“While Comcast has several options to sell wireless services, we assess a 40% probability that it will acquire a wireless company within the next 12 months, with Sprint as the most likely option within this context,” the analysts write. “To be clear, we certainly don’t know if anything is really in the offing. But we thought it would be better to plan for the unexpected than to hastily pull together synergy analysis and pro forma models ex post.”
The Citi analysts contend the recent $2.37 billion spectrum purchase by a group of cable interests lead by Comcast ” “may foreshadow a fundamental shift in cable’s strategy,” which “transcends merely adding a fourth service, wireless voice, to cable’s triple play.” Their conclusion:”Wireless will likely emerge as a critical platform for voice, data, and video. In short, wireless untethers cable’s entire business.”
The report contends Comcast has two options if it wants to move more aggressively into wireless: Participate in Sprint’s pending WiMax buildout, or buy a wireless company. Their conclusion is that “an acquisition is more likely.” The next step then is to figure out who Comcast would buy. Citi concludes that Comcast could buy either Sprint or T-Mobile (controlled by Deutsche Telekom (DT)), but find Sprint to be a more likely target.
They find strategic reasons for such a deal, noting that it would keep Sprint out of the hands of the satellite companies, improve their competitive position against the telcos, allow both services to gain incremental customers, and bolster Comcast’s position in the small- and medium-sized business market.
A deal would have risks, though: “First, Sprint/Nextel integration is far from complete, and merging with Comcast may exacerbate these integration woes,” according to the report. “Second, the risk to customer ARPU erosion leaves our 2007 revenue and EPS estimates for Sprint below consensus. Third, while Sprint is now attractive to value investors, Comcast increasingly appeals to growth investors. Pro forma, a new firm will likely see top-line growth rate slow materially, even with synergies. These risks suggest multiple compression for Comcast is likely if a deal is announced.”
UPDATE: Well, okay, now I don’t know what to believe.
As I noted above, Citicorp on Friday asserted that there is a reasonable chance that Comcast (CMCSA) will buy Sprint (S) in the next year. (They put the probability at 40%.) But Aryeh Bourkoff, an analyst with UBS, isn’t convinced. He issued a report that asserted that an acquisition of Sprint by Comcast is “unlikely in the intermediate term.” He views the recent spectrum purchase by a group of cable companies lead by Comcast as “experimental,” and does not expect any significant capital spending on a build out of service in the foreseeable future.
Bourkoff does expect Comcast to move into the wireless arena, but in an evolutionary way, “rather than a revolutionary one.”
Here’s my take. Eventually, we’re going to see an expansion in the idea known as “place shifting,” which really boils down to the notion of watching the programming of your choice on computers and mobile devices. Sling Media’s Slingbox offers a way to watch content from your set-top box or DVR on any Internet-connected device; MobiTV offers a service for watching TV on your handheld device. As power and bandwidth available to handhelds improves, there is going to be an increasing urgency on the part of consumers to have immediate access to programming - downloading movies and TV shows from iTunes and moving them to your iPod is nice, but spontaneous viewing when you have unexpected downtime seems far more compelling.
Ergo, Comcast eventually is going to find a way to offer service on its customers cell phones. It won’t be this year or next year, but it will happen some day, and Comcast is smart enough to know that if they don’t offer the service, someone else - the telcos, or satellite players, or someone new - will step in and steal away slices of their business.