The Case for Cable MVNO – Why This Business Makes Sense

In the US communications industry, 2023 will be regarded as the year when the line between residential and mobile broadband service providers has truly blurred. As RCR Wireless reports on T-Mobile and Verizon’s impressive momentum in the residential broadband space with their Fixed Wireless Access (FWA) offerings, Light Reading’s “2023 in Review: Cable’s Wireless Growth” summarizes how Comcast and Charter (and their smaller peers) took the competition back to the mobility front through their Mobile Virtual Network Operator (MVNO) offerings.

Cable Needs to Go After the Mobile Broadband Market That’s Twice in Size in EBITDA

In 2017, the combined EBITDA of the US cable industry (Comcast, Charter, Altice USA, Cable One, and an estimate for the remainder of the industry) was ~$50B. During the same year, the combined EBITDA of the US mobile industry (AT&T, Verizon, Sprint, T-Mobile USA, US Cellular, and Tracfone) was ~$85B. This means that in terms of EBITDA, mobile wireless was 1.7x the size of cable wireline. Therefore, it was not at all surprising to see cable leader Comcast debuting their Xfinity mobile in April of 2017. That was followed by Charter’s Spectrum mobile launch in September 2018. Altice USA’s Optimum mobile was launched in the fall of 2019, followed by Cox mobile’s launch at CES 2023 in early January. Many other smaller cable operators also either started or showed interest in launching their mobile service, primarily through the MVNO model (more on that later). Here, the point is, as the residential broadband market neared full penetration and more importantly, the mobile telcos encroached into that market via FWA offerings, the cablecos had no incentive to sit out of the mobile market that is nearly double their existing market in EBITDA terms.

MVNO and Cable’s “Right to Win”

Well, it’s one thing to have the desire to get into a new market (mobile wireless broadband). But it’s a completely different thing to have the “Right to Win” in that market. From that perspective, US cable operators can consider themselves “lucky”. Currently in the US, arguably, most of them find themselves in a sweet spot to offer mobile service via the MVNO model. Let me summarize the highlights of those favorable market conditions below before delving into more details- ??????

Figure: from Introducing Evolved MVNO Architectures for Converged Wireless Deployments blog

a.????? Low Barrier to Entry, Specially if You Choose the “Reseller MVNO” or “Light MVNO” Model

We know that the nationwide population and geographic coverage-related regulatory requirements (the latter one is much harder/more expensive than the former one) make facilities/infrastructure-based mobile service offerings prohibitively expensive. If the right economics is in place with the host Mobile Network Operators (MNOs), then the MVNO model can be a big savior here. In a 2021 blog post, Omkar Dharmadhikari, My ex-colleague @ CableLabs articulated an array of MVNO models, from Reseller or Light (Thin) to Full (Thick) or Hybrid. If any cable operator (or any other non-cable operator, for that matter) decides to launch their branded mobile product via the Reseller or Light model, then they need 2 things - getting an attractive “per GB” data offload cost from the host MNO and setting up their back office “IT Stack” for tasks such as customer provisioning, onboarding, customer support and charging/billing (in case of the Light model). There will be other associated costs involving sales, marketing, and administration but the business model will basically come down to the “Arbitrage” opportunity. This means you can make money selling something (Data in GBs) if you are buying the same product at a reasonable spread aka lower cost.

b.????? Cable has An Edge for their In-Market Incumbency with Fixed Wireline Broadband

The arbitrage argument above begs the question “But, Why Cable”? The short answer is – cable’s existing end-customer relationships in their markets for fixed wireline broadband and the opportunity to add “mobile” to their service menu for a “Quad-play” offer (mobile broadband on top of fixed broadband, voice, and video). Additionally, cables’ extensive in-market network footprint (in terms of homes passed) makes them a dominant player in any market they are in. In most major North American metros, cable’s network footprint/mileage is estimated to be roughly 3~5X of the network mileage of their telco peers. We should not lose sight of the fact that except for the air interface between the radio base station and the mobile terminal/handset, any mobile network requires reliable wireline connectivity for the remainder of the network infrastructure. Therefore, if any cableco decides to move up the value chain with a Full (Thick) or Hybrid MVNO model, they would have an immediate advantage in terms of wireline coverage. This can help them in multiple ways – reducing the high cost of mobile transport (backhaul/midhaul/fronthaul), leveraging the cable strands for strand-mount small cell deployments, and deploying WiFi hotspots in high-traffic public areas, etc. If nothing else, it can provide them with a solid advantage in a “Give and Take” relationship as seen in the New York market between Altice USA (MVNO) and ex-Sprint/current T-Mobile (MNO). The prevailing perception is that the former offers cable strands for the latter’s strand-mount small cells and in exchange receives a very favorable per GB data rate for their MVNO service.

