New York — The cable industry seems destined for wired-wireless convergence as consumers demand access to services in the home and on the go, but how MSOs will get there is far from certain.

Creating a mobile virtual network operator (MVNO) in partnership with an existing wireless carrier might work for some, and there’s still plenty of speculation that a large player like Comcast could someday make a move to buy a T-Mobile or Sprint if the opportunity (and the price) were right.

Future wireless and mobile strategies for the cable industry, as well as game-shifting 5G technologies, were among the key themes discussed at last week’s Inform[ed] Wireless conference in New York, an inaugural one-day event hosted by CableLabs.

FASTEST-GROWING SEGMENT

Wireless and mobility are becoming increasingly important for cable, Phil McKinney, CableLabs’s CEO, said, noting that those areas have become the fastest-growing segment at the R&D organization.

Beyond the ongoing Cable WiFi initiative, which continues to deploy hundreds of thousands of hotspots in various public and quasi-public venues, several MSOs around the world have worked out MVNO deals (General Communication Inc. of Alaska and Liberty Global, for example), operate their own mobile networks (Rogers Communications of Canada), or are mobile carriers at their core but are also expanding into cable (Vodafone, which now owns Kabel Deutschland of Germany and Ono of Spain).

“We’re seeing this converged network,” McKinney said, adding that consumers “don’t want that broadband service to stop at the front door.”

But how those strategies will evolve for many MSOs, particularly in the U.S., is still being sorted out and debated — a topic taken on by a panel led by two top industry analysts.

Though the wireless and mobile sector is heated and saturated, it gives cable a prime opportunity to seek opportunities that are adjacent to their existing businesses for a market that is about 2.5 times larger than the one cable’s serving today.

“To me, it looks like an absolute no-brainer,” Jonathan Chaplin, managing partner at New Street Research, said during the panel discussion.

He said he sees several ways cable MSOs can get into that market, including a WiFi-only approach; a WiFi-and-MVNO play; network sharing deals; building a network from scratch; and acquiring another provider.

Chaplin said WiFi-only is not a product. “My apologies to Cablevision [Systems],” he said, noting that the MSO has been travelling that path with its Freewheel service. “It’s a niche product that goes after a very small part of the opportunity … That’s not exciting.”

And building a network from scratch is too expensive. Cox Communications tried it, at great expense, and eventually threw in the towel. That leaves MVNO-focused strategies and acquisitions and partnerships among the most viable options for some MSOs.

Comcast already has the MVNO option available to it through deals with Sprint and Verizon Communications, and has begun to trigger its arrangement with Verizon, but has not announced what it will do next or when.

Chaplin said Comcast has little to lose here.

“It makes all the sense in the world to start leveraging that MVNO and to start testing the market,” he said, noting that Comcast could, for example, use that to learn more about how to position products, determine if it needs to have a big retail presence and how deeply it would need to subsidize the handsets.

“The economics are attractive enough,” Chaplin said, but warned that the MVNO structure Comcast would have to live with doesn’t give it much control over the product. “That’s not an ideal long-term strategy, either.”

But Comcast could use it as a “stepping stone” for a longer- term approach that gives it more control of the product and the relationship with the customer.

And, because of that, Chaplin said he also thinks it makes sense for Comcast to make a play in the upcoming spectrum auctions. If Comcast comes away with spectrum, particularly with blocks that provide national coverage, it would be in position to broaden its options.

Paul de Sa, vice president and senior analyst at Bernstein Research, held that cable is already a dominant carrier of residential wireless traffic, given its WiFi coverage in and out of homes.

But he also agreed that the cash for wireless is in the cellular/mobile industry, though cable operators can make some scratch here and there by providing non-subs with paid access to their WiFi networks or using WiFi to sell higher-speed broadband tiers. Plus, cable has already established a nice revenue stream with its wireless backhaul business.

While cable has a decent default position (doing nothing new), de Sa said during the panel that he also thinks MSOs must weigh the risks and rewards of entering the cellular mix having missed the growth market, and of jumping into a sector that is dominated by the four major carriers.

