Cable MVNOs face major challenges in a competitive market

The mobile and wireline industries are set to collide as some cable companies appear to be gearing up to launch wireless services. But there's little reason to expect the mobile landscape to be radically overhauled anytime soon.

Comcast (NASDAQ: CMCSA), the world's largest cable TV company by revenue, executed on its MVNO deal with Verizon (NYSE: VZ) last fall and is rumored to launch a service leveraging its Wi-Fi footprint sometime this year. Comcast has been seeking tech executives with wireless experience for key positions in recent months, according to The Donohue Report, and Comcast CFO Mike Cavanagh said in April that the company has what it takes to make 5G work.

"We're still in early days," Cavanagh said on a quarterly earnings call with analysts. "Antennas are going to need to go up, and we need space and power and backhaul. The spectrum doesn't pass through trees and buildings."

And Comcast isn't the only cable company itching to get into the wireless game. Charter Communications (NASDAQ: CHTR) CEO Tom Rutledge said last month his company could offer a nationwide wireless service because its Time Warner Cable (NYSE: TWC) acquisition gives it access to the same Verizon MVNO agreement as Comcast. Charter is now the second-largest cable operator in the U.S. behind Comcast.

Wi-Fi as a mobile technology: 'A lot of work still to be done'

Wi-Fi would be the key for any cable company looking to unlock the wireless market. A wireline broadband provider could use existing residential and commercial Wi-Fi access points and public hotspot networks, routing traffic over those connections whenever possible and falling back to cellular only when necessary. Or traffic could be routed over cellular networks unless rock-solid Wi-Fi connectivity is available. Either model could allow an MVNO to offer somewhat discounted service.

"I am not convinced these services will necessarily be 'Wi-Fi first,' at least initially," said Mark Lowenstein, managing director of Mobile Ecosystem, via email. "Rather than being Wi-Fi first, Comcast would steer as much traffic as possible onto Wi-Fi, especially in homes and other areas where they have deployed hotspots and have Wi-Fi relationships; where the quality and reliability are good."

But while the major U.S. carriers increasingly provide strong service across the bulk of their nationwide cellular networks, Wi-Fi largely remains a hodgepodge of access points where service quality can vary greatly. Substantial wrinkles will have to be ironed out before any MVNO can leverage Wi-Fi as a major weapon against the carriers whose cellular networks they'll also need to provide comprehensive service.

"For a cable MVNO to be heavily dependent on deployed public Wi-Fi hotspots or cable Wi-Fi hotspots (such as Xfinity WiFi), especially outside the home, there is a lot of work still to be done to improve the user experience," Lowenstein said. "Even though there is significant density of able Wi-Fi hotspots in some cities, there are lots of issues around quality of signal, reliability, interference and authentication that need to be resolved for an MSO (multiple system operator) to be able to rely on those hotspots for a 'cellular' service."

Could spectrum make the difference?

Interestingly, cable companies' interest in wireless is heating up just as some crucial airwaves are about to come to market. The FCC is already negotiating to make broadcasters' spectrum available for the incentive auction of 600 MHz airwaves, and will likely begin to accept bids next month from companies looking to put them to use for wireless.

A newcomer could conceivably put those airwaves to use to launch its own network, perhaps focusing on densely-populated areas. Comcast is set to participate in the incentive auction, while Charter has opted out. But as Lowenstein points out, other options exist: Charter or another player could simply buy spectrum or partner with a company that owns some – Dish Network (NASDAQ: DISH) is an obvious candidate in either of those scenarios – or could leverage LTE-Unlicensed (LTE-U) or radio waves in the 3.5 GHz band that could eventually be put to use via spectrum sharing.

The challenge of adding value

Ultimately, though, the prospects for any newcomer to the mobile market will hinge on how much value it can bring to consumers, according to William Ho of 556 Ventures. The four major U.S. mobile carriers own and operate their own networks, giving them a major advantage over companies that would essentially rent them to provide services. While MVNOs have tried for more than a decade, none has emerged as a real threat to the tier-one carriers. And the market has only become more competitive in the last two years, driving down prices and making it more challenging for any potential newcomer.

"The Verizon and Comcast relationship hasn't really garnered any lasting impression," Ho said via email, adding that he's "not bullish" on the viability of a cable MVNO. "The bottom line with cable companies operating their own MVNOs is that they need to provide a tangible and large value proposition on why they need to switch from their current provider."

That value proposition could come in the form of substantial discounts or zero-rated exclusive content, Ho observed, but those would likely require generous deals with network operators that have little incentive in seeing increased competition.

"All this needs to pass an underlying cost to serve/operate. Will the host network provide favorable rates that the cable companies can have a modicum of profit?" Ho wrote. "There's a lot that goes into that cable MVNO business plan."

There is indeed. So while a cable company may eventually prove disruptive in the world of wireless, incumbent carriers aren't likely to lose much sleep over them in the near future. --Colin | @colin_gibbs