FWA Part 3: Cableco Impact

Final part in my series on FWA. Given that I’ve historically written about Charter, I wanted to round out this series by looking at FWA through a cable lens.

The final part in my series on FWA – you can read the first part on demand here and the second on capacity here. Given that I’ve historically written about Charter, I wanted to round out this series of posts by bringing it back to cable. First though, I think a little history will help frame the headwinds cable faces.

History – Pre-Fixed Wireless

Cable has ridden the wave of internet adoption over the last couple of decades. Conveniently positioned with coaxial cable already in the ground, they switched focus from video to broadband as the demand for data grew; cable had an advantage vs telcos as copper networks (twisted pair) were technologically inferior. Over time, as data demand rose, copper’s disadvantage became more clear, and cable ended up with ~50-60% nationwide broadband penetration.

Telcos steadily overbuilt their copper footprints with fiber to better compete vs cable, but their cadence has ramped up over the last few years; fiber now covers ~50% of the U.S. Overbuilding with fiber is expensive at >$1k a passing, but it turns penetration from ~10-15% (with copper), to ~40-45% at maturity. A classic split in a 2-provider town (pre-FWA) would have been ~50% cable, ~40% fiber, and maybe ~10% no provider (or another option like satellite). In towns where cable competes vs legacy DSL, the split might have been closer to ~70% cable, ~15% DSL, and ~15% no or another type of provider.

So, duopoly markets, where cable competes against fiber were increasing, but cable still had a solid competitive position:

• Their coax provided more than enough performance; D4.0 created a decade+ runway and cable networks are ~99% fiber (coax is not the next DSL).

• A significant portion of the U.S. that doesn’t have a fiber option (~50%) is uneconomical for overbuilding, leaving cable as the only high-speed wired option.

• Their coax was already in the ground and fiber overbuilders need to earn a return on their ~$1k per passing investment. Fiber usually prices slightly higher than cable; if fiber lowers prices, cable can match the decrease due to their cost advantage – this usually means a rational market and solid returns for both (assuming cable doesn’t fight too aggressively – if cable does, it’s usually because an overbuilder is financially vulnerable).

• They’re the incumbent. A portion of subscribers won’t change providers unless forced to (laziness/if it ain’t broke don’t fix it) – these are usually high return customers.

• Broadband market expansion was slowing, but cablecos had high return edge-outs opportunities and still ~15mm DSL/VDSL subs (as of Q1 2022) that could be switched to cable/fiber.

Bottom line, cable was going to experience more competitive markets, but continued subscriber growth was expected with margins expanding as video customers rolled off. Charter added >1mm broadband subscribers annually from 2016-2021, with 2020 >2mm due to the pandemic tailwind.

Fixed Wireless Access – FWA

In 2021, T-Mobile launched their FWA offering. They’d got a 2-year head start on 5G by betting that mid-band would be the sweet spot; they made this bet by acquiring Sprint, who held ~150MHz of 2.5GHz spectrum (Sprint didn’t have the capital to build it out). Flush with capacity, and with other 5G use cases looking underwhelming (self-driving, private networks, VR etc.), they launched a 5G wireless home internet product.

FWA had poor economics vs traditional wireless plans (~20x worse on a per GB basis), but it was a high margin product with a readily available TAM and offered a way to monetize their 5G network.

*Shows AT&T fiber and copper adds net, and T-Mobile’s add include business (estimate ~1/3^rd of adds are business)

FWA picked up momentum in 2021, and with the offering appearing to resonate, T-Mobile & Verizon aggressively pushed the service in 2022 and 2023. The chart above sums it up nicely; cable went from ~90% of subscriber adds to <10%.

There were a few potential reasons for this:

1. Normalization post-pandemic – demand pulled forward.

2. Low move activity – fewer opportunities to win connections.

3. Increased competition – from fiber overbuilders and FWA.

The simplest answer now appears to be the right one, FWA was the biggest factor impacting cableco net adds. It’s true overall connection growth did slow – the chart above shows a decrease in adds vs 2020, even though FWA expanded the TAM and T-Mobile’s adds include SMB. The low move activity had a small amount of validity, but it wasn’t a key driver. Fiber competition has followed historic patterns, grinding towards ~40% penetration as their overbuilds mature – Interestingly fiber has been less impacted by FWA (less overlap between fiber and potential FWA customers).

Why FWA Worked

I covered where FWA was finding success in part 1 (rural, SMB, and price sensitive customers), and a little bit in my Selling Charter piece, but I want to reiterate what I think is an underappreciated part of why FWA is working. The market rightly points to the cost, the simple set up (just need CPE and download an app downloaded on your phone), and no contracts, but I think how FWA competes is overlooked.

Traditionally, cable prices broadband nationally, but competes locally. They do this by offering retention offers to cancelling customers, based on their location. If a customer is in a cable footprint with only DSL or satellite, they’re less likely to offer a discounted retention offer (customer likely to return or is bluffing). If they’re dealing with a customer in a footprint with a fiber overbuilder, they might offer a discount (usually for 12 months) to keep that customer.