“It’s difficult for fringe players to disrupt that [mobile market],” de Sa said, noting that cable would be pressed to enter that arena “without any compelling consumer proposition” given little evidence that a bundle with a wireless component gives much value to the provider. And simply competing on price won’t be enough to move the needle much in what’s now a saturated market.

ON THE FRINGES

He also said that while there aren’t any right or wrong answers yet, aligning with Verizon under an MVNO deal is the obvious path for some operators despite the limitations with respect to product control that presents, as is aligning with a “fringe” player, like Google is doing with T-Mobile and Sprint for its Project Fi hybrid cellular/WiFi offering.

Buying a fringe player and attacking the duopoly of AT&T and Verizon is yet another option, if the price is right.

Any one of those choices is appealing, de Sa said, though “none are overly compelling.”

“Staying neutral,” he added, “is also not a bad option.” In a panel later in the day, Rob Howald, senior vice president at Comcast, toed the company line when asked about the MSO’s intentions with respect to the coming 600-MHz incentive auction.

Comcast, which previously said it will participate in the auctions, is “assessing [its] options carefully in that space,” Howald said, adding that the MSO is still doing its homework on any possible strategies it might go with.

But on a broader level, he said, any focus on cellular by Comcast is to “make sure that existing services are well complemented outside the home,” rather than worrying about some “magic” around a quad play offering that was once under consideration by various cable operators.

SIDEBAR: The Slow Road to 5G

NEW YORK — 5G, an emerging standard that represents a quantum leap over 4G/LTE, promises to enhance current mobile and wireless experiences in many ways.

A big one is a jump in the ability to deliver at least 10 Gigabits per second per cell. 5G will also facilitate the so-called Internet of Things, as well as critical apps and communications services that require super-low latency, such as autonomous, self-driving vehicles and other high forms of robotics.

Technically speaking, that low-latency element will be pushed forward by virtualization techniques that will allow for a more distributed network in which software apps are running at the edge.

5G standards are still being developed, and deployments aren’t expected to be underway until at least 2020.

Though some of those use cases can employ LTE, 5G offers a combination of capabilities that hit them all, Bob Berner, chief technology officer of Rogers Communications, said during a mid-day keynote at the Inform[ed] Wireless conference.

But the big question, he said, is whether there’s enough money in those markets to justify the economics in these high-band frequencies that can work over short ranges.

“Spectrum is the real estate of the mobile business,” Berner said. But the wireline business will also expand — a good sign for cable — because those wireless hubs still need to be connected to high-capacity terrestrial networks.

Berner also said 5G has the potential to play a role in cable operators’ networks, suggesting that a 5G small cell at the edge of the wired network could prevent having to run fiber all the way to the home.

In a follow up panel, Bjorn Ekelund, head of device technology and ecosystem at Ericsson Research, agreed that 5G is being viewed as a potential fiber replacement.

Another new characteristic that 5G will bring is the idea of “network slicing” — the ability to micromanage the network for specific use cases as they arise.

And though 5G standards are not yet cooked, “5G is really happening,” Ekelund insisted, pointing out that Ericsson has 21 field trial agreements in place with carriers.

In the meantime, 4G still has plenty of life left in it and will be complemented by 5G, Timothy Burke, vice president of strategic technology at Liberty Global, said.

Sidebar: Small Cells Equal Big Opportunity

New York — Even if cable operators stay out of the mobile service game to a large degree, they are well positioned to continue to make hay on backhauling them with their hybrid fiber/coax and fiber-only infrastructures, particularly with the increased need for small-cell infrastructures and 5G technologies on the horizon.

Small cells are factoring in as carriers and venues seek out ways to handle big, spikey data loads in concentrated, heavy-traffic areas that aren’t supported well by the macro cellular network.

Crown Castle owns 40,000 tower locations in the U.S. and, as part of a market expansion, now supports about 16,000 small cells, Phil Kelley, the company’s senior vice president of corporate development and strategy, said.

And that demand will increase as mobile moves into 3.5-GHz and 5-GHz spectrum.

“It’s backhaul, power and access,” Jeremy Bye, vice president of carrier and wholesale at Cox Communications, said, noting that the MSO launched a small-cell service last year. “When you have all of those, it really fits well into our business model.”

