October greetings from Boston, Cedar Rapids, and Kansas Metropolis. It was nice to satisfy with Troy Doom, the CEO of Ice Home America, one in every of Fort Level Capital’s investments (extra on the corporate right here) in Boston earlier this month. Third quarter earnings begin subsequent week and proceed into November, offering buyers with 2024 and 2025 priorities for the telecom and infrastructure sectors. After a brief market commentary, we’ll focus this week’s Temporary on questions we’d ask Comcast and Constitution. Whie their legacies are rooted in linear video, their futures are extremely depending on wi-fi providers and broadband.
Right here is the ultimate earnings presentation schedule with hyperlinks to every of the investor relaitons web sites. If in case you have not had an opportunity to learn the final Temporary (right here), we advise you achieve this previous to Tuesday when Verizon kicks off the earnings parade.
The fortnight that was
Whereas the Fab 5 and the Telco High 5 have been each up within the combination over the past two weeks, all or almost all of these beneficial properties have been pushed by two shares: Apple (+$125 billion) and T-Cell (+$17 billion). Of the ten shares we observe, T-Cell and AT&T are at present the second and third-highest proportion gainers for 2024, outpacing Google, Apple, Amazon and Microsoft. Sure, a greenback invested in AT&T on January 1 has returned extra worth than in every of the Fab 5 shares besides Meta/ Fb. We’d not be stunned to see Ma Bell overtake Comcast someday within the subsequent 6-9 months because the third most precious US telecom. AT&T is a outstanding story that seems to have legs.
The Chinese language hack that impacted many carriers together with Verizon, AT&T, and Lumen is constant to draw lawmaker curiosity. In keeping with this Broadband Breakfast article, Congressional Democrats and Republicans on the Vitality and Commerce Committee despatched the heads of Verizon, AT&T and Lumen a collection of questions with responses due by final Friday. The magnitude of this breach, primarily based on our conversations with analysts, was higher than others as a result of it could have enabled the Chinese language to find out how the federal government displays communications actions. For background, the unique Wall Road Journal article on the breach is right here and the follow-up article from The Washington Submit is right here.
Lastly, whereas we expect that Verizon is overpaying for Frontier’s belongings, there are a lot of Frontier shareholders who take the alternative view. In keeping with this Reuters article, Glendon Capital Administration, who owns almost 10% of Frontier shares, has publicly introduced that they are going to be voting in opposition to the deal. Cerberus Capital Administration, who owns greater than 7% of Frontier shares, has voiced considerations however has not gone so far as indicating a “no” vote.
3Q earnings questions (Half 2)
Within the first a part of our earnings questions (hyperlink above), we targeted on Verizon’s pay as you go enterprise transformation, their Frontier acquisition rationale, T-Cell’s postpaid churn problem, and AT&T’s enterprise wireline woes. General, wi-fi is challenged by the worth proposition of present and future expertise improvements. In brief, 5G has not created the step operate in worth creation for buyers that different funding alternatives (e.g., Synthetic Intelligence) have. We’re getting into the sixth yr since deployment, and the customer-facing advantages are nonetheless rising.
We warned in regards to the 5G hype in July 2019, devoting a whole Temporary to the subject: “About This Factor Referred to as 5G.” We posited that the way forward for 5G is determined by “Extra software program, doing extra issues, quicker and higher.” Like LTE, 5G relied on modern purposes that may enhance lives. There’s nonetheless time, however outdoors of fastened wi-fi as a wired various for each residences and companies, it’s exhausting to level to mass market purposes which were remodeled due to 5G. Shipyards could be extra environment friendly, however your yard hasn’t modified a bit.
This improvements drought has positioned extra stress on wi-fi carriers like Verizon and T-Cell to develop subscriber share (5G has helped enhance community scalability and buyer profitability). That worth creation has come by two sources: a) Improved month-to-month revenues per wi-fi subscriber (ARPU) by adjustments in month-to-month subscription pricing buildings, and b) Mounted wi-fi providers to make the most of extra capability that ought to have been consumed by the software program improvements described earlier.
