Thoughts on the evolving battle among US fiber, cable and 5G providers
The American telecommunications landscape is settling into a protracted battle among companies using three main network technologies: fiber, 5G and cable.
The companies involved in this battle include several pureplays (T-Mobile in 5G, Lumen in fiber) as well as a few that straddle multiple technologies (AT&T and Verizon both operate 5G and fiber networks). Of course, there are plenty of blurry lines (Charter and Comcast both offer 5G, but they're doing so through Verizon's 5G network). And just about everyone is dealing with legacy operations, whether that's 3G or DSL.
Furthermore, the actual battle for consumers is unfolding at a neighborhood-by-neighborhood level. For example, Lumen's fiber is challenging Comcast's cable in my Denver suburb, but neither Verizon nor T-Mobile offers fixed wireless access (FWA) here.
Nonetheless, virtually every player in the market is desperately working to protect their existing market share while gaining more customers. Some are handling that chore relatively well (T-Mobile), while others are not (Verizon).
And it's only going to get tougher from here on out. There are growing indications that the outsized customer growth of 2020 and 2021 – in both fixed and mobile subscribers – is starting to slow in 2022. And that appears to be spooking investors, who have sent shares plummeting for virtually every US telecommunications provider in recent months.
How this will ultimately play out is anyone's guess. Some have speculated that Charter will eventually purchase T-Mobile (though that would be a surprise given their respective values). Others think AT&T could acquire Dish Network or Altice. Of course, the Antitrust Division of the US Department of Justice might have something to say about any such combination.
Here are three trends currently affecting this battle:
Fixed wireless access is perhaps the newest and most pressing trend. That's because both T-Mobile and Verizon are positioning the service as a direct attack against the cable industry, and they're both scaling up their offerings thanks to their new midband spectrum holdings. (Verizon's previous FWA efforts against cable using millimeter wave spectrum were mostly a feint.)
However, in reality, FWA is more like guerrilla warfare than a full-fledged battle because it's being used to quickly strike at small groups of customers – mostly those on DSL – scattered around the country.
For example, a recent analysis from the financial analysts at MoffettNathanson found that T-Mobile's FWA subscribers "significantly over-index in rural areas, and in areas where DSL is the only wired option."
"We don't see direct impacts from fixed wireless access in our churn or our gross additions," agreed Charter CFO Chris Winfrey during his company's most recent quarterly conference call, according to a Seeking Alpha transcript. "But we would see that as a potential parking lot for conversion to our faster, more reliable and more ubiquitously marketed and deployed broadband offering."
Nonetheless, in the first quarter, T-Mobile and Verizon collectively reported 532,000 new FWA customers. That's well ahead of Wall Street expectations of 365,000, according to the financial analysts at Cowen.
"Even if these subs aren't coming directly from cable (although some certainly are), there is a fear that, with the total broadband market growing at just 3.6 million or so subscribers per year, in a world where FWA is capturing 2 million+ of those, there simply won't be room for cable to continue growing. That is, there is a fear that FWA is 'crowding out' opportunities for cable broadband growth," warned the MoffettNathanson analysts.
Further, the financial analysts at LightShed Partners recently estimated that there's now less than 10 million DSL subscribers left in America and another 5 million VDSL subs. "That remaining 13% market share doesn't leave much low hanging fruit left on which cable operators can feast," they wrote.
But the MoffettNathanson analysts predict that FWA momentum will peak in 2023 with a total of 2.3 million new FWA customer additions that year, as T-Mobile and Verizon load up their networks. Starting in 2024, they expect the FWA trend to begin to slow: They predict Verizon and T-Mobile collectively will add 1.7 million new FWA customers in 2024 and just 1.1 million in 2025.
"We expect Verizon and T-Mobile to sign up 9.3 million wireless home broadband customers by the end of 2026, which represents 7.5% share of the market," wrote the financial analysts at LightShed Partners.
On the opposite side of that argument sit T-Mobile, Verizon and – to a lesser degree – AT&T. In general, they contend that they will be able to bolster their midband FWA strategies with mmWave and other spectrum holdings, thus significantly increasing their reach beyond their stated customer goals.