AT&T’s plans to phase out its U-verse TV service in favor of satellite giant DirecTV makes sense on the surface, as the move allows the telco to take full advantage of the larger distributor’s cheaper programming deals. It also could open a window of opportunity for some cable competitors, according to analysts.

AT&T has indicated that satellite TV will become its primary traditional pay TV offering by the end of the first quarter of 2016, according to Sanford Bernstein analyst Paul de Sa. The move will allow the company to take better advantage of DirecTV’s programming contracts, de Sa said — the satellite service has 19 million customers vs. 6 million for U-verse.

It also potentially frees up 20 megabits per second of wireline capacity that could be used for broadband service. While some U-verse TV subscribers probably won’t switch to DirecTV, the company thinks that number will be negligible.

AN OPENING FOR CHARTER

Not de Sa though. In a report, the Sanford Bernstein analyst mapped out what he thinks could be a golden opportunity for Charter Communications, which has a largely rural footprint and the greatest exposure to U-verse TV at 29%. While Charter is expected to complete its merger with Time Warner Cable by the end of the first quarter, which would reduce its U-verse exposure to about 26% of homes passed, the analyst believes the opportunity is still there.

De Sa noted that Charter also is susceptible to the more aggressive DirecTV promotional activity that is expected as AT&T transitions away from U-verse TV. But he believes at least for the short term, the tradeoff is to Charter’s advantage.

De Sa thinks that de-emphasizing U-verse TV will ease the competitive pressure in those markets — reducing video competition from four providers to three — and he believes a “material number of subscribers will shift to cable rather than take a DirecTVbased bundle.”

While AT&T could aggressively discount DirecTV service in its U-verse TV territories to make its package more palatable to consumers, de Sa believes that won’t happen for at least the next 12 to 18 months, as AT&T concentrates on post-merger integration, deploying its planned unified satellite/managed IP platform and neutralizing overall content costs.

“We are inclined to think that the opportunity for cable outweighs the risks,” de Sa wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak wasn’t too convinced that AT&T would scrap U-verse TV, but he did see an opportunity for cable to assert its best-in-class broadband chops.

“Cable is all about leveraging their best in class fixed broadband,” Wlodarczak said. “AT&T is relying on inferior technology to try to leave more bandwidth to increase their U-verse DSL speeds. Cable should inevitably take back the vast majority of DSL subs.”

Telsey Advisory Group media analyst Tom Eagan added that moving U-verse TV subscribers to DirecTV will free up more capacity for broadband, which could make the product more compelling, rather than less.

“I’m not sure necessarily that Charter is going to win out on that because it has the largest satellite exposure,” Eagan said. “Anything that enhances DirecTV’s competitive market share isn’t necessarily a good thing for Charter.

“At the same time, AT&T also is aggressively marketing its wireless service, last week unveiling an offer that gives new and existing AT&T wireless customers who have or add DirecTV or U-verse TV unlimited video streaming, data talk and text for $180 per month. Couple that with up to $500 in discounts for DirecTV customers who are not current AT&T wireless subscribers to add that service, and the phone giant appears to be laying the groundwork for an aggressive quad play.

Eagan said the wireless moves could be a test of the viability of the quad play of voice, video, data and wireless, which up to now has fallen flat in the U.S. market.

MAKING A QUAD PLAY

In the past year, however, several cable operators have hinted at future wireless products including Comcast, which in October activated its mobile virtual network operator (MVNO) agreement with Verizon Wireless.

Eagan said that while the quad play has had more success in Europe — Virgin Media and Liberty Global have made inroads with their respective wireless offerings — in the U.S. it could have more value as a retention tool. He added that Virgin Media offered free cellular minutes to subscribers who took all four products.

“It was a low-cost way to combine the various services,” Eagan said. “What we saw was that the lowest churn of any customer anywhere was the quad-play customer.”  

SIDEBAR: The U-Verse Multiverse

Cable operators could see a window of opportunity open as AT&T transitions its pay TV customers to DirecTV. And the operators with the biggest exposure to the service could have the biggest chance to benefit.