That brings us to Comcast and Constitution, two of the Telco High 5 which have had higher years. For the reason that finish of 2019, Comcast and Constitution’s fairness values have decreased by 27% and 58% p.c. The Triple Play tiger (Excessive Pace Web + Linear Cable + House Telephone) of the earlier twenty years is now toothless due to Google (YouTube TV), Hulu (Comcast+Disney), Netflix, and wi-fi substitution. The identical technique used to scale back scale and profitability with incumbent telcos (create “Swiss cheese networks”) in earlier years is now being utilized by fastened wi-fi and fiber to the house (FTTH) suppliers to restrict cable’s scale economies. And the Reasonably priced Connectivity Program (ACP) is gone.
Regardless of all of those headwinds, cable marches on. They nonetheless have scale. They’ve alternatives to increase into beforehand unserved geographical areas. They proceed to develop their industrial enterprise. They’ve wi-fi. In brief, they’ve choices and proceed to have the next market share than fiber or fastened wi-fi of their footprint.
Listed here are the questions we’d pose to Constitution and Comcast:
- (For each). What number of gross additions are coming from fiber suppliers? These seemingly signify clients who’ve beforehand been double or triple play (wi-fi, not house cellphone) clients and are returning to cable. Whereas there is no such thing as a bodily porting, this could be a superb proxy for product superiority (a “port ratio” equal utilized in wi-fi).
Our view is that this quantity may be very low. Cable is dropping to fiber and clients are reluctant to return for a lot of causes. First, new networks have fewer oversubscription points (cable nodes can turn into congested – suppose again to April and Might 2020 throughout COVID). Second, there’s an “funding” in fiber for many new clients – the multi-hour set up course of. Lastly, most FTTH deployments include new Wi-Fi gear (many occasions built-in into the FTTH in-home tools) that’s Wi-Fi 6 or increased. Fiber can ship a buyer expertise that’s materially completely different from DOCSIS 3.1. That’s why the “port in from fiber” ratio is vital.
We agree with the cable suppliers that fastened wi-fi could be extra susceptible. However neither T-Cell nor Verizon invested in 5G for the needs of solely offering fastened wi-fi. When a number of money flows are feeding the economics of a tower/ city/ area, the impression on wi-fi suppliers might be transferred to different services.
- (For each). Whither Xumo? We listened to a number of latest investor convention updates from Constitution and Comcast and their set-top field/ aggregation three way partnership referred to as Xumo was barely talked about. Xumo streaming containers began distribution in October 2023, so a 12-month assessment/ milestone announcement ought to have been made. Thus far, no information.
That is stunning because the Xumo platform is great (we’ve been utilizing ours for six+ months and enormously want it to Roku). Comcast consists of one Xumo field for each new Xfinity Web buyer, and Constitution permits clients to buy the field outright for $60. Each provide the “tools as a service” for $5/ mo. which represents a $6-8/ mo. low cost to set-top field prices.
Xumo additionally has a line of televisions which can be distributed by Finest Purchase (right here) and Walmart (right here). A follow-up query like “Why not give away a Xumo TV with chosen bundles?” makes a whole lot of sense if the next high quality expertise would create extra affinity (pun meant) for conventional cable packages. With cloud DVR accessible/ included, the expertise could be extra cell pleasant than a set-top field. We wrestle to see why each Constitution and Comcast should not pushing Xumo more durable and selling the 2025 roadmap.
- (For each). Will cable buy further spectrum? Chris Winfrey appeared to trace on the Goldman Sachs Communacopia convention in September that future shared spectrum purchases and deployments could be within the offing:
“We’ve additionally bought CBRS licenses for shared license. We expect that framework may be very pro-consumer, and it’s good for lots of different individuals within the spectrum house. And so, we count on to proceed to be lively within the shared-license spectrum house as properly… In some sense, we’ve not been in a race [to deploy spectrum] due to the connection and the setup that we’ve with Verizon and a few of that construct out is tempered by the connection with Verizon. We even have a major quantity of different capital tasks and work and labor that should happen. However we’ll totally deploy the CBRS, however we’re not in a rush to do it. Apparently, the extra traces we’ve, the higher the return on funding for the construct. So the return of deploying that spectrum and deploying these small cells simply continues to get higher.”
We agree with Chris that specializing in the shared spectrum house makes a whole lot of sense for cable and suppose that they need to have a dialog with Dish about utilizing their CBRS holdings to extend capability.
