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How Big of a Threat Are Cable Companies to Wireless Carriers?

Adam Levy, The Motley Fool

It's been over a year and a half since Comcast (NASDAQ: CMCSA) launched its mobile phone service, Xfinity Mobile, and the rest of the cable industry is following suit. Charter Communications (NASDAQ: CHTR) launched Spectrum Mobile in July, and Altice USA is set to launch its own service next year.

Meanwhile, competition among traditional wireless carriers remains fierce even with the potential merger of T-Mobile (NASDAQ: TMUS) and Sprint. The launch of services from cable companies could become a major competitive threat to wireless carriers next year.

The Xfinity Mobile app loading on a smartphone.

Image source: Comcast.

Current industry trends

One of the biggest wireless industry trends is the decline in prepaid-subscriber growth at the major carriers. T-Mobile's prepaid-customer additions fell to 325,000 through the first nine months of 2018, compared to 706,000 during the same period last year. In 2016, the company added over 2 million net new prepaid customers.

Verizon (NYSE: VZ) has lost 852,000 prepaid customers over the last four quarters. Sprint has also seen a decline in prepaid subscriber additions over the past year. Only AT&T (NYSE: T) is showing improvements in its prepaid-phone business.

Most of the lost prepaid customers are migrating to postpaid plans on the four major carriers. And while churn levels for postpaid accounts remain extremely low across the industry, prepaid churn is still elevated. That means services from the cable companies could easily steal customers away from prepaid plans on the four major carriers, particularly because the pricing they offer is similar to prepaid-plan pricing.

Cable is coming on strong

Comcast is leading the way among cable companies offering wireless service. It already had over 1 million active lines as of the end of the third quarter. Analysts at Morgan Stanley expect Comcast to add 863,000 new customers this year.

Meanwhile, Charter is off to a much slower start. After rolling out the service in July, Charter added 21,000 lines through the first quarter of service. That said, it didn't fully launch the service to all of its customers until September, so the pace of additions ought to pick up. Morgan Stanley analysts expect 86,000 total customers by the end of the year.

Next year, the cable companies' growth in the wireless market could accelerate. Analysts are predicting a total of more than 1.6 million net additions across Comcast, Charter, and Altice's planned service, a 70% year-over-year increase. For reference, the projected net additions across the cable industry would be higher than the number of phone customers (prepaid and postpaid combined) that any of AT&T, Sprint, or Verizon added in the last 12 months.

With the market increasingly saturated, finding new customers will become even more difficult for the big wireless carriers.

Not all is lost

It's important to note that Comcast, Charter, and Altice aren't running their own wireless networks. Their services run on the major carriers' networks. Comcast and Charter work with Verizon's network, and Altice will use Sprint's network.

With the vast majority of cable company wireless customers joining Comcast or Charter, Verizon stands to make up for any retail customer losses through its wholesale agreements with the companies. That's a good thing, because net phone additions have fallen off a cliff at Verizon since Comcast introduced Xfinity Mobile. In the last 12 months, Verizon has added just 50,000 phone customers total. In the previous 12 months, it added 642,000.

On top of Sprint's agreement with Altice, T-Mobile and Sprint may be required to agree to wholesale their combined network to interested parties as part of receiving merger approval from the Department of Justice or the Federal Communications Commission. While that would mean more competition, it also means the company would be well-positioned to offset any losses.

AT&T appears to have the most to lose. Considering that it competes most directly with cable companies, it's unlikely that cable providers will look to partner with it. If AT&T can't promote customer-retention or package offers to draw in new customers, it could lose a lot as cable companies grow their wireless services.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.