discussion” around the Thanksgiving table.
If there’s one thing that unites a “family” in dislike, it’s having others meddle in family matters. This includes the FCC-run Obama administration. As the Wall Street Journal reported this weekend (subscription required), on top of valuation issues, any acquiring company faces increased regulation. Enter Tom Wheeler, the new FCC Chairman and one-time head of the National Cable Telecommunications Association (NCTA). Also enter the most networked cable executive in Washington, David Cohen from Comcast.
For Charter to succeed in an industry-changing cable event (as opposed to a highly leveraged transition), they will need to go through the FCC and state regulators. Time Warner has significant operations in New York and California, the two most active Public Utility Commissions (note, there are others such as North Carolina and Texas who will also want to extract concessions). These commissions, along with the FCC, want to regulate broadband. Specifically, they want to prevent the prioritization of one byte of data over another, a concept commonly known as net neutrality or nondiscrimination.
The possibility of a discriminating Internet has regulators seething. For those of you who aren’t following the story, Verizon has appears poised to win their lawsuit challenging the constitutionality of the net neutrality provisions adopted by the FCC in 2010. (For a good background read on the story, read the InfoWorld article here). A recently penned editorial in Wired magazine summarizes the situation as follows (the article is titled “We’re About to Lose the Internet as We Know It”):
Given how sticky this morass is, there’s one simple way for you to judge the opinion: If the court throws out the non-discrimination rule, permission-less innovation on the internet as we know it is done. If the nondiscrimination rule miraculously survives, then, for now at least, so too will freedom on the internet.
The DC Circuit Court ruling will likely set up months if not years of appeals. Rather than have an argument with Verizon, why not bring the cable industry to the table (who have more High Speed Internet customers than Verizon, AT&T, and CenturyLink combined) and resolve net neutrality outside of the courts and Congress? Exercising executive branch privilege is nothing new to the Obama administration, and, after the 2014 elections, it will be the primary (if not only) way they can quickly enact their agenda.
This is one reason why Comcast must be at the table. Enter David Cohen, head of regulatory affairs for Comcast and an expert negotiator (picture left). He’s a strong supporter of the Obama administration and also the cable industry. If cable had a Secretary of State, it would be David Cohen.
The value generated from turning today’s broadband connection into an engineered information delivery system is enormous. In traditional telecom speak, this is “access” redefined. It would entail turning Netflix, YouTube, and others into payers as opposed to users of today’s broadband network. It would likely drive up network speeds to Google Fiber levels in areas Google Fiber could not economically reach. The value created in a discrimination-based world would be enormous – tens of billions of dollars per year.
This is one reason (and, in my opinion, the primary reason) why Comcast wants a seat at the table. Dealing with regulators requires technique. Regulations set precedents. And no one is going to dictate the cable industry’s direction without Comcast’s input.
Can regulators get it right? Can a Cohen/ Wheeler/ Rutledge/ (Rob) Marcus deal emerge that makes everyone happy? The short answer is yes. It will not happen overnight because the appetite for an overarching agreement is strong. As a result, today’s cable rumors may take months if not years to fulfill. However, the cable industry will get congestion relief and re-cluster itself, and as a result position their broadband services favorably against their wireless and telco competitors.
The family will make it through one more Thanksgiving dinner.
Next week, we’ll cover six events that will shape the fourth quarter and 2014. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can. Have a terrific week!
Greetings from Austin, Seattle, Charlotte, Greesboro (pictured), and Dallas. Three airlines, three separate rental cars, three dinners – all in one week. It goes without saying that I did not make it to the stunning end of the Stanford/ USC men’s football game last night. There’s always next year, Stanford.
