Charter Communications’ strong Q4 mobile subscriber growth -- its best quarterly increase ever -- could be the thing that finally changes investor perception of cable wireless from mere “hobby” to “real business,” according to MoffettNathanson senior research analyst Craig Moffett.
Both Charter and Comcast reported their highest quarterly wireless subscriber growth ever in Q4 -- Comcast also set a record for yearly growth -- and with aggressive pricing and rising profitability, mobile could become a strong second growth product behind broadband for the industry.
Charter launched Spectrum Mobile, a Mobile Virtual Network Operator (MVNO) offering in conjunction with Verizon Wireless in 2018. Since then, Charter has grown Spectrum Mobile from 0 to 3.6 million customers. With aggressive pricing and plans to expand its reach to rural markets funded in part by federal Rural Digital Opportunity Fund (RDOF) money, it can only get better.
Spectrum Mobile isn’t profitable yet, but it’s getting closer. According to Charter, the mobile business had negative EBITDA of $92 million in Q4, and for the year EBITDA was negative $311 million. But the deficits are getting better -- EBITDA was negative $401 million in 2020 and negative $520 million in 2019. According to Moffett, Charter could reach EBITDA break-even this year.
That would put it on a profitability path akin to its MVNO partner and the largest cable operator in the country -- Comcast -- which already has reported four straight quarters of positive wireless EBITDA growth.
Moffett doesn’t expect wireless to replace broadband in investors’ hearts -- he still believes high-speed internet is a better business. But he does believe that investors have to stop thinking of cable as “only” a broadband provider.
“Cable isn’t a broadband-only business,” Moffett wrote. “It is, as we have repeated so often over the past two decades, an infrastructure business, with multiple revenue streams – residential and commercial, wired and, yes, wireless – riding on that infrastructure.”
To drive that point home, Moffett pointed out that mobile is becoming a larger component of overall revenue -- wireless accounted for 4.8% of total Q4 revenue, up from 4.1% in Q3.
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“Up to now, investors have treated Cable wireless as something closer to a hobby than a real business,” Moffett wrote, adding that while growth numbers have been good, the service has been pooh-poohed as just an MVNO. Spectrum Mobile’s 380,000 subscriber additions in Q4 -- beating analysts’ consensus estimates by nearly 100,000 customers -- could “go a ways towards changing that perception.”
Comcast is no slouch on the wireless front either. Xfinity Mobile launched in 2017 -- about one year before Charter, using the same Verizon MVNO agreement -- and ended 2021 with 3.98 million subscribers. Xfinity Mobile added 312,000 subscribers in Q4 -- its best quarter ever -- and 1.12 million for the year -- its best annual growth ever.
Adding to the optimism is that Charter plans to expand its broadband and mobile footprint substantially over the next five years. Charter was the largest recipient of federal Rural Digital Opportunity Fund money last year, and launched its first market -- El Paso, Texas -- this month. According to Charter, the plan is to expand its mobile and broadband reach by about 1 million homes in that five-year period. That’s on top of the 1 million homes passed it is adding each year via edge-out and network expansion programs.
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Last year Charter committed to spending $5 billion -- including $1.2 billion from RDOF -- over five years to bring broadband to more than 1 million customer locations in unserved areas of the country. In El Paso, Charter said it will offer broadband, mobile, TV and wireline voice service to more than 1,200 homes.
Broadband expansion can only help mobile growth -- customers need high-speed data service to be mobile customers. And at least for now, as the pandemic has caused more and more consumers to stay put and stick with existing providers, much of Charter’s mobile growth is coming from existing broadband customers upgrading to mobile service and existing mobile customers adding lines.
“I expect that through time, we’ll get more pull-through on the new customer creation side of it,” Charter chairman and CEO Tom Rutledge said on a conference call with analysts to discuss its Q4 results. “But just when you do the math in terms of where the opportunity is to grow mobile, given our existing broadband penetration -- just mathematically, we have more upside in upgrades.”
Rutledge added that Charter also is making inroads in offloading mobile traffic from the MVNO to its own WiFi network, which makes service more cost efficient. Charter also has a large block of CBRS spectrum, which Rutledge said the company could use to offload as much as 30% of its mobile traffic.
“We also are already offloading enormous amounts of traffic on WiFi,” Rutledge said on the conference call. “And I think that we have the ability to take that up significantly, too.”
That could be key. According to Moffett, the biggest goal for both Comcast and Charter in cable wireless is to offload as much traffic as they can onto their own networks to become both a Mobile Network Operator (MNO) and an MVNO.
“A hybrid MNO/MVNO combines the best of all outcomes,” Moffett wrote. “They will be facilities-based where the returns are high and an MVNO in the places where the returns on building would be low. Margins will likely grow over time, but the real appeal of the strategy isn’t EBITDA margin but instead return on invested capital.” ■
