By Daniel Frankel
The year 2014 will probably be remembered as one of the most transformational in the history of the cable business--and that's besides the huge pending mergers. While the sustained growth of the once wildly profitable business that built the industry, video services, has begun to give way to over-the-top distribution, a massive opportunity with unknown dimensions has quietly emerged: Wi-Fi.
Industry analysts are unable at this point to speculate on the eventual size of cable Wi-Fi business. The exact way it's going to be monetized is also unclear. But there's a belief quickly taking hold that carrier-grade cable Wi-Fi could offset degradation in TV distribution.
"The time is coming when Wi-Fi will shift from being a 'secondary' network to being a primary one. Instead of thinking of Wi-Fi as an alternative to cellular everywhere Wi-Fi is available, we will instead to begin to think of cellular as a backup network needed only when Wi-Fi is not," noted MoffettNathanson analyst Craig Moffett.
Moffett's statements came just a few weeks after his "Wall of Worry" report, where he suggested OTT competition, combined with the current regulatory climate, could put a serious dampener on the performance of cable's "video profit pool," a forward-looking dynamic the analysts feels isn't being reflected in current business projections.
"The opportunity in Wi-Fi-first wireless offers a counterpoint," he said. "Once again, we do not expect it to be included in anyone's near-term numbers. We do, however, expect it to mitigate, at least to some degree, the multiple compression from the longer-term risk to the video profit pool."
Due to a number of technical challenges still not overcome, Moffett sees cable's Wi-Fi business as being still three years away from bearing real fruit.
But captains of cable industry including Cablevision (NYSE: CVC) chief James Dolan and Comcast (NASDAQ: CMCSA) grand puba Brian Roberts are already expressing public bullishness.
"We see the data product as more important than the video product to the customer right now," Dolan said in August, during his company's second-quarter earnings call. "We have a strategic advantage that we haven't yet exploited. But there's no reason to think we won't. It's connectivity that the customer really wants."
Already, the majority of mobile data consumption occurs on Wi-Fi networks. According to Adobe's 2014 Mobile Benchmark Report, 93 percent of U.S. data usage on tablets comes through Wi-Fi vs. only 7 percent for cellular. Data usage on smart phones also tips to Wi-Fi by a 57-to-43-percent margin. Further, a February 2014 Cisco report predicted that 64 percent of cellular traffic will be offloaded to Wi-Fi by 2018.
In October, Wi-Fi Alliance, a trade group which is pushing interoperability and expansion of the technology, announced certification updates for its the Passpoint program it established two years ago, allowing cable carriers to resell their connectivity to mobile carriers, recoup some of their investments and help mobile carriers easily upgrade from outdated equipment.
This coincides with the release of mobile devices like the iPhone 6, which supports Wi-Fi calling.
It's a bit startling to examine how quickly cable's carrier-grade Wi-Fi gambit has materialized. For example, Comcast, which analysts believe is best positioned to profit on the cable Wi-Fi boon, only started publicly talking about the business over the spring.
But as of September, Comcast controlled about 4.6 million of the 6 million cable Wi-Fi hotspots in the U.S., the bulk of them coming in the form of dual routers that are embedded with a second SSID.
Cablevision controls about 1 million hotspots, with Cox, Time Warner Cable (NYSE: TWC) and Bright House controlling the rest. By the end of 2014, Comcast and Cablevision will have turned on nearly 9 million hotspots. Additionally, Cox, Cablevision, Comcast, TWC and Bright House have an agreement to let their respective customers share 250,000 hotspots spread across the country.
"One client we work with has forecast 10 X growth [in hotspot deployment] for next year," said Mike Serrano, senior product marketing manager for NetScout, a company that sells network monitoring solutions for the cable and wireless industries.
"We're installing 150 access points a day," added an operations manager for a leading MSO, who asked not to be identified. All of this is happening "while staying as head-count neutral as we possibly can," he noted.
While hotspot reach is exploding, particularly for Comcast, Moffett doesn't believe the No. 1 MSO will have a carrier-grade network that can truly compete with cellular for monetization until at least 2017.
Moffett identifies such factors as login processes and security concerns as technical barriers that first must be overcome. Also, he noted, the process of hotspot selection "is automatic only if a mobile device recognizes the specific SSID generated by a network. In most cases, however, a connection manager must be launched; an SSID must be selected; a browser will then be launched, before credentials can be entered. This is a big limitation in voice call handovers, and similarly limits data offload, due to the manual nature of authentication."
Down the road for Comcast, Time Warner Cable and Bright House, the ace in the hole could come from a mobile virtual network operator (MVNO) agreement they signed nearly decade ago with Verizon (NYSE: VZ) after giving up on entering the cellular business and selling their spectrum to the wireless company.
The MVNO agreement lets the MSOs build out their Wi-Fi networks up to the point to where it makes economic sense, while purchasing wholesale access to Verizon's network to fill in the gaps. (The cable companies received permanent MVNO wholesale purchasing access from Verizon as part of the deal.)
By Moffett's estimate, Comcast could capture 90 percent of all broadband traffic with its Wi-Fi network with a very feasible number of residential and commercial hotspots. The remaining 10 percent could be filled in by purchasing wholesale access to Verizon's network.
"Unfortunately, Wi-Fi is not suitable for that last 10 percent of usage," the analyst noted. "For that, one needs the wide coverage capabilities of traditional cellular. And for cellular, one needs to either build their own cellular network--an unappealing prospect at best--or enter into an MVNO agreement."