There were few earnings releases this week, but two bear mentioning as we discuss the overall state of the cable industry. Wide Open West (WOW!), a cable over-builder that was created out of Ameritech’s Cable initiative (appropriately called Americast), surprised many in the analyst community with the strength of their subscriber gains (click here for a link to their earnings release). The company has been absorbing acquisitions (including Knology), and has not been immune to the secular changes hitting the broadband industry as a whole. However, WOW! is an excellent regional barometer (Midwest, Southeast) and an annual leader in Consumer Reports residential metrics for all products. WOW’s subscriber performance is detailed in the following chart (from their most recent 10-Q):
There are many things to glean from this chart. First, notice the continued strong performance of High Speed Data (HSD) customers throughout the merger/ integration quarters (WOW! completed the acquisition of Knology in 3Q 2012). No surprises there. But also notice the “flatness” of video, which is only down 2.5% from the post-acquisition peak. Given the intense competition present between three broadband providers (and two satellite competitors), as well as the standard churn that occurs as a result of merger and integration activities, this is an impressive number (Comcast’s video subscribers were down close to 2.0% over the same period when adjusted for business gains, and Time Warner Cable residential video subscribers were down 6.3% over the same period).
Many have characterized WOW! as scrappy or “teaching for the (Consumer Reports) test.” The implication that WOW! is undisciplined or intentionally focused on pleasing one particular publication could not be further from the truth (have a look at the JD Power results if you have any doubts). Having worked with them on their voice rollout in 2004 and 2005 (Sprint was an early provider of voice services to WOW!), they are faster and more methodical than their cable competitors, and their focus on every element of customer experience is intense and thorough. As many analysts have written off the demise of video, WOW appears to be reinventing the value equation. If Google Fiber had franchisees, WOW would be the first (and probably only) cable company to qualify.
The other major cable company reporting results this week is Suddenlink. I like to look at Suddenlink as a proxy for cable company performance without AT&T U-Verse and Verizon FiOS competition (Suddenlink previously disclosed that there is a minimal overlap between their service territory and U-Verse/ FiOS). With concentration of customers in West Virginia, it’s a very rough proxy, but it’s a data point for “without telco competition” performance. Here are the latest figures for Suddenlink (Cequel is the parent company of Suddenlink):
Note the stemming of the losses from the first and second to the third quarter. Suddenlink is rethinking the structure of their customer relationships. Some other statistics of interest: 27% of Suddenlink’s customer base takes all three services (“triple play” customers) as of 3Q, up from 25% a year ago. Most impressive in this statistic is that they did it without compromising double play penetration (still at 39% of total customers).
Also, Suddenlink reported that 20% of their customer base has a non-video relationship with the company. This is also up 2.5% from a year ago. Given Suddenlink’s rural weighting, they are managing to supplement the traditional satellite provider relationship with High Speed Data (and perhaps phone). Once they have established the beachhead in the home, they selectively promote advanced data services (and phone where applicable). This is a sound and sustainable strategy considering that in the next several years all video will be carried into the home through IP feeds.
To round out the financial picture, Suddenlink’s revenues were up 6% and adjusted EBITDA (cash flow) were up 8%. Like their larger cable peers, subscriber revenue increases were offset by political advertising decreases. Without AT&T and Verizon (but with satellite), the industry would likely be growing revenues and profits in the mid to high single digits. Given Time Warner Cable’s 2.6% growth and Comcast’s 5.2% revenue growth in the third quarter, it’s probably safe to say that telco competition is costing cable at least 300-400 basis points of revenue growth, and probably an equal if not greater percentage of cash flow growth.
Why focus on smaller providers as opposed to Time Warner Cable and Comcast (Suddenlink is the 11th largest video provider as measured by basic subscribers; WOW is #13)? As we talked about earlier, they provide actual or “stretch” data on how the larger providers could perform – WOW! a proxy for metro performance with better service/ customer experience, and Suddenlink for non-metro performance.
Have a look at WOW’s performance on consumer video relative to their peers in the Great Lakes and Southeast regions here. They not only top the triple play reviews (most valuable customers), but also tie on video with FiOS (which shows that coax can achieve a similar score as their fiber brethren). They lead in Internet even though they do not own a Tier 1 IP backbone. How do they do it? The chart below from the May issue of Consumer Reports shows how:
Each element of the customer experience is pursued on an independent basis: Bill presentation, support, pricing (note that no broadband provider in the Consumer Reports survey gets a better than average rating for service value, and that pricing, especially after the promotion has ended, inhibits a higher score from Cablevision). The distinguishing factor, however, is service satisfaction, which represents the ability to continually exceed (low) expectations for integrated services. When viewed through the lens of the entire business cycle – from the first installation to the final bill – WOW and Suddenlink take top honors. Comcast and Time Warner take two of the last three spots of the top ten.
