Comcast Stock: Wireless – A Major Threat & A Key Opportunity

Like a lot of stocks, Comcast (NASDAQ:CMCSA) has been battered this year, though Comcast has actually been battered less than most. It is down “only” 30% in the last 12 months, as opposed to many entertainment/telco stocks which are down over half. With a P/E ratio now under 10, Comcast certainly appears to be a bargain.

The problem I’m having is, the reason for Comcast’s decline is not going away. Comcast isn’t just following the market down; there are real fundamental changes happening in this stock’s industry, and I’m not even talking about cord-cutting. I’m talking about the new competition in broadband, largely instigated by T-Mobile (TMUS) and Verizon (VZ) since AT&T (T) has elected to sit on the sidelines.

Before buying into Comcast, an investor should first satisfy themselves that this problem is contained and its negative effects already largely priced in.

Are they?

Management’s Current Approach

Back in March, Comcast CEO Roberts was saying that Comcast wasn’t seeing much impact from fixed wireless. About 1 million net fixed wireless subscriber adds later for T-Mobile, his tune has changed slightly… but not very much.

By the Q2 earnings call, five months later, Comcast management indicated that they’re not expecting to see substantial broadband net subscriber growth for the foreseeable future. But they still couldn’t bring themselves to admit they’d misread the changing market. Instead, they insisted that there were three factors affecting broadband market trends, and the primary two were fewer people moving between homes and less need for broadband post lockdowns. Only third and grudgingly did management concede that “increased competition” was also playing a role.

Even so, they evinced no desire to really change course from a broadband perspective. Rather, they intend to ride it out. As Roberts put it, fixed wireless would suffer from “significant long-term limitations” and was only making gains now because of “excess capacity” being marketed to “value-seeking” consumers. This current state of affairs, which Roberts insisted wasn’t affecting churn, only connects in a small way, would not last.

First of all, selling excess capacity and seeking value for money aren’t exactly dirty words, but never mind that. The central point of Comcast’s approach is that it doesn’t think T-Mobile and Verizon can keep this up long-term, so they’re just going to keep going as they are now and when the smoke clears, they’ll still have a broadband monopoly, for all intents and purposes, just one with a few million less subscribers, those who win the geography lottery and actually manage to make it onto a wireless network before the capacity is all used up.

Is this approach likely to succeed?

Wireless: Congestion & Irrelevance Is Not Certain

If T-Mobile and Verizon did nothing but what they’re doing now, perhaps. But the point about early days for fixed wireless cuts both ways. While that does mean that they have a lot of low-hanging fruit to get an early start with, it also means they’re still experimenting with the optimal business models and probably not yet really innovating all the different ways they could maximize the value of their limited capacity.

It’s worth noting that the variation in data usage across the fixed wireless customer base is already quite broad. On T-Mobile’s Q1 2022 earnings call, CEO Mike Sievert indicated that while the average FWA household was consuming 300-400 GB per month, roughly 10% of households were over 1 TB. Thus, roughly 10% of households consume 3x or more the average amount. If T-Mobile could gradually nudge data guzzlers off the network and replace them with average customers, that alone would expand its network’s effective customer capacity by 20%.

Usage Based Billing

Another strong possibility is through a shift to more usage-based billing, instead of flat-rate billing for unlimited data. This could encourage households already on the network not to waste capacity unnecessarily.

Unfortunately we don’t have much actual data to use here, since almost all broadband connections in the US are sold in a flat-rate billing structure. (Understandably so, since until very recently virtually all home broadband connections were wireline connections, where veritably the entire cost of operation lies in maintaining the connection and the marginal cost per gigabyte may be under a penny.)

Still, there are early indications that UBB could be very significant. One recent survey showed that switching a customer from flat-rate billing to UBB produced a 44.4 GB reduction in total data use, even as their data speeds increased. Holding speeds constant the effect is presumably larger.

