The final frontier: Comcast CEO Brian Roberts acknowledged for the first time last week that Comcast plans to offer an MVNO-based wireless plan by the middle of 2017. The announcement is not a surprise and has been anticipated for a while, according to a report put out by Barclays Capital.
The firm said it could force moves by others toward a more vertically integrated end state. The benefits of new revenue lines are likely to compound over time due to variables like churn reduction. Also, while the service appears to be more targeted at its present base of 28 million customers, wireless allows Comcast to go national over time. Combined with its industry-leading content rights, this could allow the company to launch a customized video product using its wireless platform, thereby adding to its addressable market and operating leverage, the report said.
The Barclays Report said the wireless roadmap is unlikely to involve full network ownership–for now. “While different iterations of cable wireless have largely failed in the past, the difference this time, is in part evolution of (a) cable infrastructure; (b) technology platforms and handset ecosystem; and (c) consumption patterns. Based partly on past experience, we believe the core objective for Comcast in getting into wireless is likely to be churn reduction in its core base rather than sustaining independent economics for a wireless business,” the report said. Barclays believes Comcast is unlikely to attempt an inorganic path near term until its MVNO-based business scales to a certain critical mass and provides some proof of concept. “This is likely to take time,” the report said.
Stock Rating/Industry View: Overweight/Positive
Price Target: USD 70.00
Price (20-Sep-2016): USD 66.23
Potential Upside/Downside: +5.7%
Tickers: CMCSA Source: Barclays Capital
How big can the opportunity be? Barclays Capital believes the wireless headline opportunity itself could add $14 billion in revenue and $3 billion in EBITDA in an end state, potentially adding 8-10 percent to EV. Also, bundling is likely to help reduce churn across its products, something that has become more apparent with X1. The report notes that the impact just from a 10 percent reduction in voluntary churn across the company’s business could add 4 percent to end-state cable EBITDA. Also, the company gains operating leverage from monetizing costs that are already part of the business, like customer service and content, which could help margins. The impact of these variables could start showing up in the form of higher multiples over time given that top-line growth for Comcast’s distribution business could accelerate to high single digits (vs. mid singles now), assuming the end economics above.
“While we acknowledge the upside and have done so for awhile (Estimate Revisions and Valuation Context, 7/8/16), it is unlikely that Comcast gets credit for this near term given the cable industry’s track record on wireless execution,” the report concluded.
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