This is an important lesson for cable. Technology will continue to change – the cable industry has many talented engineers and operations personnel. But the changes to the technology need to be transparent to the majority of customers who view bandwidth, phone, and video as utilities.
Whether the change is Analog-to-Digital video transition, home automation service installation, or next-generation set-top boxes, the simplicity and intuitiveness of each solution must be confirmed by the customer. Each change must build on previous one with the ultimate goal of reducing dissatisfaction with (or improving the condition of) the current state. While this sounds easy, it will take years to perfect. Those who focus on radically improving satisfaction (perhaps by starting with reducing dissatisfaction) will win the subscriber and earnings prize. Those who look to tweak their existing business models will be very disappointed.
Next week, we’ll cover six events that will shape the fourth quarter and 2014. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can. Have a terrific week!
Greetings from Los Angeles and Dallas (Texas). It goes without saying that the lead picture is from California, and specifically Manhattan Beach where several of us reflected on a day of cable truck rolls and customer service calls. My key takeaway from the day was that connecting bandwidth into homes is difficult and personal at the same time. The dedication of field techs is amazing. More on this when we get to our end of year issue where we’ll highlight what StepOne is doing with cable and telecommunications providers to redefine customer service.
This week, many in the telecommunications community began to take T-Mobile seriously. For the second quarter in a row, the Bellevue-based wireless carrier posted net additions of over one million subscribers. They did this with minimal Machine-2-Machine net additions, and with only a few thousand tablets. And in the process, they outpaced the rest of the wireless industry in (smart)phone net additions. Full earnings release, webcast, and financial trends can be found here.
Here’s the past eleven quarters of the wireless industry’s postpaid net additions:
Many of those who look at the industry have compared T-Mobile’s performance to Sprint, noting that the upstart is gaining on the number three wireless provider (although they are close on branded pre-paid, they lag Sprint by about seven million postpaid subscribers when you allocate a portion of T-Mobile’s 3.4 million M2M customers to retail).
T-Mobile is already the third most profitable wireless carrier, generating more than $1.2 billion more in adjusted EBITDA over the past four quarters.
The real question is “Should we have been comparing T-Mobile to AT&T?” There’s a lot of back and forth about the failed merger, and everyone winced at the thought of T-Mobile merging with a no-contract CDMA provider named Metro PCS. Then we have the bizarre investor day in Germany with a new CEO who “didn’t even come from our industry” (an actual quote from a wireless colleague of mine who now admits he underestimated John Legere’s understanding of customer buying behaviors and handset development).
Look at the 2013 Year-to-Date (YTD) postpaid growth for T-Mobile and AT&T above. On a purely post-paid basis, AT&T has grown 1.21 million postpaid net additions, and T-Mobile has grown 1.14 million. A mere 73,000 net additions separate the two, and that does not include M2M for T-Mobile (340,000 net additions so far in 2013). This is an incredible achievement for T-Mobile considering:
- AT&T’s network serves 55 million more of the US population (which means that in the markets where AT&T and T-Mobile compete, T-Mobile has added more customers than AT&T).
- AT&T has a sizable enterprise presence. 2013 has been a terrific year for enterprise customer takeaways from Sprint as they completed their iDEN transition. So long as AT&T took away 73K more iDEN customers than T-Mobile (which is highly likely), T-Mobile acquired more postpaid consumer customers than AT&T.
- AT&T had the iPhone for the entire year – T-Mobile did not. It’s hard to remember a time when T-Mobile did not have the iPhone, but they have only been selling the iPhone5/ 5c/ 5s since mid-April. They did convert a large number of AT&T iPhones to the T-Mobile network prior to selling new iPhones (1.7 million as of the December 2012 Investor Day).
- AT&T has been selling a lot of tablets to enterprises and consumers – T-Mobile is just getting started. While the postpaid base does not include connected devices, AT&T’s shared plans clearly make the process of adding a tablet easier.
T-Mobile already has more prepaid customers than AT&T (15 million for T-Mobile vs. 7.4 million for AT&T). They are clearly winning share versus AT&T in the MVNO/ Wholesale space (1.039 million gain for T-Mobile vs. 951 thousand loss for AT&T year-to-date). They are much smaller in postpaid (AT&T is 3.3x larger in total, and probably 2.1x larger in consumer).
