The 1st in a series of articles on FWA. The 1st will focus on where FWA has found success. The 2nd post will focus on capacity, with a 3rd/4th on FWA at maturity and cables' competitive response.
I think FWA will be a competitor and serve a certain cohort of the market but I think that’ll really be on the margin. If you look at the amount of capital that the telcos have deployed into their network, with little to no incremental cash flow being returned (at least for T and Verizon - haven’t looked at T-mobile) I would suspect that their shareholders, and management, would stop short of making a big push into the broadband market because of the capital spend that it would require to increase network capacity. It’s a low return business and they’ve already deployed a couple hundred billion dollars collectively with no growth in cash flow. It’s staggering when you run the numbers. Therefore, I don’t see them making a big push beyond their announced plans.
Personally, I like the investment in Charter through Liberty Broadband because you are getting mid-teens free cash flow yield on a normalized basis (ex. growth capex) which I believe more than compensates for the risk taken. It always comes down to what price am I paying for the risk assumed and I’m comfortable with the long-term competitiveness of Charter. Lastly, I think Charter competes very well on a cost and service level with FWA.
Yep, 5G investment has been huge, and right now hasn't yielded any real new revenue streams outside of FWA (5G spend has been maintenance capex). capex intensity will start slowing now though as major spectrum has been paid for and 5G upgrades slow (tmus is furthest along).
I agree FWA has a limit, but I'm not sure it's the hard cap the market thinks (i.e., in 2025 it hits its ceiling and that's it - ~15mm is current market expectation).
No one debates FWA is more popular than originally predicted (MDUs, college kids, SMBs, rural etc.); this has to have an impact on the sub potential? or you need to be really comfortable with wireless carriers capacity limitations.
Next article will be on capacity (so more to come on this) but i think it's tough to feel confident about capacity hitting a wall in 2025; spectrum efficiency tech like MU-MIMO and beamforming have the potential to increase network capacity, and there's even talk about ARPU increases. If they're increase ARPU, and the product is more popular than predicted, i see the potential for targeted densification in certain areas (if carriers believe it's NPV positive and it's not a huge capex investment).
I liked Charter for a lot of the reasons you mention, but two key parts of my thesis haven't played out. I thought margins would expand (FWA has pressured ARPU and stopped this), and i thought they'd add ~300-400k broadband subs a year. They've missed on both these, which is why i sold most of my position (i still hold a small amount as i bought some ~$300 and still in ST gains period).
In the long run this is a commodity business where being the low cost provider is critical to compete and providing speeds that meet ever increasing demand. Demand for increased speed and capacity is certainly going to increase over time. It doesn’t seem to me that FWA is best positioned to meet those two end states: low cost and speed. I think FWA has little to no room on ARPU because why would a customer want lower speeds for higher cost? I want Charter to keep a low ARPU as a competitive tool because this is ultimately a commodity service.
If FWA edges out the customers with low data needs then that really doesn’t kill the investment thesis. The levered buyback story is still intact and per share value can increase at a very attractive rate if you are buying shares at current prices. Of course sub growth is preferred but it’s not the only factor at play.
One thing I am comfortable with is that wireless carriers capacity will never meet or exceed wired players. Wireless carriers will improve their capacity over time but customer demands will keep driving higher speeds as well so I see them only serving the low end of the market.
Interesting debate as always. You have fiber players with the fastest speeds to meet their narrative of data consumption exploding over time. You have FWA players saying there’s plenty of customers who don’t need a lot of speed. Then you have cable in the middle that really satisfies the entire market. They can build 100 gig fiber to enterprise. They can offer faster speed than FWA at the SAME cost.
Thanks for sharing. I look forward to the remaining series.
Question regarding pricing of FWA plans vs cable for like speeds. Is FWA really a low cost provider? I don’t believe that’s the case in urban and suburban markets where you have density of network and customers. So is that an advantage only in rural?
Either way, is cable (specifically Charter) lowering prices to compete? In my view, I don’t see the telcos having an enduring low cost advantage over Charter specifically. I’m surprised that Charter has been slow to respond.
Hey Connor, appreciate the comment! I think the way to look at FWA is in relation to their opportunity costs. They're still a low-cost provider in urban areas (no wire to the home and network already built), but given the capacity limitations, the economics of FWA don't work in a lot of cases. ARPU for FWA and wireless are similar (call it ~$50) but home broadband consumes 20x the data, so prioritizing FWA at the expense of wireless doesn't make sense. Rural is less likely to have capacity limitations, so there's less of an opportunity cost (i.e., don't need to give up any traditional wireless business to offer FWA).
Charter is definitely responding. They've got their SpectrumOne offering (broadband and wireless for ~$50) and I've seen some anecdotal evidence of more aggressive retention offers. They've also guided towards negative broadband adds in Q4 despite this (haven't been negative since Q2 22). What do you think happens longer-term?
