End of February greetings from Colorado (pictured), Louisiana, Texas, Nebraska, and the City of Fountains Super Bowl LVII Champions, the Kansas City CHIEFS.  Like many of you, we watched every second of Super Bowl LVII and were amazed by the Chiefs second half performance.  We have a special picture at the end of this Brief to commemorate the occasion. 

This week, after a full market commentary, we will look at the scene for cable providers (using Comcast’s earnings as the basis for our key points).  Our thesis is that cable still has a lot of market share to take in mobile, but they need to move quickly, or they will be outflanked by T-Mobile and Verizon.  More competition results in more (not less) value creation and sets the stage for a new round of consolidation and property re-clustering. 

We had an overwhelmingly positive response to the last Brief on T-Mobile.  Hopefully we were able to answer everyone’s follow-up questions adequately.  To reemphasize one of the main points in the Brief, we do not believe that majority ownership by parent Deutsche Telekom changes the T-Mobile USA plan at least for the next 3-5 years.  In fact, we think that the cash flow generation gives T-Mobile USA more opportunities to expand their segment reach and product offerings. 

The Fortnight That Was

Markets continued their declines over the last two weeks as interest rates continued to rise.  The Fab Five lost $295 billion over the last fortnight ($270 billion of that last week), and the Telco Top Five lost $12 billion (with $26 billion in losses last week offsetting $14 billion in gains the week prior).  Verizon is the only company of the ten we track that is in the red for 2023 (down $3 billion or about 2%), and Google is on the cusp of turning negative for the year thanks to fears over ChatGPT. 

Despite the recent losses, Apple continues to lead with $265 billion in market cap gains so far and, with Meta/ Facebook, has increased Fab Five market capitalization by nearly $400 billion.  We seem to be in for a repeat performance where one or two of the Fab Five/ Telco Top Five break with the remaining group, likely to the downside (re: Meta’s breathtaking destruction of over $600 billion in market value in 2022).    

Meanwhile, the companies that do not qualify for the “Telco Top Five” are getting slaughtered.  As we mentioned last week. Lumen is definitely in a slump (down 63% over the last 12 months and more than 80% over the last five years) and Altice, who reported account and subscriber High Speed Internet losses for 2022, is down 66% over the last 12 months and nearly 80% the last half decade. 

Lumen released their annual report (form 10-K) on Thursday.  Debt levels and structure seem to be on everyone’s mind recently given the change in interest rates, and Lumen disclosed the following in their filing:

“As of December 31, 2022, we had approximately $7.8 billion floating rate debt, none of which is currently hedged. A hypothetical increase of 100 basis points in LIBOR relating to our $7.8 billion of unhedged floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately $78 million. Additionally, our credit agreements contain language about a possible change from LIBOR to an alternative index.”

From our friends at global-rates.com, here are the recent trends in the 12-month LIBOR (note the change in the center chart): 

As interest rates rise (and an additional 100 basis points is definitely not out of the question – see J.P. Morgan CEO Jamie Dimon’s comments from the CNBC interview on a 6% interest rate likelihood this year here), the impact of increased debt service costs on Lumen’s $7.8 billion in total variable rate debt will be felt on capital spending.  Higher interest rates mean fewer fiber builds, and that seems increasingly likely in 2023.  We are still scratching our heads as to why they did not execute a hedging strategy. 

Lumen is not the only telecom company with variable rate concerns – Altice is also swimming in debt – $26.6 billion in total indebtedness per their most recent earnings release and 10-K (with nearly a quarter of that as variable).  The repayment schedule of their fixed and variable debt from their earnings presentation is shown nearby.  Clearly, the work that they did in 2022 to restructure their term loans bought them some breathing room.  But their current earnings suggest that they may not have the EBITDA ($3.867 billion for full year 2022) or the operating cash flow ($1.952 billion) to support a straight rollover.  Like Lumen, Altice faces a tradeoff between debt service and capital expenditures.  Unless metrics materially improve in 2023 and 2024, it’s hard to see how Altice can avoid some asset sales to get their leverage ratios in line.  (For those of you who have not been following closely, Altice contemplated the sale of the Suddenlink asset in 2022 but that process fell through at the end of the year – more on that here). 

Debt and telecom go together – the entire cable industry was built on leverage – but we have not seen an interest rate environment like this in the last fifteen years, and it’s likely to get worse before it gets better.  T-Mobile, AT&T, Verizon, and Comcast have very solid debt structures, but their smaller peers face a steeper wall. 

Finally, on a bittersweet note (and interim Brief readers can skip this section as we talked about it last week), T-Mobile’s President of Technology, Neville Ray, announced his retirement effective later this year (announcement here).  We are working on the final title of our tribute Brief to Neville, but we think that “Did more with less” is probably the epithet for the architect of T-Mobile’s network evolution (although the runner-up, “Supreme cake maker” isn’t too shabby).  We wish Neville well in his victory lap and post-Magenta life. 

Cable’s Mobile Breakout Year?

Despite a lot of downbeat projections by many analysts, we think that the evolution of the cable industry’s mobile offerings (and the completion of selected headcount and operating cost alignments) will bring them out of their current slump. 

Comcast, Charter, and Altice are the three publicly-traded cable companies that report their mobile net additions.  Nearby is their historical net additions since the launch of their businesses (Charter’s wireless business will turn five years old in 2023, and Comcast will turn six). 