Ultimately, the jury is still out on exactly how the FWA market will develop. Some companies, like T-Mobile and Starry, are doubling down on the opportunity. Others, like Shentel, are not. In fact, Shentel recently announced that it would shutter 20 unprofitable FWA cell sites and take a $5 million hit in restructuring and impairment charges as it mostly exits the FWA space in favor of fiber.
Perhaps the most salient data point comes from UScellular. It recently disclosed that it needs to get at least 150 customers per cell site, each paying $65 per month, for its FWA service to be profitable. "The cost of building and maintaining a tower in rural America can be nearly twice as expensive as building a tower in an urban area, and the density of customers in these areas is far less than in suburban and urban areas, thereby putting pressure on the revenue generation needed to drive a positive return on investment," the company warned.
2. Fiber and the IIJA
AT&T, Lumen and other fiber operators are in the midst of dramatically expanding their fiber operations. According to the LightShed analysts, US fiber network operators are set to increase the number of homes passed with fiber from 40 million today to 70 million by 2027.
This increase will likely put pressure on cable operators. "Where today cable is overlapped by fiber in something like a third of the market, in the future that overlap is likely to rise to half, or perhaps slightly more," wrote the analysts at MoffettNathanson.
Further, "fiber to the home deployments have demonstrated rapid consumer adoption, topping 30% penetration within three years," noted the LightShed analysts.
However, some of the companies like AT&T and Lumen that are in the midst of these big fiber expansions haven't yet begun posting the quarterly customer additions that might make cable companies worry.
"Lumen continues to lag expectations for fiber deployment and fiber broadband penetration," wrote the financial analysts at New Street Research following the release of Lumen's first quarter results. "This will please the cable management teams who have been prophesying that fiber companies would struggle."
Hovering over this emerging battle is the Infrastructure Investment and Jobs Act (IIJA), passed last year. The legislation fully allocates $42 billion for the construction of broadband networks around the country. The IIJA doesn't prescribe network technologies, and some expect a portion of the cash to be funneled into FWA offerings from the likes of T-Mobile and UScellular. Most, though, believe the bulk of the money will be allocated to fiber networks.
However, the IIJA isn't expected to finance the "overbuilding" of fiber networks into cable territory. Indeed, the recent Rural Digital Opportunity Fund (RDOF) can be viewed as a kind of template for the IIJA – and Charter is already beginning to receive payments from the RDOF to build a massive fiber network in rural parts of the US.
Moreover, Charter's embrace of fiber for the RDOF project is noteworthy considering that Altice USA and Virgin Media O2 in the UK, two longtime cable companies, are in the midst of shifting their DOCSIS-powered cable networks to fiber. So far, though, cable heavyweights like Charter and Comcast seem content to remain on Docsis cable technology in their core markets for the foreseeable future.
In light of all of this competition, most of the market's biggest players are working to entice new customers with service bundles. This isn't a new strategy by any means. Both cable and telco providers worked to bundle Internet and TV services in the past. But the rise of Netflix and other streaming services has upended that strategy. In response, both AT&T and Verizon exited the content space altogether, while Comcast and Charter recently inked a joint venture for streaming video.
In the absence of a strong and profitable bundle pairing Internet and TV, almost all of the market's big players are now pivoting to bundles of Internet and mobile. Comcast, Charter, Altice and other cable companies are adding mobile services to their core Internet offerings via MVNO relationships, while Verizon and T-Mobile are adding home Internet services to their nationwide mobile networks via FWA.
The core sales argument here involves locking customers into a bundle via service discounts. For example, T-Mobile recently announced that subscribers on its most expensive Magenta Max smartphone plan can get FWA for just $30 per month, a 60% discount from the $50 per month it otherwise charges. Verizon offers a similar FWA bundling discount.
On the other side, Comcast and Charter offer their own existing Internet customers unlimited mobile services for just $45 per month, which is generally less than what AT&T, Verizon and T-Mobile charge for similar services.
