US cable MVNOs edge along the path to profitability
INSIGHT SPOTLIGHT
US operators have a long history of offering a mix of
mobile, fixed broadband and pay-TV services. However,
fewer than one in 10 US households take all services
from a single provider. There are a couple of reasons for
this. Firstly, the US has not seen the aggressive
discounting that drove adoption of converged bundles
in Europe. Secondly, cable broadband has remained the
dominant access technology in the fixed broadband
Analysis
Cable MVNOs: a defensive play
Adoption of traditional pay TV started to decline in 2013 (largely
due to Netflix) and has fallen sharply in recent years. Satellite and
cable-TV providers have suffered the most, with Comcast and
Charter losing more than 1 million pay-TV connections in 2019.
This trend is set to continue, underpinned by the continued success
of Netflix and the plethora of direct-to-consumer service launches
from major US studios.
As content providers battle for screen time across multiple
platforms, new types of converged bundles such as mobile and
video (without fixed broadband) are beginning to emerge. This
spells further danger for cable providers as mobile and OTT
content take a central role in converged propositions, while fixed
services become the add-on (yet relevant) element.
The move to launch cable MVNO services is therefore primarily a
bid to maintain or improve cable broadband and pay-TV churn in
light of these market dynamics. As such, both Xfinity Mobile
(Comcast) and Spectrum Mobile (Charter) are limited to existing
cable broadband subscribers. The unlimited and per-GB pricing of
cable MVNOs is comparable to competitor offerings, though Xfinity
Mobile and Spectrum Mobile customers can also switch plans each
month. A lack of novel features beyond this could constrain appeal.
Core business trends unchanged; mobile losses improving
As US cable operators do not report broadband or pay-TV churn, it
is unclear whether cable MVNOs are achieving their primary
objective of lowering churn in core business units. However,
looking at net additions in broadband and pay-TV suggests mobile
has not significantly altered the underlying trends. For cable
operators, broadband net additions remain steady, while pay-TV
losses continue to accelerate.
It is also important to look at the performance of cable MVNOs on
a standalone basis. At the end of Q2 2020, Xfinity Mobile (launched
in Q2 2017) reached 2.4 million connections, while Spectrum
Mobile (launched in Q3 2018) had accumulated 1.7 million
connections. This shows that both MVNOs normally add around
200,000 connections per quarter, which is equivalent to 30–40% of
postpaid net additions in a typical quarter.
© 2020 GSM Association @GSMAi
market, yet cable providers have remained largely
absent from the US mobile market. This could be about
to change though, as the MVNOs of the two largest
cable operators in the US continue to take an
increasing share of contract net additions and edge
towards profitability. This could have significant
consequences for the mobile, fixed broadband and
pay-TV markets in the US.
As of Q2 2020, cable MVNOs remain loss-making. For example,
Comcast reported an EBITDA loss of $400 million in 2019 for its
MVNO. This is largely because typical MVNO agreements have a
variable cost element: the host network charges the MVNO for
each GB of data used by an MVNO subscriber. Unlimited data plans
therefore become unprofitable for cable MVNOs once data usage
rises above a certain point. Given their lack of control over this, it is
important that cable MVNOs accelerate subscriber acquisition to
spread their fixed costs over a larger customer base.
The effect of Covid-19
In Q2 2020, Charter recorded the highest number of postpaid
phone net additions in the US market – the first time an MVNO has
achieved this. A key driver was customers switching their
smartphone purchases to the online channel. GSMA Intelligence
data shows that prior to lockdown nearly 60% of smartphones were
sold through the retail channel in the US and Canada. This figure,
however, was likely to be much lower in Q1 and Q2 due to
lockdown-related store closures. This benefits cable operators as
they have a much smaller retail presence than the nation’s largest
mobile operators. If these behavioural changes persist beyond the
pandemic, it is likely to boost the outlook for US MVNOs.
Charter and Comcast also recorded improvements in mobile
EBITDA losses as lockdown restrictions meant most subscribers
spent more time at home connected to Wi-Fi, leading to a decline
in mobile data usage.
Source: GSMA Intelligence Consumer Insights Survey
US mobile operators’ exposure to the cable MVNO risk
Qn: Which operator provides your mobile service?
19% Other 28%
23%
Verizon
AT&T 22%
25% T-Mobile
22%
33% 28%
Comcast households Charter households
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 US cable MVNOs edge along the path to profitability
Implications
Cable operators
• Renegotiate MVNO terms – TracFone (the largest MVNO in
the US) reported a 6 pp improvement in EBITDA margin in Q2
2020, driven by the enhanced MVNO agreement it recently
signed. This new agreement could spur US cable MVNOs to
seek new terms with their existing partners, or find new host
networks. One option would be to partner with Dish, which
will need to quickly grow subscribers on the independent 5G
network it plans to launch by 2023. If Dish is able to use open
and virtualised technologies to build this network at a
reduced cost, cable operators might be able to secure
favourable MVNO terms compared to current agreements.
• Increase mobile data offload – To minimise wholesale costs
paid to the host network, cable MVNOs offload mobile data
traffic onto Wi-Fi networks when customers are in range of a
Wi-Fi hotspot. However, the majority of these hotspots are
routers inside customers’ homes, rather than in public areas,
which limits the amount of traffic that cable operators can
offload. CBRS offers an alternative offloading mechanism to
reduce wholesale costs. This could involve cable MVNOs
accessing spectrum in the general authorised access tier, as
well as acquiring priority access licences, which offer greater
levels of protection. However, the cost of deploying this
network for a cable MVNO means it is likely to be viable only
in dense urban areas.
• Push eSIM adoption – Increasing traction for eSIM in
smartphones could be an upside to subscriber acquisition for
smaller players such as cable MVNOs, as eSIM makes it easier
for customers to switch. In the US, T-Mobile and Dish have
announced their support for eSIM technology, but AT&T and
Verizon’s support is currently limited to select handsets.
Related reading
Fixed broadband and pay TV: Future outlook at a glance
Region in Focus: North America, Q4 2019
© 2020 GSM Association @GSMAi
Mobile operators
• Postpaid performance remains resilient – In the period
since the launch of cable MVNOs, postpaid churn at AT&T, T-
Mobile and Verizon continues to decline, while postpaid
ARPU levels remain steady. This reflects the success of US
mobile operators in differentiating their services (e.g. through
bundling content) and moving postpaid subscribers to family
plans. This makes it difficult for cable MVNOs to compete
with mobile operators offering discounts on a multi-line
basis.
• Keep an eye on the prepaid segment – There are signs that
the cable MVNOs could be attracting prepaid subscribers
with their monthly rolling, per-GB service plans. Sprint,
TracFone and Verizon all recorded heavy prepaid losses in
2019, only partly offset by gains for AT&T and T-Mobile. It is
likely that the prepaid segment will become more of a focus
for US operators in the next few quarters, as it usually
performs well during periods of economic downturn.
• Looking to the FWA opportunity – Due to the capex
burden of FTTP deployment, US operators have shifted their
focus to fixed wireless access (FWA) services to build their
fixed broadband footprints. While LTE-based FWA is more
targeted at rural areas, 5G FWA represents a more direct
threat to cable operators. This is particularly the case with
mmWave-based services, which can offer comparable speeds
to cable in the right conditions. Deployments of mmWave
FWA should accelerate in H2 2020, driven by the launch of
new customer premise equipment.
Author
James Joiner, Analyst
www.gsmaintelligence.com