This strategy doesn’t work as well vs FWA. Building fiber requires planning permission, a public announcement, and running cables directly to customer homes; an incumbent cable provider knows you’re coming (down to the street and house number) and can adapt their retention strategy accordingly. With FWA, there’s no easy way to know when a provider will begin offering the product. Sure, you might be able to find out towers are getting upgraded by Verizon, but does that mean they’re about to start offering home broadband? Verizon might not have enough capacity and is simply just upgrading a tower for traditional wireless.

In areas where FWA is offered, cable has a difficult choice to make. Do they aggressively attempt to retain customers, or do they let them go knowing FWA has limited capacity and can only support a certain number of customers in the footprint? Keeping a customer with a retention offer might just mean there’s more capacity for FWA to offer the next potential customer (keep one customer with lower ARPU and lose the next one anyway).

This is where I think demand is key, even if capacity is limited. I think it’s fair to say FWA demand is significantly above everyone’s expectations, even T-Mobile’s. Some of T-Mobile’s recent moves are evidence of this. First, they raised prices. This is definitely a good sign for cable; you raise prices if there’s heightened demand and limited supply. Next, and not as good for cable, would be more targeted customer acquisition. An example is the easiest way to show this; let’s say FWA has 4 potential customers, 1 uses >1.5TBs a month, and 3 use ~600GBs. If you have 2TBs of capacity, being able to target the 3 who use 600GBs is 3x the economics. This is a grossly simplified example, but it shows how the popularity/demand for the product, when coupled with more appropriate customers, can change the economics. Telcos have backed themselves into a bit of a corner with their no contract and no data limit offerings (underestimated demand), but I’m sure they’ll find a creative way around this.

Cables’ Response

Charter’s response has been years in the making; in 2018, they launched a wireless offering running as an MVNO on Verizon’s network. The hope was to replace video losses with wireless and keep the bundles’ benefits (lower churn). Video and MVNO wireless don’t have great margins, but wireless could add value by providing a necessity at a low cost (if customers were willing to monitor data use); video was increasingly becoming a high-cost product with little value. Charter offered internet and 2 wireless lines for ~$125 (no promo), compared to ~$175 from an MNO like Verizon.

This wasn’t your usual MVNO, though. Charter and Comcast effectively gave up on their previous plans to launch a wireless network in 2011 by selling their spectrum to Verizon; in return, they obtained the right to use Verizon’s network as an MVNO (you can read more about the agreement here).

This might not sound like much, but it significantly shifts the leverage in negotiations; Charter can’t be pushed out the market – they can negotiate with other networks like AT&T but can fall back on their right from Verizon. Details of the agreement aren’t public, but Charter and Comcast use phrases like “perpetual” when describing the agreement, and they also have the right to offload traffic onto their own network after renegotiating the deal in 2021. They already offload a significant amount of traffic using their Wi-Fi hotspots (~85%), but they’re now building a wireless network in areas where they have high traffic, using CBRS spectrum purchased in 2020 for ~$900mm (Charter & Comcast combined price).

The math here is interesting. Comcast reports ~60% of their data traffic occurs in ~3% of their footprint. An MVNO agreement works by paying MNOs, like Verizon, for a GB of data. Verizon has a national network, but the cost of a GB in rural areas is significantly higher than urban; MNOs don’t charge a different price though, they run their model based on a network average. Charter/Comcast are effectively trying to arbitrage this difference by running their own network in urban areas (low-cost), and then paying Verizon for the expensive rural connectivity (but at the nationwide avg. cost per gig).

Neither company has rolled this out (they’re in the pilot/testing phase) and both companies claim wireless is profitable without their own spectrum, but their actions speak differently. Charter just raised the price of their “by the gig” plans from $14 to $20 and lowered the default video streaming resolution to 480p. I think the hybrid network is an interesting idea, but running a wireless network is expensive, and having to switch back and forth between providers adds another layer of complexity. Scale and great execution are needed to make this work. If ~40MHz of CBRS spectrum (3.1GHz band) could turn the MVNO model on its head, I don’t see why others wouldn’t have tried it already?

I want to be clear though, wireless is a value-add product for cable, even if you exclude the MNO hybrid network part – it creates a new bundle opportunity that is proven to reduce churn – however, like I wrote in my original wireless piece, I don’t wireless can save cable. Cable will live or die by broadband.

Final Word

My original Charter thesis was relatively simple. FWA had a limited runway, Charter would add ~400k connections a year, margins would expand as video rolled off, wireless would reduce churn, and fiber would follow historic competitive patterns. Put this together with their buyback strategy and ~15-20% CAGR over the next few years was achievable.

Charter added ~350k connections in 2022, but only ~150k in 2023. Margins haven’t increased as I predicted, and even though they’ll likely expand in 2024 as they lap labor cost adjustments and SpectrumOne promos roll-off, ARPU isn’t growing and adds are lower than I predicted. That’s why I sold. I think management’s execution window has narrowed, and given the leverage I was unwilling to hold a concentrated position.