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In the Long Run

Lots of earnings announcements this past week, including both Comcast and AT&T. Both companies are busy transforming themselves from network operators into full-stack media conglomerates. Both companies now have enormous influence over the future of TV.

Wall Street focuses on the quarterly earnings, but what’s really going underneath the EPS numbers, and what does it mean in for the short run and long run future of TV? Two thoughts.

1. Short Run: Wireline Broadband Providers Remain Firmly Entrenched
The technology world includes both long waves (the web, mobile phones) as well as short waves (Snapchat, Serverless Dev). Wireline broadband connections in the home is a very long wave. It’s been more than two decades now since ‘always-on’ broadband started replacing dial-up Internet over analog phone lines as the principal way American households get online. Cable modems have gotten a little faster over that time, but not a heckuva lot considering we’re talking about 20+ years of progress (or the lack thereof).

Surprisingly, however, all these years later wireline broadband still has a surprising amount of legs. Comcast had 397,000 net additions to its residential high-speed Internet business in the first quarter, while AT&T lost 69,000 subscribers as legacy DSL customers transitioned on to AT&T’s U-verse offering. These are very solid numbers, especially given that wireline broadband pricing continues to drift upward. In Comcast’s case, for example, high-speed Internet revenue increased 10.1% year-over-year even though annual subscriber growth was only 5.5%.

These numbers are even more impressive in comparison with the video (i.e., pay-TV) numbers. Comcast added 42,000 video customers in the quarter. One simple way to think about this is that for each ten net adds on the broadband side, Comcast is adding one video customer. Not terribly impressive. AT&T, for its part, did even worse, losing 233,000 video customers in the quarter.

With respect to the traditional ‘dual play’ (i.e., broadband Internet plus pay-TV) bundle, the broadband Internet portion is doing all the heavy lifting. AT&T CEO Randall Stephenson admitted as much in his discussion of the quarter on the earnings call, noting that AT&T lost video subscribers in the quarter due to competitive pressure from cable, “particularly in markets where we don’t have broadband to bundle with video.” In other words, without broadband to support it, standalone pay-TV offerings are struggling mightily to keep their heads above water.

In the case of Comcast this has resulted in two key initiatives. First, the cable giant is relaunching its Xfinity Stream service as Xfinity Instant TV within the skinny bundle boxless pay-TV category. Starting at just $15 for a package including TV-as-an-app access to the broadcast channels + HBO, the intent of this service is clearly to sell something (anything) on top of bare bones broadband Internet.

Second, later this year Comcast is launching Xfinity Mobile, in which it will resell Verizon unlimited data plans to Comcast broadband Internet households for $65/month/line. Whether or not this is a great deal for the customer, Comcast clearly understands that wireline and wireless Internet are converging and that Comcast needs both offerings to be competitive going forward. In the company’s own words, “We believe including mobile in our bundles will help improve retention and ultimately benefit lifetime customer economics.”

Unfortunately (for Comcast), AT&T understands this all-to-well and has a much bigger strategy in mind, which brings us to our second point.

2. Long Run: 5G will be Highly Disruptive to the Residential Broadband Business
Smartphones obviously have wireless data plans (utilizing today’s 3G/4G network), but it’s important to stop and realize that most devices already connect wirelessly to the Internet. It’s called WiFi. This is true not just for smartphones and tablets, but also for PCs and fixed devices like TVs and streaming TV boxes. My Apple TV, for example, connects via WiFi because (like many people) there’s no good way to run an Ethernet cable to the location where its attendant TV is located.

The important point here is that people have long stopped caring how they get on the Internet. The only things they care about is the speed, reliability, and price of Internet service. AT&T has already launched a 5G market trial in Austin, Texas.

Theoretically, 5G can deliver one gigabit to a cell, but only over relatively short distances (200 meters). This requires an extremely dense network of small cells in every building, which means there won’t be 5G coverage at that speed outside of the densest urban centers. At the same time, 5G can produce competitive speeds over traditional cell towers. In the company’s own words on the same conference call:

So think about the configuration in Austin. You’re going to get some serious, serious bandwidth there. You have the potential for 500 or 600 meg. Now, obviously on a loaded network you’re going to get about a tenth of that, but 50, 60 meg? That’s a competitive offer, and we think we have a lot of legs with that, and that over time just keep pushing the small cell structure deeper and deeper.

As I write these words in my home office in Mercer Island, WA, I ran a speed test on my current Comcast cable Internet connection. I maxed out at 28 mbps, which is actually a good day. Much of the time I get about 10 mbps. My point? 50 mbps to the home absolutely has legs. The day AT&T (or Verizon) offers me a 50-mbps home broadband connection (using a home gateway with an antenna that connects to the WAN and makes the connection available within the house over WiFi), I will cancel my wireline Internet service and never look back.

Bottom line: Wireline Internet still rules the roost as the most valuable residential service on the market. As a result, wireline providers have been able to constantly raise prices to deliver double-digit revenue growth for Wall Street. The coming of 5G means the big mobile operators have this market firmly in their sights, meaning that one day these price increases will come back to haunt legacy wireline players.

Residential wireline broadband Internet service in the US has been a good (and often great) business for more than two decades, delivering continuous subscriber growth, fat margins, and lots of pricing power. Nothing lasts forever, though, and change is in the air.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to technology start ups. He lives near Seattle, WA.