For the first time, however, T-Mobile is taking smartphone share from AT&T. Barring any dramatic changes in the remaining months of this year, T-Mobile will likely take consumer share from AT&T in 2013. That’s a huge headline that no one would have predicted at the beginning of the year.
T-Mobile should be compared to AT&T and not Sprint. The prospects of SIM Card swaps make it easier to move networks (just ask the MetroPCS representatives who are converting customers in droves). AT&T will soon complete the acquisition of Leap Wireless, who was once considered a MetroPCS merger partner. Leap and MetroPCS currently go head-to-head in many markets, and it’s about to get a lot worse with MetroPCS expanding into Cincinnati, Cleveland, Denver, Phoenix, Pittsburgh and Portland (note: with the exception of Cleveland, all of these markets are legacy Leap/ Cricket areas). T-Mobile has the third largest LTE footprint today, and will likely end 2014 with 85% of the LTE coverage of AT&T.
Interestingly, T-Mobile has and will claim that this has been their goal all along. In the December 2012 Investor Day, John Legere had to correct himself and correctly state “Our focus is on AT&T” (he had originally stated that T-Mobile’s focus was on Sprint). The analyst and investment community should have taken him more seriously.
With two quarters of success as a backdrop, what part of the telecom industry is left to disrupt? What can T-Mobile do to beat AT&T? Here are some ideas:
- Win more enterprise business. Start with Cbeyond (full disclosure: I am on the Technical Advisory Board of CBEY), then move on to tw Telecom, XO, and others. Certify 20,000 “T-Mobile ready” buildings with superlative coverage by the end of 2014. Rally around the “Beat the Indoor Beast” mantra, which creates more cringing than any other single problem in the telecommunications industry (having both an AT&T and Sprint phone, I can attest that they cannot keep their speed promises in many buildings). Eliminate that “Bring Your Own Data Cringe” customers feel when they enter an office building, hospital, courtroom, or packed arena. Make the partnerships profitable for both buyer and seller, and build enterprise credibility on a building-by-building basis.
- Delight customers with exceptional application experiences. Over three years ago, I wrote a Reality Check article for RCR Wireless called “The Tweet Guarantee.” There’s a lot of value in a superior Pandora, Spotify or Rhapsody (or Netflix) experience. No one owns the application experience in wireless – yet (Verizon is very close based on several devices I have recently tested). T-Mobile can own this space, but it’s going to require a data center/ content management/ edge network strategy that is better than AT&T’s. Plenty of Internet/ broadband partners willing to help here, including Level3, Cogent, Savvis, and the underlying applications providers. And, once Sprint Spark is launched on SprintLink (one of the largest backbones in the world), low latency applications providers are going to flock to Sprint.
- Improve national coverage. I know this sounds like a broken network, but Sprint is T-Mobile’s friend here. Both lack the last 50 million POPs. Partner with Sprint to blanket the Mississippi Valley (US Cellular spectrum) and break the small town duopoly that Verizon Wireless and AT&T currently enjoy. Last year, we went into some depth on several areas where Sprint and T-Mobile could get started (the “Dear John” October 2012 Sunday Brief is available upon request).
While many of you want to add complex wireline/ wireless product partnerships or inorganic growth options to the list, these take a lot of time and energy. T-Mobile is rightly focused on daily execution because it’s working. Make gains from the current strategy throughout 2014, and then contemplate more complex activities.
As the title of this week’s Sunday Brief implies, this has been a good year for T-Mobile. Sprint had blowout years in 2004 and 2005, right before the Nextel merger. AT&T had a terrific wireless performance in 2009 and 2010, just as iPhone exclusivity ended. Verizon had a blockbuster year in 2012 and is likely to replicate it again this year. These are examples of good years, not dynasties. T-Mobile has had a good 2013, and these typically come in pairs. To create a dynasty, T-Mobile needs more – a lot more.
Next week, we’ll cover cable earnings in greater detail. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can. Have a terrific week!