According to the financial analysts at New Street Research, the cable and 5G industries have reached a sort of stasis against each other. "Both companies are offering the others' core product at $30," the analysts wrote of T-Mobile's new bundle versus those from the cable companies.
But, given the steep discounts offered on both sides, profitability metrics have become tricky.
"Wireless represents an incremental revenue growth opportunity for Charter and a method to lower overall account churn," wrote the LightShed analysts. "Yet after nearly four years of service it has yet to turn a profit. Charter has racked up $1.5 billion of cumulative EBITDA [earnings before interest, taxes, depreciation, and amortization] losses for the 3.9 million wireless subscribers it services. It originally expected to hit break even at 2 million subs. We don't think it reaches that milestone until 2023, when subs top 5 million."
T-Mobile's new FWA discount is creating similar worries. "If all [customer] adds came on at $30 ... they would need to add 2.2 million to generate the same revenue as they would with the 1.7 million we assumed previously," argued the New Street analysts. "[Customer] adds would have to be higher than that for this to be good for value. They may well do better ... But the bar is high."
Others have a much more positive outlook on cable's mobile aspirations, particularly in light of the cable companies' interest in obtaining "owner's economics" by building their own wireless networks in select locations.
"In just over three years, wireless has soared to 5.2% of Charter's total revenue – up from zero in Q1 2018 – and now by itself contributes 1.6 percentage points to total company year-over-year growth," noted the MoffettNathan analysts.
"All said, we continue to see cable mobile in an advantageous position, with the ability to steal share, needing only to win its own broadband customers, allowing them to take little (or no) margin, justified by broadband churn benefits, making for a disruptive and destructive dynamic for the overall wireless industry," wrote the financial analysts at Cowen. "We expect cable to continue to be a viable threat to the wireless industry, as we expect a ~30% share of net [customer] adds in the years to come."
As the battle rages among fiber, 5G and cable providers, each side argues that it holds the high ground.
Fiber-focused companies like Lumen and AT&T argue that fiber represents the clearest and best investment they can make with their dollars. In fact, fiber company Frontier just reported that it's commanding a 44% market share in its new fiber markets after just two years of offering services, far ahead of its expectations of 25%-30%. Thus, the Fiber Broadband Association argues that "investing federal money in non-fiber broadband is irresponsible" due to the speeds and reliability provided by the technology.
But companies with a 5G focus, like Verizon and T-Mobile, argue that smartphones have become an absolute necessity among most Americans – to the point that they can even raise prices if necessary. On top of that, other lines of 5G business – from FWA to IoT to private wireless networking – can only represent an upside to their core smartphone investments.
Cable proponents argue that cable networks can keep pace with demands through relatively inexpensive upgrades, and therefore will be able to keep the threats from fiber and FWA at bay. Further, they too have options for either cutting costs (like building their own small-scale mobile networks) or creating new lines of revenue (like Peacock).
There's no real way to say which of these sectors will ultimately come out on top. It's also hard to know how any possible consolidation might happen. Will wireless acquire cable, or will it be the other way around? Most analysts seem to see cable doing the buying, despite the fact that it was Verizon that reportedly made a $100 billion offer for Charter in 2017. Further, there remain some wildcards, such as the role that an Amazon or Microsoft might play in any possible consolidation in telecom.
I'm personally partial to the wireless argument, mainly because that's my background. You just can't beat the ease and simplicity of a speedy cellular connection that works just about everywhere. But it will be extremely tricky from an antitrust perspective for any 5G operator to purchase any other telecom provider, given the difficulties T-Mobile faced in purchasing Sprint.
Regardless, pretty much everyone agrees that we're all speeding toward a future of convergence. Meaning, the lines between Internet service providers – and Internet connections themselves – will slowly blur into the background. Already the "10G" initiative from CableLabs – the cable industry's technology development organization – takes an agnostic view to the access network by focusing not just on cable but fiber and wireless as well.
Winners in this future will be the companies that help customers get online rather than throwing up barriers to protect their legacy positions.
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- UScellular launches 5G FWA, eyes government subsidies
- T-Mobile's fixed wireless sub base skews heavily rural – study
— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano