Will Comcast and Charter Take over Sprint?

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It didn’t take long to validate our thesis that Comcast is after pretty big game in the mobile area, as an interesting triangle has emerged of Comcast, Charter and Sprint.

In April, when Comcast announced the launch of Xfinity Mobile, overwhelming consensus opinion was that the company had very limited goals in mobile, simply wishing to defend its existing cable subscriber base. We found this opinion to be highly suspect. (See: “Comcast’s Bigger Ambitions for Xfinity Mobile”, MCE 4/17/17). Mobile represents Comcast’s largest area of potential growth. Furthermore, a series of moves by the company indicated that it had larger plans afoot for mobile.

Major Recent Moves: Charter and Sprint

Since then, the company has moved rapidly. In May, it cemented an agreement with Charter to cooperate on operational issues in the mobile field, and, for each party not to take any acquisition moves in mobile without the assent of the other party for a period of one year.

In June, it was announced that the two companies had entered an exclusive two-month agreement with Sprint to discuss a range of possible undertakings.

Comcast and Charter

Comcast and Charter are the two largest cable companies in the U.S. with combined total customer bases of about 55.5 million as of 1Q 2017.

They’ve been intertwined in a complex series of moves in the past few years. These focused, in large part, on their separate attempts to take over Time Warner, then the second largest cable provider. Charter eventually succeeded at this, but not before Comcast had made a counter attempt of its own, and then withdrawn.

Liberty Global – The Malone Factor

Spurring on the interest in Sprint is the fact that John Malone who is the largest shareholder of Liberty Global (and Liberty Media), owns through his company 20% of Charter, which has given him effective control of the company.

Malone is the master deal maker, manipulator, in the history of the cable/media/telecom industries. Having sold TCI, the largest U.S. cable provider, to AT&T in 1999, he continued to be active in the global cable industry, as well as a range of other video/media/telecom areas largely through Liberty Global and Liberty Media. Liberty Global describes itself as the largest company in the international cable business.

Malone’s activities in the U.S. cable and related markets have focused on Charter. Malone has spoken quite openly for years about the need for consolidation of the cable industry.

He is also a strong advocate for combining cable companies and telecom/wireless providers. This has been a long-held strategic belief of his. In a conference we sponsored in 1991, Malone held an audience spellbound as he described what he characterized as the inevitable combination of cable and telecom.

Back in 2006 when Malone upped his interests in the U.S. by acquiring DTV from News Corp., we wrote:

“Malone is a potential player in both media and telecom on a scale of very few others. A former Bell Labs member, he has had a powerful interest in telecom and shown an uncanny skill to manipulate leading companies in the industry….. To be blunt about it, once he enters – EVERYONE’S PLAYING FIELD HAS CHANGED!”

Sprint

Sprint has shown a record of declining revenue; subscribers; and revenue per subscriber for the past several years. This has hardly come as a surprise, since we published an in-depth study entitled “Sprint’s Fall” in 2008. The company has never come up with a management team capable of addressing the challenges that we set forth in that study.

However, this does not eliminate the possibility of Comcast/Charter acquiring Sprint outright or making a controlling investment in the company. Sprint has a revenue base of over $30 billion, more than 40 million subscribers and very extensive spectrum holdings, an essential asset in the mobile broadband wars.

There certainly exist opportunities for creative new market approaches, services and products that could develop from a cable-wireless combination. At various times, the parties have explored doing this, unsuccessfully, through joint ventures, however, an actual combination could achieve far different results.

Our Take

We are not predicting that the cable partners will take over Sprint, however, we do reach the following conclusions:

1. It appears illogical, counter-intuitive, that Comcast and Charter would have to undertake a close agreement, tying each other’s hand regarding wireless acquisitions, if their only true objective was to negotiate MVNO agreements with Sprint, as has been speculated widely in the press and the industry. In fact, we can’t conceive why Comcast would even need Charter’s involvement to achieve such an agreement. So we conclude that they are certainly contemplating something much more extensive.

2. We find it unlikely that Sprint would have foregone possible merger talks with TMobile and tied itself up for two months in exclusive negotiations with Comcast/Charter just to discuss MVNO agreements with the cable companies.

3. We believe that Comcast probably realizes that “Wireless is Their Future,” once again contrary to consensus industry opinion. Although it is only a rough analogy, we believe that Comcast is at a similar turning point to where Facebook was in 2012 when we wrote in our study on “The Future of the Mobile Cloud” that:

“We believe the ultimate mobile challenge for Facebook is how it will address the longer term implications and vision of the Mobile Cloud that includes a blending of mobile capabilities with social networking and search.”

In that case, Facebook made a series of truly impressive moves to gain a leadership position in mobile social networking and advertising. It remains to be seen how successfully Comcast will address its key challenge in the mobile area.

4. The involvement of Charter and specifically of Malone enhances the possibility that truly significant transactions will result.

5. We believe that other initiatives undertaken by Comcast and Liberty Global in the wireless arena, while not receiving much publicity, support our views. Indications of this convergence of strategic alignment is clear in two areas:

Balan Nair, EVP and CTO of Liberty Global, in a recent interview, (March 10, 2017, with Digital TV Europe) emphasized the role of WiFi, cloud storage, MVNOs and software platform harmonization by the cable operators. The mention of harmonization is interesting since both Comcast and Charter have been prime movers in the development of RDK-B, “reference design kit – broadband,” which is the open software platform of choice for these cable players.

The other major sleeper in the technical collaboration between these two organizations is related to the Internet of Things, IoT. In May of this year, Semtech announced “a low cost LPWan development model, that can leverage millions of cable network access points”, which uses the LoRaWan standard. Comcast is a sponsor member of the LoRaWan alliance, a global standard for low power wide area networks for the Internet of Things. The LoRaWan standard has been strongly supported by the Wireless Broadband Alliance, which includes Liberty Global, Charter and Comcast.

The possibility of being able to optimize unlicensed spectrum, by means of existing industrial grade roamable WiFi networks and the spectrum assigned to LoRaWan, in the EU and USA, (Note: roaming is being deployed among this spectrum too), and the potential to use Sprint‘s spectrum resources augmented by the Verizon deal, creates a set of wireless assets which can change the rules of engagement in the wireless broad and narrowband battlefields.

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