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Someone Tell the Cablecos Fixed Line is Dead

Everyone agrees fixed line is a dying, low margin business. Yet Cablecos like Comcast (CMCSA), Cablevision (CVC), Shaw (SJR), and Time Warner (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, 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?

The telltale signs of this problem are emerging. Lightreading quotes from the Time Warner conf call:

“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 (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: Were 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 (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.

Discussion

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  1. I personally will not give up my POTS line for love or money!

    Posted by Bob | November 7, 2006, 4:09 PM
  2. The one major issue that keeps the land line for me and I suspect a significant number of people is the 911 infrastructure. With mobile your 911 call goes to the the Highway Patrol, at least here in CA. By the time you get to someone who can help you might as well drive yourself to the hospital.

    The answer is to program your mobile phone to the local emergency numbers.

    This issue is non existant in ASIA though, where mobile is just a cheaper easier way to deploy to more people.

    Back to the main point of this thread. Cablecos are in a knee jerk reaction to protect their customer base from the triple play threat from the Telcos. In the end this will be where the competition comes from. The only difference will be where the roots of the company lie and their last mile distribution network.

    Posted by Matt | November 8, 2006, 12:23 PM
  3. Great Post Sprint (S) could be one of the big winners you were looking for several weeks back at a little more than 4x cashflow the stock is cheap with great growth prospects. Now starting WiMax build out and a huge fiber network is in place that is not properly valued in the stock at this time.

    Posted by TED GEOCA | November 8, 2006, 4:35 PM
  4. The question is not just about Cablecos providing Voice
    services. It is, for them to provide triple services
    (Video, Data and Voice). This is why they are in a position
    to dent Telco’s revenue stream.

    The only way to counter Cablecos is what Verizon is doing;
    that is taking fiber all the way to the home.

    I would not put too much hope on Fixed-Mobile Convergence.
    The main wireless providers (Verizon, Cingular) will fight
    it. That is why the only serious provider thinking of FMC
    is T-Mobile.

    Posted by Peter | November 10, 2006, 9:36 AM
  5. I understand your opinion on the current industry however I think your making too broad of a conclusion on the future.

    It sounds like your general assumption is that cable and telco media services are going to be worthless once everyone fully adopts some “wireless standard”.

    I have myself recently gone back and forth on the ideas myself. Here are my thoughts thus far.

    1. The real market to fully capture is are those consumers that fall into the “last mile”.. because Business will never ever allow the continuity of its network infrastructure to ride the instability of wireless.. even WiMax.

    2. Consider all network type services ( Megaband internet, Fully OnDemand TV and VOIP ) and who of all the players has the actual bandwidth to service the largest volume of usage. Consider Cable, Fiber, DSL and Wireless mediums.

    So if we are simply looking at the laws of supply and demand, those who have the greatest “Supply” in this case bandwidth capacity per subscriber and the capacity of the largest number of subscribers wins.

    Simply looking at this at the future, the only ones who’s networks stand to even compete in the arena of HIGH volume network services are the ones who can serve it up: Fiber ( Verizon + Bell South ), and the Cable co’s.

    Some of us techies love the stability of a “Potts” based connection however PHYSICS dictates that you cannot transmit a digital signal over *DSL greater than one fourth of what Cable and Fiber is capable of.

    Wireless is has not yet matured nor has the capacity to fully handle what DSL can handle on a per subscriber basis, and I have already pointed out that DSL cant handle what Network services consumers will be demanding of going forward.

    WiMax is a very interesting technology indeed, however I do not believe it will supplant the “wired” mediums, however it WILL supplant the wireless cellular mediums as now many PDA/Cellphones come with wifi cards . We all know what that means… Skype and VOnage via PDA connected wifi/wimax telephone.

    THis is a great discussion and I’d love to hear others opinions on my message.

    Posted by Ben Del Vento | November 16, 2006, 12:55 AM
  6. I think you are missing the high level argument here – this is about voice only – not broadband. Wireless voice trumps wired voice- regardless if the wired connection is POTS or VoIP. Few would argue that Wireless broadband could reach parity with wired broadband in the near future.

    Posted by Andrew Schmitt | November 16, 2006, 12:11 PM
  7. I love your blog and very thoughtful analysis but think you’re way off base on this one, Andrew. You must be at such a high level that your horizon is 20 years or so. Personally, I care about the next 5-7 years.

    Point One:
    The estimates I see of cord cutters (wireless only connections) go from single digits to maybe 25% of households by 2013 (deutsche bank, among others). That means that 75% of the households still have a landline phone. Thats more homes than have terrestrial cable of some sort today and more than have broadband Internet access. Sounds like a pretty big opportunity for a pretty long time. And the cash flow from phone service is great at $40, even $30. Ultimately, as market penetration progresses, you’ll see cable co’s come up with in-state and local calling plans to save money for people who don’t use their landline as much and increase their market coverage and get to the next levels of penetration.

    Point two:
    Wireless may trump wired voice one a one-off comparison from your perspective, but don’t make the mistake of assuming you are representative of the broader market. Would your parents agree? What about people who have lousy cell coverage at home(that’s me)? More importantly, your comment misses the fact that the nature of competition is changing from individual product price/value to bundled price/value equations. That’s why cable is able to stop losses to satellite and actually grow its core cable business with a three product phone bundle. I see it happening every day.

    Point three:
    There continues to be much upside in landline communications. A huge untapped opportunity is in small business (1-20 lines) market that is underserved by incumbents, aint ditching their landlines anytime soon and requires a relatively small incremental investment to harvest. Expect major cableco’s to announce small business phone initiatives within 12 months. I would posit that for the near term, the marginal economics of small business (landline) phone service are better for a cableco than anything wireless.

    Full disclosure: I work for a mid-sized cableco…

    Posted by David Isenberg | November 21, 2006, 3:27 PM
  8. I’m not saying there will be cord cutters en extremis. I’m just saying most people will have/want a converged landline/wireless number.

    My point is consumers decisions about who provides them their landline (regardless of whether it is VoIP or POTS) will be driven by the quality/price of the wireless component.

    And a deal with Sprint will never be as effective as owning the business itself.

    Posted by Andrew Schmitt | November 21, 2006, 3:36 PM
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