?c.???? But, What About the Host MNOs? Are There Many Options?

By definition, an MVNO business model will NOT stand, if there is no host MNO/s to do business with. This is where the US mobile wireless market stands apart from most other markets – in the US, all 4 nationwide facilities-based MNOs (Verizon, AT&T, T-Mobile, and Dish) have publicly demonstrated their interest in hosting MVNOs. Verizon is already hosting Comcast, Charter, and Cox Communications. T-Mobile is the host for Altice USA. AT&T has finally made inroads by inking a deal with National Content & Technology Cooperative, NCTC which has stated that nearly 50 out of its 700+ members are at different stages of assessing/preparing for an MVNO offering. For a tri-party deal to enable one-stop service for MVNO aspirants of any size and capability, NCTC has also looped in a SaaS platform provider Reach. Reach, by the way, claims to have separate relationships with other major MNOs too – With T-Mobile, they launched their own branded Reach Mobile. The flexibility of this model is further demonstrated by the launch of WOW! mobile, by WoW!, a midsize cable operator who rebranded Reach Mobile’s service to launch their MVNO service in the summer of 2022.

The dynamics here at play on the host MNO side is- their network cost (both Capex and Opex) is a sunk cost for them. Therefore, if they can monetize their network by further increasing its utilization ratio (without compromising on their own service quality of course), then they have incentives to do just that. More importantly, there seems to be a “Fear Of Missing Out” dimension as well- if Verizon or T-Mobile is aggressively doing these MVNO deals, that then creates inevitable pressure on AT&T or Dish to do the same before the counterparties for potential MVNO deals run out. ???

d.????? Now, Why Should Cable Do This?

There are 2 main rationales.

Rationale #1: Protect Your Fixed Wireline Broadband Business – First and foremost, this has to be a defensive move to protect cable’s “Bread and Butter” – the high margin high-speed internet (HSI)/broadband product. Combining the mobile service with an existing residential broadband service and allowing the subscribers to deal with only one service provider/ one bill for both mobile and residential fixed broadband needs have a compelling value proposition. It makes the customer relationship stickier and churn less likely. It’s true that across the country, a lot of cablecos are enjoying their near monopoly/partial duopoly (with telco FTTH) in their respective markets. But, that situation is rapidly changing with the advent of aggressive telco fiber builds (thanks to the up-and-coming BEAD grants) and cable over-builds in certain markets. So, strengthening customer relationships with an additional line of service is an effective pre-emptive move. More so before it happens anyway from the opposite direction via Telco’s mobile+FWA convergent offer. Even for non-cable HSI subscribers, these typically lower-cost MVNO offers can help to win some mobile-only/ mobile-first subscribers, resulting in an expansion of the customer base for the incumbent cableco.

Rationale #2: Show Me the Money – The 2nd rationale is purely number-centric. No service provider would want to introduce a new service, even with clear qualitative benefits, if it is a big drag on its financials. The good news is - that the base seems to be covered here. Well-respected industry analyst Craig Moffett articulated in his Q1 2023 report that cable’s gross margin from MVNO in 2022 seems to be 70% and the estimated net margin seems to be between 5%~35%, with the consensus toward the lower end of that range. Therefore, if a cableco’s existing wireline business returns around 10~15% net margin, adding MVNO to its service menu doesn’t necessarily dilute its bottom line. Rather, it contributes to solid top-line growth as Craig commented in the same report that in just a few years, mobile wireless can account for more than 10% of cable’s overall revenue. This is as impressive as it can be. From my recent engagements with multiple Tier-1 cable operators, I have found that there is tremendous interest in expanding their business lines in the face of flat to slowly growing residential broadband revenue. For that, cablecos are looking into Multi-Access Edge Computing (MEC) opportunities, Private Networks opportunities, and IoT opportunities including Cellular Vehicle-to-Everything (C-V2X), among others. But none of these is guaranteed to grow the top line by 10% in a few years. So, from that perspective, if done right, the addition of mobile wireless via MVNO stands out.

?e.???? So, Can This Be “Done Right”? Is the “Arbitrage” Opportunity Real?

