BTIG: Comcast's wireless costs skyrocket, with little competitive impact

Comcast Xfinity Mobile store display
Comcast features its Xfinity Mobile in its retail stores. (Mike Dano/FierceWireless)

Comcast added 250,000 wireless subscribers over the first four months of its MVNO launch (and 187,000 net line additions in the fourth quarter), and investors believe the cable giant is on track to add more than 1 million wireless subscribers for the full-year 2018. However, while that pull is impressive in a saturated domestic market, at least one analyst is questioning the true impact on the competitive wireless landscape—and pointing out a concerning cost of acquisition for those subscribers: $1,260 per customer, to be exact.

With Comcast and soon Charter getting into the mix (analysts expect Charter to take an incremental 500,000 to 750,000 wireless subscribers per year when it launches its intended wireless offering in the coming months), there are more players vying for what is inarguably paltry domestic industry growth; overall postpaid adds totaled just 3 million last year, according to BTIG. Yet so far, Comcast isn’t having much of an impact on wireless operator strategies, according to BTIG analyst Walter Piecyk.

“The real concern for wireless investors is … whether cable operators will reverse the downward trend of record low wireless churn and induce price cuts by the wireless operators,” he wrote in a research note. “The first indication that Comcast was not having a material impact on the wireless industry is when operators did not increase their phone promotions with the launch of the iPhone 8 and X.”

He added, “More recently, prices have been on the rise.”

Also, the latest quarterly earnings show no indication of competitive drag. T-Mobile announced better than expected postpaid net adds of 891,000 in January; while Verizon reported 431,000 adds—also better than expected—along with record-low churn. Sprint added 385,000 net customers, and AT&T meanwhile saw its first quarter of subscriber growth in postpaid since Q3 of 2015, with 286,000 net additions.

T-Mobile CEO John Legere, in the fourth-quarter earnings confab with investors, said that Comcast’s Xfinity Mobile is “very irrelevant, and I assume that [Charter’s soon-to-launch mobile service] will be irrelevant squared,” Legere said. “The furthest thing from my mind is any concern about the impact of cable.”

BTIG agrees—for now.

“If Comcast added more than 325,000 subscribers in a quarter, we believe it would merit more attention,” Piecyk said. “However, we don’t think its current level of growth, which was only 187,000 in Q4, will evoke a response from the incumbent wireless operators, especially as growth appeared to have moderated since the initial launch.”

Beyond the lack of impact on mobile carrier financials so far, Piecyk also pointed out that the viability of the MVNO model—Comcast is riding on Verizon’s network—should be under some scrutiny, given the cableco’s EBITDA losses. Margins for MVNOs are thin in the best of times.

Overall, Comcast said in its fourth-quarter earnings that it has paid $480 million to date for its wireless customers, which works out to be more than $1,260 per gross addition (including one-time startup costs). Mike Cavanagh, Comcast CFO, said in the earnings call that losses for the full-year 2018 “could be a couple of hundred million dollars higher,” working out to $680 million and $680 per gross addition if Comcast were to add the one million customers that investors expect.

Yet BTIG thinks he’s overly optimistic, and that Comcast’s wireless cash EBITDA losses could top $1 billion in 2018 if the company accounts for handset financing in the same way that incumbent wireless operators do.

“When the wireless business was first launched, Comcast indicated that it could leverage its existing cost structure, limiting the incremental impact to EBITDA. What is the incremental costs for customer care or billing to add a wireless subscriber that would result in EBITDA losses of that size?” Piecyk said. He added that Comcast provides no breakdown of what is contributing to those losses, but added that if Comcast accounts for phone payment plans in the same way as the incumbent wireless operators do, it means counting the entirety of the revenue from future phone payments as complete and received on the day the phone is sold.

“If we excluded this non-cash benefit to reported EBITDA, as we do for wireless operators…it would imply an expected cash EBITDA loss of nearly $1 billion for Comcast in 2018 for its wireless business, representing nearly $1,000 per gross addition and based on expectation of 1 million gross additions,” Piecyk said.