Mobile has been more than a science experiment or a side show – they are now contributing to total EBITDA and allowing overall cable unit growth to be positive (offsetting video and telephone losses).  Expectations are rising for mobile to be the next cable differentiator, and investments in mobile infrastructure (including billing systems), retail storefronts (to handle an array of smartphones), and advertising are increasing.  While cable’s overall home penetration is lackluster (single digit penetration after 5-6 years is not a crowning achievement), they have a plan to improve their market position and share of gross additions.   

Building a mobile network to complement their current network provider (Verizon) costs money, and cable stepped up to the plate at the Citizens Band Radio Spectrum (CBRS) auction in 2020 (auction summary from Light Reading here).  Cable companies were the #3 (Comcast), #4 (Charter), #5 (Cox), and #8 (Mediacom) largest winners of the CBRS Priority Access License auction.  They chose this particular auction and spectrum band because of the ability to combine generally available unlicensed access (GAA) with priority access licenses (PAL).  As this 2019 Brief describes in detail, the combination could avail cable of potentially 150 MHz of contiguous spectrum, plenty for most residential and business needs. 

The cable industry as a whole has been relatively quiet on their long-term plans to deploy a complementary network, with trials underway to potentially use some of the CBRS band as offload for their mobile traffic (see Comcast’s September 2022 announcement from Tom Nagel here which describes their relationship with Samsung, the use of 600 MHz and CBRS as an augment to Verizon’s network, and the interplay between Wi-Fi and CBRS).  As Tom indicates in the article, their ability to pinpoint investments to maximize traffic (and cost) offload is critical to broad-based deployment. 

While executive comments concerning the future of wireless have been relatively benign, Dave Watson, President and CEO of Comcast Cable, commented on the last earnings call (transcript here) about mobile’s importance: 

“When we look at wireless, we actually do, it’s a nice growth opportunity in and of itself. But the core real opportunity is to surround broadband, both residentially and commercially….

So the mobile game plan is really to support broadband. We do see continued positive results. When you package the broadband with mobile, there is a churn benefit to that. And so we’ll continue to really — that’s our — part of our core strategy is to do that and leverage as a feisty competitive marketplace in wireless. For those that are offering different kinds of offers, we’ll be there with bring your own device as well. So we got a really good balance towards it. And business services is just getting going in mobile. We’re excited about that… it’s early but good progress.”

Less than two weeks ago, Comcast introduced an Internet-mobile-Wi-Fi bundle for new customers (full details of that offer here, and a comparison to Spectrum’s bundled offer from Best MVNO here).  Here are the details of the offer from Comcast’s website: 

While we will not go into Comcast’s $25/ mo. standalone Internet offer in this Brief, we included it as it’s indicative of the competition they are seeing from fixed wireless entrants (who, as movers, may be bringing their equipment with them).  A $50 bundle for 24 months, with or without taxes, is very compelling and will drive additional gross adds. 

Overall, the picture looks bright for continued wireless momentum.  What could derail cable’s efforts?  In the short term, the future of cable’s wireless product depends on Verizon.  We posed in a previous Brief the potential impact of a change in Verizon leadership (specifically Hans Vestberg, cable’s internal executive champion), and continue to believe that there is a camp within Big Red that would prefer to disable cable.  However, that die has been contractually cast (based on what little we know of the revised cable/Verizon agreement) and Verizon’s obligations will grow, not shrink, over the next decade regardless of who occupies the corner office. 

Fixed wireless could reduce the overall cable base.  Despite comments that this technology is flaky and inconsistent, we think that there is a distinct segment of the population that cares more about the price and less about consistency (this assumes that the product is attractive to suburban and urban homeowners).  The size of this segment is the biggest question.  Given the large portion of cable’s base that is off of promotion (our estimate is that more than 60% are paying a post-promotion rate for their associated Internet product), cable will likely need to winback a lot of customers in this segment if they are willing to return. 

Then there’s the N factor (newness).  There is a portion of the population (our estimate 20-25%) that, faced simply with a new technology medium (fiber, wireless) and a known brand (T-Mobile, Verizon), will try out an alternative.  Assuming no porting of a home phone number is required (and that there is an existing mobile relationship with T-Mobile or Verizon), trying/ testing an alternate network is an option. 

Bottom line:  Cable’s entre into mobile has been slow and methodical.  Revising the Verizon relationship, building an Apple relationship, retrofitting retail stores to showcase mobile, and developing billing systems that can easily bundle wireless and High Speed Internet are not simple tasks.  All of that groundwork has been laid.  Meanwhile, Verizon has expanded their segments to include Tracfone, T-Mobile’s network has revamped with Sprint’s mid-band spectrum, and AT&T is expanding their fiber network to 30 million homes and businesses.  Cable needs to move faster, or they will be outflanked by their larger wireless peers, particularly in the suburbs.  It’s time to move from “walk” to “run.”      

In our next Brief, we will revisit the themes of our seminal work on The Essential Economy in March 2020 during the height of COVID (Briefs are here).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list (or they can sign up directly through the website).  Have a terrific remainder of February and Go Royals and Davidson Wildcat basketball!  And congratulations to the Super Bowl LVII Champion Kansas City Chiefs on a terrific 2022-2023 season!