Continuing (Incomplete) Thoughts on the Wireless Threat to Cable

The most common question we hear from clients about Cable companies concerns the threat that Wireless poses to the Broadband business. T-Mobile reiterated their home Broadband ambitions again this week, triggering a fresh round of questions.

We have written two reports on the topic in the last few months: one focused on Verizon’s fixed wireless broadband plan (LINK) and one focused on wireless substitution (LINK).

We conclude that Verizon’s fixed wireless broadband is not the serious threat. If they go after the market aggressively they might capture 7%, in a decade or more, but we doubt they will commit the resources required to be even that successful. The infrastructure investment they are planning is focused on mobile network capacity; fixed broadband will be an afterthought.

Wireless substitution is a far more serious threat. Our report focused on the threat posed by substitution with current network resources. We show that there has already been a great deal of wireless substitution. It has weighed on fixed broadband growth for the last six or seven quarters, following the roll out of unlimited wireless plans. It is actually starting to wane.

Neither of these reports capture the full threat that will emerge when new spectrum resources are bought to bear with 5G technology. The threat rises if T-Mobile is permitted to buy Sprint. It rises further if wireless carriers get their hands on large amounts of mid-band spectrum, like the C-Band.

We are still working on an analysis to quantify the future threat of wireless substitution. We don’t need to complete the analysis to know two things with near certainty:

First, in time, virtually all things will connect to networks wirelessly (this is already true of most connected things today). In addition, all networks will be fiber-based networks that are extended wirelessly. The distinction between wireless and wireline infrastructure will disappear entirely.

Second, the mobile and fixed broadband markets will become a single market, served in its entirety by whatever remains of the current wireless carriers and the current terrestrial network providers (both Cable & telecom companies). The distinction between mobile and fixed services will disappear entirely.

It is highly likely that several among the cast of characters currently serving the fixed and mobile markets will disappear, either through consolidation or failure. A tremendous amount of infrastructure investment will be required to deliver a converged service, and only a handful of companies will have the scale to fund the investment and support its fixed costs.
Cable companies have two advantages going into the collision of markets:

First, they have the most pervasive fiber infrastructure today, and it will be cheaper for them to extend and upgrade their infrastructure than it will be for others, whether they have wireless networks or copper based fixed networks as their starting point. In addition, the spectrum that has been both scarce and concentrated in the hands of wireless companies is about to become abundant. And it will be far cheaper and quicker to add spectrum to a fiber network that to build a new fiber network beneath a wireless network.

Second, and perhaps more importantly, risk and reward are asymmetric. The connectivity market is a $300BN revenue market in the US today. $200BN of that revenue is captured by wireless companies, and less than $100BN by fixed. In other words, as fixed and wireless companies attack each other’s markets, the fixed companies have twice as much to gain as they have to lose, and the inverse is true for the wireless companies.

None of the Companies competing in either market is guaranteed of surviving the collision. That may seem hard to believe, but anyone who has read Clayton Christensen’s book will know that the annals of business are littered with the carcasses of companies once thought indomitable (LINK). Executives of companies with dominant market positions are often the last ones to see impending disruption.

Cable industry executives routinely tell us that that wireless connections are not fast enough or reliable enough to compete against their broadband products.  Christensen’s framework shows that disruptive technologies are always inferior to the technology they replace in the beginning. Disruption happens when the rate of improvement in the new technology is faster than the improvement that end users require of the exiting technology.  Eventually wireless connections will be fast and reliable enough.

Wireless industry executives are equally complacent. They claim that mobility is hard and that cable companies don’t have the assets or the knowledge to be truly disruptive.  These deficits too will be cured in time.

Disruption takes time. We aren’t likely to see much evidence of it in the next twelve months. Cable companies are likely to see record growth in broadband this year, with the threat of wireless substitution easing rather than rising. Similarly, wireless companies will face a gentler environment this year than we previously thought (LINK). But it is a matter of time before fixed and wireless companies are competing in a single, converged market with networks that look more similar than they do today.

Who lives; who dies? That will depend in large part on who is most willing to make the investments required to pursue the opportunity and how quickly they attack it. There is no defense against the threat. If both sets of companies move with equal purpose, we like Cable’s starting point.

For the full weekly review and updated comp sheets, see HERE.