Greetings from Dallas (Texas), where several thousand will complete the Susan G. Komen 3-Day Breast Cancer Survivor Walk today. First, thanks to everyone who has been patient in the many responses to the last two Sunday Briefs. I’ve been a bit under the weather, but really appreciate the kudos and many thoughtful responses. Frankly, I am overwhelmed by the response the newsletter/ column receives across the telecommunications community. I went into a few details a few months ago about why this column exists – to inform, engage, debate and stimulate new thinking about the telecommunications industry. Never thought it would get to this level. Thanks again.
This week, we have had earnings releases from Comcast, Time Warner Cable, US Cellular, and Sprint (as well as Facebook, Apple and Amazon). On top of this, we had the “what can happen” announcement of Sprint Spark, an innovative and potentially competitive differentiator for Sprint. That’s a bit more than I can cover in 1500 words, but we’ll hit the highlights of each and cover key themes in greater depth before the end of the year.
First, Sprint reported earnings that were pretty much at or below expectations (and also set the stage for a strong T-Mobile earnings announcement next Tuesday). The company lost 315,000 customers, with gains in lower ARPU prepaid and wholesale offsetting higher ARPU/ higher margin 535,000 postpaid losses (360,000 of these losses came from Sprint’s CDMA platform and 175,000 came from either the Clearwire or the purchased US Cellular properties). Dan Hesse, Sprint’s CEO, attributed the postpaid losses to the iDEN shutdown:
…we needed to shut the iDEN network down on the June 30, and we were quite successful compared to the plan in re-capturing 40% of those, if you will, those customers but we lost 60% and most companies were mixed in that. You had iDEN subscribers, typically the over simplified, the blue collar workers, white collar workers would be on the Sprint platform. If we lost the account, Nextel or iDEN customers came off in June and then the Sprint customers come up in the second half, both Q3 and Q4. The impact on the third quarter was quite significant
This is one of many transitions that were occurring at Sprint in the third quarter. The Sprint platform had no additional opportunity to benefit from the Nextel transition, yet the lingering negative effects of the previous quarter’s transition described above are still being felt. Offsetting this loss, however, are the reductions in access and tower lease costs that Sprint no longer has to incur because of the Nextel platform. Bottom line: There are a lot of puts and takes in the Sprint results, and the US Cellular and Clearwire transactions add additional swirl to the story. Without US Cellular and Clearwire, most metrics were flat or down. Relatively speaking, Sprint lagged behind all of its peers in the third quarter, including T-Mobile. You can access Sprint’s latest financial spreadsheet and management presentation here.
The question many investors are asking is “How will Sprint use its spectrum holdings to create competitive differentiation and grow profits?” Sprint clearly assuaged many investors with their groundbreaking demonstration of Sprint Spark on October 30. The technology fuses multiple spectrum bands (800 MHz, 1.9 GHz, and 2.5 Ghz) with different technologies (TDD LTE, FDD LTE, 8T8R radio heads in the 2.5 GHz band, Carrier Aggregation which is a part of the upgrade to LTE Release 10) to create a fast experience.
Several portable HotSpot devices already have the Sprint Spark capability, and the first Spark-enabled handsets (Samsung Galaxy S4 Mini, Samsung Galaxy Mega, HTC One Max, LG Optimus G2) are scheduled to hit the shelves on November 8. Sprint teased participants at the Burlingame demonstration with two additional smartphone models that will receive Sprint Spark capabilities via a software upgrade. On Friday, Google and Sprint confirmed that the Google Nexus 5 will be Spark-capable with a software upgrade in April, and it’s rumored that both the Samsung Galaxy S4 and the Samsung Galaxy Note 3 will have Sprint Spark capabilities by the summer.
Can Spark save Sprint? It’s a worthy question both to ask and to analyze. It will definitely kick start Sprint’s enterprise and wholesale/ M2M efforts. Having consistent yet dynamic 20Mbps downstream capacity could enable a lot of new applications and would certainly crown Sprint “King of the Cloud.”
The issue with the last sentence is consistent. Sprint acknowledged what many blogs have been talking about for months – Network Vision has created more than dust; it’s created havoc for many customers. Assuming Sprint will incorporate a $20-40 monthly price hike for the faster network speeds, it needs to also carry a guarantee or at least an extended trial period.