- (For Comcast). When will Comcast totally mirror [Charter] Spectrum’s cell pricing technique and product choices? Our guess is that Constitution’s introduction of aggressive buyouts (extra right here) and their “Anytime Improve” inclusion within the Limitless Plus Plan (right here) is popping some heads and driving extra gross provides than their Philadelphia-based cousin. Mike Cavanagh, Comcast’s President, made a remark that there was no “pleasure of authorship” with respect to Constitution’s actions.
As a reminder, Constitution had 1.6 million (22%) extra wi-fi subscribers than Comcast on the finish of the second quarter. During the last 4 quarters, Constitution has grown 80% quicker than Comcast (2.18 million internet additions vs. 1.22 million). For 3Q, we’d not be stunned to see 200-300K extra internet additions for Constitution than their counterpart. The first motive for this distinction is Spectrum’s deal with simplicity and switching promotions.
Whereas not wi-fi, we’d additionally recommend that Comcast mirror Constitution’s lately introduced inclusion of Peacock Premium with all Spectrum TV clients (announcement right here). It’s perplexing that Comcast has not prolonged their very own streaming service completely to their cable subscribers (see Peacock Premium promotions right here – simplification required).
- (For Constitution). How can shareholder worth be improved by further acquisitions? Chris Winfrey clearly articulated their capital allocation technique on the Goldman Sachs convention:
“… our capital allocation precedence, since I joined the corporate in 2010, truly hasn’t modified, which is first port of name is to have natural investments that produce good and higher money flows over time and protect your terminal worth. Second is, to the extent there’s M&A that’s extra engaging than shopping for again your inventory, you do M&A. Third, you purchase again your inventory. And fourth, in the event you actually have nowhere to go and also you wish to simply flip money again over to buyers so it may be taxed, you do dividends. And that’s by no means actually been in our profile.”
We see a depressed Cablevision (a part of Altice) asset as Constitution’s subsequent transfer. Each shares are down 20+% over the previous yr (and Altice has misplaced 92% of its market capitalization over the past 5 years). Altice is tormented by issues with their mum or dad firm and monetary woes – the time seems proper for a transaction.
There could be a deal the place Mediacom, one other rural-focused cable supplier (now in glorious monetary situation), takes all the non-Northeast holdings (or frankly no matter Constitution doesn’t need). A transaction with further re-clustering of belongings between Constitution and Mediacom can also be potential (they did this with Comcast when buying Adelphia Communications). Backside line: Whereas many acquisition alternatives exist or will floor within the subsequent yr, merging Lengthy Island and elements of New Jersey into the remainder of the New York Metropolis metropolitan space would create worth for Constitution shareholders. Profitable execution of synergy achievement is excessive given the latest expertise with Time Warner Cable and Brighthouse.
We’ve lengthy argued on this column that re-clustering of belongings (telco, cable, wi-fi) creates synergies and aggressive “moats.” Constitution could have the chance to have an effect on a transaction and may take a look at half/ all of Altice prior to purchasing again further shares.
Constitution and Comcast proceed to keep up their broadband share, however the different three corporations within the Telco High 5 should not idle of their fiber methods. It’s time to take some calculated dangers which can be targeted on creating aggressive benefit. Comcast has extra items to work with and, after a really profitable Olympics, ought to rethink their playbook. Constitution is definitely taking part in their (weaker) hand very properly, and can seemingly shock on many fronts, regardless of AT&T’s continued FTTH deployment success.
That’s it for this week. Search for the fourth week of Apple iPhone 16 Professional and Professional Max availability charts tonight on the web site, and within the subsequent Temporary, we’ll start to digest every earnings report. Till then, in case you have associates who wish to be on the e-mail distribution, please have them ship an electronic mail to [email protected] and we’ll embrace them on the record (or they’ll join immediately by the web site).
Lastly – go Sporting KC, Davidson School Soccer, and Kansas Metropolis Chiefs!
Essential disclosure: The opinions expressed in The Sunday Temporary are these of Jim Patterson and Patterson Advisory Group, LLC, and don’t replicate these of CellSite Options, LLC, or Fort Level Capital.