Limited Data Plans

Perhaps the best approach to reducing data consumption per account, however, is to simply start marketing limited-data plans. Even now, as streaming video prepares to administer the final death blow to linear TV, 26% of households use less than 100 GB per month, though admittedly some of those probably only because their speeds are too low to get above the mark, not because they wouldn’t like to. But clearly there is such a thing as a data sipper.

Again, there are early signs. In August, T-Mobile announced that anyone who wasn’t eligible for 5G Home Internet could sign up for Home Internet Lite, a data service at the same price capped at 100 GB. Unlike 5G Home Internet this offer isn’t limited by geography and tower capacity – any T-Mobile customer can get it. To those 26%, this may be a tempting offer, representing as it does an over 25% discount on Comcast’s broadband average monthly fee.

100 GB is a little low, and there probably needs to be a slightly larger plan available. But even a 200 GB plan would essentially cut in half the average data consumption of T-Mobile’s current FWA users and double the number of accounts the network can hold.

Comcast’s Own Data-Sipping Strategy

What’s really odd about Comcast’s attitude towards this, is that calibrating market offerings of a limited-capacity service to maximize appeal to low-data users is a tactic Comcast should easily recognize. After all, it’s precisely the tactic Comcast itself, along with Charter (CHTR) is using in wireless. Xfinity Mobile and Spectrum Mobile are just about the last major services employing the old “throttle everything” approach, where once a subscriber exceeds a given data allowance on their Unlimited plan – they’ve settled on 20 GB for now – all data usage is throttled even when the tower is not congested. This is almost certainly because as resellers of Verizon’s capacity, they don’t actually own the towers in question and are being charged on a per GB basis.

And yet, they are succeeding. One of the few major industry questions that former T-Mobile CEO John Legere got wrong as he built the Un-Carrier was his prediction in 2017 that cable companies foray into wireless would be brief and they would retreat when they realized how expensive a service without owner economics would be. But Comcast/Charter compensated for that by designing their plans specifically for low-usage data sippers, and managed to attract millions of them with no sign so far that their momentum is slowing.

Wireless Potential

This is not to say that Comcast, and Charter, will never need to build out their own wireless networks – industry analysts almost universally agree they eventually will if they want to make wireless a permanently strong part of their offering. But riding on Verizon’s network and calibrating offerings in the early stages of the process allowed them to avoid the massive red ink a new wireless network would normally incur in the early stages of the process.

That will be increasingly important going forward as continued pressure on broadband margins reduces cash flow. It’s not yet clear if the companies will coast – taking the free cash flow they can get by underpricing unlimited data plans from the Big Three to data sippers and pocketing the difference – or run wireless at break even for a while as they funnel profits from it back into the build out of their own owned and operated wireless network.

The increasingly aggressive pricing both companies are offering on unlimited data plans would suggest that perhaps they intend to lean into wireless and are willing to put major CAPEX behind it.

On the other hand coasting would definitely preserve margins as the broadband competition I expect to continue whittles away at the wireline division’s free cash flow. But Comcast will never become a major wireless power that way, so it would be capping its upside.

Key Points Synopsis

I do not agree that T-Mobile and Verizon are doomed to fall off as their networks fill up with the same data guzzlers in the same proportions as Comcast and Charter serve. It’s true that wireless will always have less capacity – and more ubiquity – than wireline service, but that’s just another reason for wireless carriers to calibrate their offerings to those who cost less to service because they use less. T-Mobile and Verizon continue to have considerable upside from fixed wireless.

That same argument, however, seems to cut in favor of Comcast when it comes to wireless service, which it can continue to gradually expand until there is enough cash flow in wireless to support a major push into network construction and give Comcast owner economics in its wireless division.

It’s also worth noting that AT&T’s decision to essentially sit out the fixed wireless broadband market, employing only as a limited tool in limited markets, will look even more foolish than it already does if it turns out the potential market is much larger than currently projected.

Investment Summary

Comcast seems likely to continue to suffer pricing power and profit declines in its broadband division. However, the picture for its NBCUniversal content division and its wireless offering seems considerably more positive. For now, I’m rating it a Hold.