There seems to be an established expectation in the market on how cable MVNO deals should be priced for the consumer market. The table below shows current (as of December 2023) data plan pricing offered by different cable MVNOs and their host MNOs –

From the table above, this is evident that if we overlook the bells and whistles associated with different plans, then the floor price for unlimited data seems to be around $30/line/month. This sets the de facto standard for an MVNO’s unlimited data plan price today. This is also in line with MVNO facilitator NCTC’s advocated value proposition. In late July, 2023, at the Independent Show, NCTC CEO Lou Borrelli commented that hundreds of independent US cable operators are in a position to offer mobile service at the non-promotional price of $30/line/month and still make a profit. ?

If the unlimited data plan price is kind of “set”, then most if not all the levers have to be on the cost side to make the “Arbitrage” opportunity real. Let’s do double-click on that to unpack the cost dynamics-

·??????? There are 2 basic dimensions of MNO data offload cost, which is the biggest cost bucket for any MVNO operation. The first dimension is the cost per GB of data and the second one is average usage of MNO/cellular data (in GB) per month by the subscribers. MVNO Cost/subscriber/month is derived by multiplying these two numbers.?

·??????? Information on the first dimension, Cost/GB of Data to host MNOs, is not publicly available. In 2018, during the earlier days of cable MVNO, leading wall street sell-side analysts estimated that cost (from Comcast/Charter to Verizon) to be around $4/GB. Currently, that cost is estimated to be in the vicinity of $1/GB. ?

·??????? To achieve a 70% GM (which I consider to be the best-case scenario) on a MVNO offering, a $30/line/month price needs to have $9/line/month cost profile. This essentially means, on average. 9GB/month MNO data usage per MVNO subscriber when data costs $1/GB. ?

·??????? For context, last year, the financial analysts at Wells Fargo estimated that Charter and Comcast pay their host MNO Verizon $12-$13/line/month.

·??????? When the cost/GB of data is fixed, then the remaining lever is the second dimension – data usage (in GB). To remain profitable, one of the KPIs for an MVNO has to be to keep the data usage (in GB) per subscriber in check. Quite understandably, the MVNO business model would collapse if the long tail of mobile subscribers who typically use more than 50GB or 100GB of cellular data per month, become a sizeable portion of its subscriber base. ??

·??????? A cable MVNO will have a few things in its toolbox to keep the average data usage per subscriber at a reasonable level-

o?? A common practice is to use a throttling mechanism once a subscriber surpasses 20GB of data within a monthly cycle. Degrading the speed to 3G/2G level severely restricts mobile usage and actively discourages heavy users from signing up in the first place. Cox Mobile, for instance, reduces the speed to 1.5 Mbps (Download)/750 Kbps (Upload) once a subscriber reaches 20 GB of monthly data usage.

o?? Another key factor is to ink multi-line deals. For example, if an MVNO can loop in 4 lines from a family at a $120/family/month price point, then the cost profile dictated by overall data usage/family should look more favorable. Even if there is one (or two) heavy mobile data user/s in a family, that can be offset by the remaining user/s which may include a stay-at-home mom or a grandparent. ??

o?? Typically, mobile-only or mobile-first millennials/Gen Z users can be heavy mobile data users. A ploy to keep them out of your subscriber base can be conditioning that only your existing wireline broadband subscribers are eligible to sign up for your mobile/MVNO offering.

o?? Finally, a cable MVNO can bring more things under its control to reduce dependency on its host MNO. Unfortunately, this is an option available only to major cablecos who have their own infrastructure on the ground via a combination of WiFi hotspots and targeted deployment of cellular infrastructure. On the WiFi front, Xfinity, Spectrum, and Cox Mobile can leverage their respective 25M, 0.5M, and 4M WiFi hotspots. On the cellular front too, all 3 of them (and a few others) acquired CBRS PAL spectrum license and also have been very active in leveraging a range of unlicensed spectrum bands (including CBRS GAA). And, why not? Analysts at MoffettNathanson wrote “ Comcast CEO Brian Roberts has cited a startling statistic. Just 3% of their footprint [by square mileage] represents 60% of the [mobile] traffic.” This is as good as it can get when it comes to targeted deployment of your own radio network infrastructure.

?f.????? And, Is This Already Happening? Is Cable MVNO Making a Splash?