Also, the technology capable with Sprint’s devices will have to be purchased – it does not have the “Bring Your Own Phone” allure that MetroPCS has been able to capitalize on this quarter with SIM Card swaps. This will slow adoption rates in the mass market. Finally, if my predictions are correct above, it will not be ready for an iPhone device until late 2014 (if then). That’s troubling news for ~20% of Sprint’s postpaid base that is Apple loyal.
Sprint must deploy Spark consistently. It cannot be a “bonus” feature (a la early versions of cable-based “burstable” data which were tied to the viewed website address), but needs to be delivered in a standard, consistent manner. This means 50 feet inside the NYC building, 5 feet outside the building, and 5 miles away. Because Sprint lacks a comprehensive coverage strategy (one is coming in 2014), the promise cannot be kept “in selected areas.” Verizon and AT&T will pounce on this, especially in NYC.
Sprint Spark will cost $4-8 billion per year to deploy and grow ubiquitously. As we saw with Verizon’s earnings release, just because they hit their initial coverage targets does not mean that capital spending will precipitously drop. Densification and continued spectrum deployments will continue to drive additional capital, and, in Verizon’s and AT&T’s cases, corresponding double-digit revenue growth.
Does Spark become the catalyst for a new consumer-based shared data plan? Does a Spark product wade into the eerie waters of wirleine data replacement, at least for some narrow segment (a la Clearwire), and, if they do, will this plan be capped? If the plan is not revolutionary, how will Sprint recover the 12 million postpaid customers it has lost since the ill-fated Nextel merger? Most importantly, how will any of these strategies benefit shareholders (vs. bondholders)?
It’s exciting to see Sprint with a spring in its step, and to see technology leadership drive innovation. It’s also exciting to see the ecosystem (particularly Samsung and Google) rally around Sprint. But shareholder value comes with ubiquity and consistent performance.
Following the bandwidth theme, Comcast and Time Warner Cable also released earnings this week (Comcast here and Time Warner Cable here). For the sake of brevity, Comcast results will be confined to their Cable division only. Here’s the brief summary of the cable subscriber performance:
It’s no surprise that Comcast grew High Speed Internet subscribers, and that growth accelerated over the third quarter of 2012. And it’s not that surprising that Comcast is managing the growth of video, recognizing that satellite and U-Verse deployments will continue to accelerate (we will elaborate on the X1 and X2 platforms in an upcoming Sunday Brief).
What is surprising, especially compared to Time Warner Cable’s performance, is the importance of the Double and Triple Play bundles to Comcast (which drives voice additions). Forty-three percent of Comcast’s base currently subscribes to the Triple Play (up from 39% in 3Q 2012) and 78% of the base have at least two components.
Voice is a critical part of the Triple Play profit picture. Comcast added 169K residential voice customers in 3Q, and has grown their base to nearly 10.5 million lines or 20% of homes passed. In contrast, AT&T lost 613K residential voice relationships in the quarter (the numbers are stark when you look at them over the past eight quarters: 1.154 million voice subscribers gained for Comcast, and 4.481 million lost for AT&T).
Why is voice important to Comcast? On top of the “control as much of the home as possible” reason, incremental phone additions are wildly profitable. Using the numbers provided by Time Warner Cable in their trending schedules, we’ll assume that each of the 709K voice customers added over the past year generates $34 in ARPU and a 73% gross margin (Comcast’s margin is likely higher because they did not outsource their platform operations). Adding in a few extra dollars for installation, promotion, access costs, and other items, the 73% gross margin becomes a 35% EBITDA margin ($11.90 in cash flow per month for every residential voice customer added).
Annualize $11.90 for each of the 709K voice customers, and you get $102 million in operating cash flow growth for the next twelve months. To put this in context, total Comcast cable OCF is growing between $160 million to $200 million per year on a rolling 4-qtr basis. Bottom line: The strong voice performance (which in reality is a low-bandwidth network augment to their robust Xfinity infrastructure) allows the cash flow gains from High Speed Internet to fund the foundational changes Comcast is driving in their video platform.
Next week, we’ll cover Time Warner Cable in greater detail (Charter also releases earnings). In addition, we will have more earnings news from T-Mobile and be able to round out the total wireless and wireline pictures. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can. Have a terrific week!