Everyone agrees fixed line telecom is a dying, low margin business. Yet Cablecos like Comcast (NASDAQ:CMCSA), Cablevision (NYSE:CVC), Shaw (NYSE:SJR), and Time Warner (NYSE:TWX) are feverishly trying to capture market share in this business. Why?
The death of fixed line isn’t a result of VoIP providers such as Vonage (NYSE:VG), and it certainly isn’t the result of Cablecos. It’s wireless substitution. No matter how many homes Comcast wires up with cable telephones it doesn’t change the fact that consumers are beginning to view landlines as a useless service with price being the only differentiator.
So will someone explain exactly why Wall St. has recently fallen in love with Cable?
“As I think you all know, we are very happy with our success in phones so far over the last year or more, and we are ahead of the industry with 11 percent of eligible homes on VOIP,” said Time Warner President and COO Jeff Bewkes. “But, of course, the next 10 points of penetration above the 11 percent that we are at now are harder than the first 10 or 11 points.”
Bewkes allowed that Time Warner has run into “some more aggressive marketing activity from the telcos,” particularly from BellSouth (NYSE:T) in the Carolinas. But he said such competitive moves were expected and insisted that the MSO is “now lifting our performance” in those areas.
Translation: We're dropping our pants on pricing to secure incremental market share. However, Time Warner still needs to install equipment at the customer premises to secure this low-margin business, equipment that will be useless in a converged fixed-mobile future.
If a wireless solution had good signal coverage at home, and was equivalent in cost to a landline, how many people would continue to use a landline? Does anyone believe that such a future is not imminent?
A vision of the future from Dave Bursteins excellent DSL Prime Newsletter:
In an economy growing at 2-3% per quarter, China Telecom’s residential lines went only from 121.0M to 121.1M. Since the Chinese carriers under government direction are actively adding services in the inland and poorer rural regions, I infer an actual decrease in landlines in the more developed parts of the country. Wendy Liu at Merrill sees “accelerating fixed to mobile substitution”, a trend likely to become more intense next year when 3G mobile begins.
This is exactly the future that fixed-mobile convergence is creating. There is no telephone landline needed therefore there is no value in providing this service. The value, and the commanding heights, are in Wireless. Other than a nebulous agreement where Sprint probably captures the majority of value and profit, the Cable companies don’t control their own destiny. This must change.
The cable companies will either make massive capex investments (they already started with the recent AWS auction) to reach parity with the Bellcos, who already have such assets in place. Or, they will acquire assets that bring them to parity alongside the Bellcos.
Something I predicted months back looks even more likely today than it did then (see "Why Softbank bought Vodaphone"): It is a virtual certainty in my opinion that Comcast, and perhaps a consortium of local cable operators, will purchase either T-Mobile or Sprint (NYSE:S). The recent appreciation of the cable equities and destruction of shareholder value at Sprint would allow the cable companies to complete such a transaction and not dilute EBITDA, the sacred metric by which the Wall St. Priesthood holds them accountable.
Full Disclosure: I am long Sprint and short Comcast.