Back in February 2018, John Legere, the outgoing CEO of T-Mobile, famously (or infamously, depending on your point of view) referred to Comcast and its move into the US mobile market as "irrelevant" and slapped the "irrelevant squared" label on Charter Communications.

Almost two years later, Legere's snarky assessment has not aged well.

In Q3 2019, Comcast, Charter and mobile newcomer Altice USA collectively snapped up about 495,000 wireless subs, extending their total to 2.5 million. The mobile subs captured by those MSOs in Q3 represented almost one third of the industry's total, when both pre-paid and post-paid adds are factored in, according to MoffettNathanson Analyst Craig Moffett.

Figure 1:

"As a percentage of net market growth, the cable operators have already reached a level of clear relevance in wireless," Moffett declared in a report issued this week holding that cable is now starting to "matter" in the US wireless sector. He said US cable is poised to snare nearly 2 million net mobile adds in 2020 all by itself.

Figure 2:

Pricing pressure
But Moffett stressed that cable's "path to disruption" into mobile has started somewhat modestly. And that has mostly been due to pricing.

Comcast's and Charter's initial pricing on unlimited and by-the-Gig options, hindered in part to their existing MVNO deals with Verizon, hasn't been "all that aggressive," particularly when placed alongside Altice USA's opening foray of $20 per month per line for unlimited data for Optimum and Suddenlink customers and $30 for all others.

Altice USA has a much more economically favorable agreement with Sprint that's less expensive on a per-gigabyte level and aided by a jointly-owned mix of strand-mounted small cells on the cable operator's network that offloads traffic and drastically reduces Altice USA's cost structure.

Comcast and Charter are saddled by variable costs, which Moffett estimates to be in the neighborhood of $31 per month per customer, and an MVNO deal with Verizon he believes to be about $3.50 per gigabyte, which together apply significant pressure on product margins. New Street Research analysts put those per-GB costs at close to $3.

New MVNO deals, spectrum bids on the horizon?
"Still, one gets the sense that Comcast's and Charter's pricing, and the impact it has had on the market thus far, is still little more than a warmup," Moffett explained, noting that Comcast's and Charter's MVNO deals with Verizon look "more like a beginning than an end."

Moffett expects cable to accelerate its share of the mobile business, and to make more moves or carve out new or updated MVNO deals that can improve the economics of those services.

Notably, AT&T CEO Randall Stephenson recently signaled that AT&T would be willing to talk turkey with cable operators about MVNO deals. "Yes, we would actually be open to that," he said on AT&T's Q3 earnings call in October. "And not just cable guys, but there are a number of people in the reseller space that are reaching out."

Moffett said Stephenson's overture is both surprising and predictable. "By inviting Cable to negotiate a better (cheaper) MVNO deal, Stephenson is inviting greater competitive instability, and potentially an all-out price war," he wrote. "On another level, however, Stephenson is merely acknowledging the inevitable. Cable has come to the wireless business, and even if their current Verizon deal isn't cheap enough for them to be all that disruptive now, their nascent evolution towards becoming hybrid network operators will mean that their variable costs will ultimately come down and, like any network operator, they will have every incentive to be aggressive in loading their new networks."

Indeed, AT&T is providing roaming for Altice outside of Sprint's footprint.

Moffett also expects cable operators to build out strand-mounted small cells on their networks with or without the help of a partner. "Indeed, it may be the cable MSOs this time who are reluctant to cut in a wireless operator," he added.

Initially, it was expected that cable's use of metro and in-home WiFi hotspots would offload a bunch of mobile traffic and reduce MVNO-related costs, but that idea has not worked out as well as hoped. On that point, New Street Research analysts note that WiFi and carrier network standards weren't developed to interoperate seamlessly, and that it's been difficult for cable operators to manage the WiFi offload without core network control. And not possessing that traffic offload piece is costly for cable, as New Street's analysts estimate that MVNO traffic accounts for about 70% of cable's wireless costs.

Same vision, new approach
But that could all change in the coming years. While cable's original offload vision will remain intact, the approach will be a bit different as cable operators size up opportunities coming in the midband, namely unlicensed and licensed spectrum in the 3.5GHz CBRS band as well as spectrum in the C-Band that could hit the auction block sometime in 2020.

US cable operators "will almost certainly participate in the midband spectrum auctions next year, and they will likely win licenses," New Street's analysts predicted in a report issued in the wake of the firm's 5G conference last week. While MSOs might be convinced to pay handsomely for C-Band spectrum, they believe it's more likely that they'll buy CBRS spectrum, expected to go for a lower price due to power limits and the band's shared licensing regime.

But if that idea turns into a reality, cable operators would get some much needed help in the form of eSIMs in smartphones and other mobile devices that could be programmed to first look for a cable-run CBRS network, and fallback to the MVNO network, Moffett said.

"The implications of such a hybrid network are dramatic, and, for wireless operators, rather threatening," he added.

So, there are two options US cable could pursue to boost their mobile margins -- striking new (and lower) MVNO rates that also allow for core network control, and deploying their own radio access network using midband spectrum. Cable operators might find that both suit their needs.

"Based on conversations at the conference, we think it is highly likely that the Cable companies will deploy their own RAN, and there is a good chance they will secure a new MVNO too," the New Street analysts noted.

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— Jeff Baumgartner, Senior Editor, Light Reading