MSO                             % of Total Footprint

Charter. . . . . . . . . . . . . . . . . . . . . . 29%
Time Warner Cable . . . . . . . . . . . .26%
Comcast . . . . . . . . . . . . . . . . . . . . 26%
Cox . . . . . . . . . . . . . . . . . . . . . . . . .21%

Despite being ignored for years, landline voice service — once the cornerstone of cable’s triple-play bundle — is on the decline, but it’s not quite dead yet.

In fact, a new analysis from Sanford Bernstein telecom analyst Paul de Sa indicates cable can count on that revenue for quite a few more years.

Landline telephony has been almost an after thought in recent years, a service considered to be more of a retention tool than a product that brings in customers, like broadband or even video to an extent.

That is evident in buy-rates: Over the past five years, telephony adds for the four publicly traded operators have lagged broadband additions by a ratio of almost 2 to 1.

“By now, residential wireline voice service should have ceased to be,” de Sa wrote in his report. “There seems to be little reason why any consumer would pay $30 a month or more for a phone line.”

But the data shows a different trend, he noted. According to the National Center for Health Statistics National Health Interview Survey (NHIS), which obtained information from 21,517 households, more than half of the homes surveyed had a landline.

And the trajectory suggests landline service might not disappear for at least another decade or more, according to the data.

Landline voice customers won’t trend to zero at least until 2026, de Sa estimated, adding that he thinks there probably will always be a customer segment that retains a landline for emergencies or because wireless service is spotty.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak agreed that landline telephony still has some life left, but added that ARPUs will continue to decline.

“Overall, traditional fixed phone growth is likely to continue to decline but I imagine it will last longer than people think,” Wlodarczak said.

That could have similar implications for pay TV and telephone company digital subscriber line (DSL) service.

According to NHIS, wireless-only homes are generally younger: 71% of respondents aged 25 to 29 didn’t have a landline, compared to 19% of those older than 65.

But they also were less affluent: 67% of renters were wireless-only subscribers, compared to 37.3% of homeowners. Adults in poverty (59.3%) and near poverty (54.4%) were more likely than higher-income adults (45.7%) to live in a household with only wireless phones.

The Sanford Bernstein analyst had three reasons for voice’s slower-than-expected decline:

Inertia: The opportunities to buy residential telecom services are few: Mostly when a new household is formed, due to a change in address or because of unacceptably high levels of frustration with the current provider.

“The answer to the question of why households still have residential voice (or DSL or pay TV) in the face of new alternatives that appear to offer superior value propositions may just be that they’ve had it in the past and there’s no particular reason to change,” he said.

Segmentation: While usage patterns vary differently among households, the behavior of a particular segment is unlikely to be representative of the entire base. The NHIS data shows differences in voice penetration around age, household makeup and income, just as value propositions for slower, cheaper DSL service compared to cable broadband, or pay TV (with traditional or “skinny” bundles) compared to over-the-top video, will probably continue to be appealing to a large population segment.

Pricing and retention strategies: Voice ARPU has declined over the past decade, but that is largely due to segment-specific offers like bundling, instead of mass repricing. According to de Sa, there are ways to keep customers and maintain penetration rates by offering products with different price points (like varied amounts of long-distance minutes for voice, different speeds for broadband and different channel bundles for pay TV) and through discounts or other promotions when subscribers call to disconnect.

“As with mobile, the cost of these retention efforts is generally invisible to investors relying on reported financials, only being revealed in the long term as the offers work through the base,” de Sa wrote. “Metrics such as net adds and churn can therefore be misleading from a value-creation perspective, though they garner attention and drive stock movements around the quarter.”

Telephone Line

Cable telephony customer adds for the four publicly traded cableoperators (Comcast, Time Warner Cable, Charter and Cablevision) have lagged broadband by a nearly two-to-one margin over the past five years. (Figures in thousands)

                                 2010           2011             2012              2013                2014              Total

Telephony Adds. . . . 1,602. . . . 1,022. . . . . . 1,003 . . . . . . . . . 776 . . . . . . . 1,088 . . . . . . 5,410

Broadband Adds . . . 2,064 . . . 1,897. . . . . . 2,039 . . . . . . . . . 1,791 . . . . . . . 2,236. . . . . 10,027

SOURCE: Company reports