The short answer is – Yes, absolutely. It’s much more than a splash. Citing MoffettNathanson’s latest work, Light Reading reports that US cable represented nearly half (49.2%) of all mobile phone net additions (on the back of ~15% gross additions) in the latest reported quarter (Q3, 2023). Cable MVNO market leader Spectrum Mobile ended the quarter with 7.22M subscribers to overtake Dish as nation’s largest MVNO within Q4, 2023. Comcast’s Xfinity Mobile had 6.27M subscribers; followed by Altice USA’s Optimum Mobile with ~290K mobile lines. Still, US Cable MVNO’s 13.77M mobile lines by the end of Q3, 2023 represented only 4.3% of the post-paid market, thus “pointing to a significant room to grow market share”.

However, it's not only “Rosy” pictures. Mid-tier operator WoW! apparently has made little progress on the mobile front nearly 1.5 years after its service launch in mid-2022. Roger Entner @ Recon Analytics said WoW!’s apparent lack of success in mobile so far illustrates that the challenges smaller cable operators face with launching and growing a mobile business should not be underestimated. Mobile “is a tough business, in general…To be successful in mobile, you need the right people for it”, Roger continued.

g.???? We Should Not Underestimate the Challenges

There certainly is a path of doing the “execution” right to make cable’s MVNO pursuit worthwhile. But, to do that, we must have to recognize the challenges first. I intend to address those in detail in a future article. For now, let me shed light on a few-

·??????? In any arbitrage deal, the balance of power typically lies with the supplier (MNO) side, specially when you lack the subscriber base to match its scale. MNO’s “non-friendly” actions may include increasing/not reducing the offloaded data (in GB) cost over time, prioritizing its own traffic over the MVNO traffic, or even threatening to pull out from the deal altogether. ?

·??????? Brand awareness as a “mobile” service provider is also super critical. Cox Mobile chose CES 2023 and Super Bowl LVII to promote its service launch. Smaller operators can think of doing similar things at local college football games/state fairs/similar events, along with carefully designed online marketing push. Targeted introductions of physical stores in select markets also should be considered. A clearly crafted and highly visible campaign is needed to convince people why they should consider their local cable MVNO over the incumbent MNOs for their mobile needs. Needless to say, all of these efforts cost money and resources.

·??????? Another major challenge for smaller operators in this business is to gain access to new Apple devices that enjoy ~70% share of the US postpaid market. This is because Apple has high minimum volume commitments which are not easy to meet. The NCTC approach of offering a combined front of smaller MVNOs may go a long way to address this issue. In the meantime, those operators can sell smartphones online and/or encourage Bring Your Own Device. ?

·??????? Last but not least, there is competition from lower cost non-Cable MVNOs too. Actor Ryan Reynolds backed Mint Mobile has amassed an estimated 3M subscribers. Although, their $1.35B acquisition by the host MNO T-Mobile hasn't yet been cleared by FCC, the strategy to allure customers with low cost data plans ($30/month for unlimited data with 3-months purchase upfront) seems to be working for them. ?10-time Grammy-nominated music producer Leon “Roccstar” Youngblood Jr.’s Roccstar Wireless intends to follow that footstep by offering unlimited data at $20/month with 3-months advance purchase priced at $60. This celebrity-backed MVNO launch is also hosted by T-Mobile. Then there are the likes of AT&T MVNO Light, T-Mobile MVNO Humane, and Decentralized Wireless proponent Helium Mobile with their unlimited data plan for $20/month.

So, Where Do All of These Leave Us At?

Comcast and Charter’s stellar success (in terms of subscriber acquisition) in their respective MVNO operations has put the limelight firmly on cable MVNO. Additionally, the tri-party deal between AT&T, Reach, and NCTC (and by extension its members) has significantly lowered the barrier to entry for mid-tier cablecos. That means, in 2024, we can expect to see quite a few more cable MVNO launches. As with many other things in business, the analyst community is split in their take on cable MVNO’s prospects. This Light Reading article, for instance, highlights opposing viewpoints by MoffettNathanson (fairly positive) and by CCG Consulting (not so positive). As I alluded to above, I belong to the positive camp. The fact that cable MVNO’s subscribers are coming largely from AT&T and Verizon postpaid is just another sign that this business is capable of bringing in quality subscribers with staying power. I want to reiterate that the success of this business will ultimately come down to proper execution. Beyond having the right economics from the supply side and a solid plan for customer acquisition, you absolutely will need the right team with the right leadership who has a broad understanding of the mobile, and more specifically the MVNO business dynamics. Let’s buckle up for an exciting year to witness quite a few more mid-tier cable MVNOs and the subsequent winners and losers from that cohort.