I think FWA will be a competitor and serve a certain cohort of the market but I think that’ll really be on the margin. If you look at the amount of capital that the telcos have deployed into their network, with little to no incremental cash flow being returned (at least for T and Verizon - haven’t looked at T-mobile) I would suspect that their shareholders, and management, would stop short of making a big push into the broadband market because of the capital spend that it would require to increase network capacity. It’s a low return business and they’ve already deployed a couple hundred billion dollars collectively with no growth in cash flow. It’s staggering when you run the numbers. Therefore, I don’t see them making a big push beyond their announced plans.
Personally, I like the investment in Charter through Liberty Broadband because you are getting mid-teens free cash flow yield on a normalized basis (ex. growth capex) which I believe more than compensates for the risk taken. It always comes down to what price am I paying for the risk assumed and I’m comfortable with the long-term competitiveness of Charter. Lastly, I think Charter competes very well on a cost and service level with FWA.
Yep, 5G investment has been huge, and right now hasn't yielded any real new revenue streams outside of FWA (5G spend has been maintenance capex). capex intensity will start slowing now though as major spectrum has been paid for and 5G upgrades slow (tmus is furthest along).
I agree FWA has a limit, but I'm not sure it's the hard cap the market thinks (i.e., in 2025 it hits its ceiling and that's it - ~15mm is current market expectation).
No one debates FWA is more popular than originally predicted (MDUs, college kids, SMBs, rural etc.); this has to have an impact on the sub potential? or you need to be really comfortable with wireless carriers capacity limitations.
Next article will be on capacity (so more to come on this) but i think it's tough to feel confident about capacity hitting a wall in 2025; spectrum efficiency tech like MU-MIMO and beamforming have the potential to increase network capacity, and there's even talk about ARPU increases. If they're increase ARPU, and the product is more popular than predicted, i see the potential for targeted densification in certain areas (if carriers believe it's NPV positive and it's not a huge capex investment).
I liked Charter for a lot of the reasons you mention, but two key parts of my thesis haven't played out. I thought margins would expand (FWA has pressured ARPU and stopped this), and i thought they'd add ~300-400k broadband subs a year. They've missed on both these, which is why i sold most of my position (i still hold a small amount as i bought some ~$300 and still in ST gains period).
In the long run this is a commodity business where being the low cost provider is critical to compete and providing speeds that meet ever increasing demand. Demand for increased speed and capacity is certainly going to increase over time. It doesn’t seem to me that FWA is best positioned to meet those two end states: low cost and speed. I think FWA has little to no room on ARPU because why would a customer want lower speeds for higher cost? I want Charter to keep a low ARPU as a competitive tool because this is ultimately a commodity service.
If FWA edges out the customers with low data needs then that really doesn’t kill the investment thesis. The levered buyback story is still intact and per share value can increase at a very attractive rate if you are buying shares at current prices. Of course sub growth is preferred but it’s not the only factor at play.
One thing I am comfortable with is that wireless carriers capacity will never meet or exceed wired players. Wireless carriers will improve their capacity over time but customer demands will keep driving higher speeds as well so I see them only serving the low end of the market.
Interesting debate as always. You have fiber players with the fastest speeds to meet their narrative of data consumption exploding over time. You have FWA players saying there’s plenty of customers who don’t need a lot of speed. Then you have cable in the middle that really satisfies the entire market. They can build 100 gig fiber to enterprise. They can offer faster speed than FWA at the SAME cost.
Thanks for sharing. I look forward to the remaining series.
Question regarding pricing of FWA plans vs cable for like speeds. Is FWA really a low cost provider? I don’t believe that’s the case in urban and suburban markets where you have density of network and customers. So is that an advantage only in rural?
Either way, is cable (specifically Charter) lowering prices to compete? In my view, I don’t see the telcos having an enduring low cost advantage over Charter specifically. I’m surprised that Charter has been slow to respond.
Curious on your thoughts. Thanks!
Hey Connor, appreciate the comment! I think the way to look at FWA is in relation to their opportunity costs. They're still a low-cost provider in urban areas (no wire to the home and network already built), but given the capacity limitations, the economics of FWA don't work in a lot of cases. ARPU for FWA and wireless are similar (call it ~$50) but home broadband consumes 20x the data, so prioritizing FWA at the expense of wireless doesn't make sense. Rural is less likely to have capacity limitations, so there's less of an opportunity cost (i.e., don't need to give up any traditional wireless business to offer FWA).
Charter is definitely responding. They've got their SpectrumOne offering (broadband and wireless for ~$50) and I've seen some anecdotal evidence of more aggressive retention offers. They've also guided towards negative broadband adds in Q4 despite this (haven't been negative since Q2 22). What do you think happens longer-term?