The recent price wars initiated by
are causing all kinds of headaches for the wireless service
providers. These firms had enjoyed a stable and profitable
pricing environment in recent years, but are now being forced to
slash their own prices to keep customers from defecting.
is among the casualties,
as I recently noted
, and its shares have lagged the S&P 500 by more than 30%
over the past year.
#-ad_banner-#This is not how things were supposed to turn out.
AT&T and its peers spent tens of billions of dollars
constructing national networks with an eye toward charging
monthly service fees that would always rise a bit every year.
The nation's cable companies have deployed a similar business
model, making heavy investments in broadband access, and at the
moment, are reaping a huge windfall as they charge $30 to $50 for
various levels of Internet access. Yet like the wireless
carriers, these cable/broadband firms may also soon get a rude
wake-up call. And it's coming from the skies.
Over the past decade, satellite TV providers such as
had hoped to undercut their terrestrial rivals by offering
broadband service from orbiting satellites. Though such service
has emerged as a viable option for customers that have no access
to land-based broadband, the technology has never been good
enough to go mainstream. The distance from satellites to Earth is
just too far.
Perhaps the clearest threat to cable companies'
broadband dominance comes from Google Fiber.
But the notion of airborne broadband access received a fresh
announced "Project Loon" in June 2013. The company has launched a
series of balloons that hover more than 10 miles above the Earth
along an east-west axis in the Southern Hemisphere (the 40th
parallel, to be specific).
How seriously is Google taking this project?
In a recent article in Technology Review
, Google's Rich DeVaul predicted that "in the next year or so,
we'll see some big announcements."
Still, the need to traverse that much space means that Google
can only generate transmission speeds akin to 3G wireless
technology, which may not be good enough for mainstream users.
Google engineers are presumably looking for ways to increase
They may want to check out the approach reportedly being
. Rumors abound that
Facebook is looking to acquire Titan
, a maker of solar-powered drones. These drones are capable of
delivering transmission speeds of up to 1 gigabyte (
) per second, which would satisfy almost any Web surfer's
Perhaps the clearest threat to cable companies' broadband
dominance comes from Google Fiber. So far, the high-speed wiring
of major cities has been limited to Kansas City, Mo.; Provo,
Utah; and Austin, Texas (which is slated for service to begin
Yet Google is now in talks with more cities and in any city
where consumers can choose from more than one broadband provider,
price competition will be the end result. Right now, Google's
stated plans would only make a modest dent in the national cable
footprint. "The highly profitable (cable) HSD market could
potentially be faced with a compelling alternative in roughly 10%
of its footprint (with
the most heavily exposed, with a 33% share in these markets),"
notes Merrill Lynch analyst Jessica Reif Cohen. Still, she sees
Google Fiber as more of a long-term threat rather than
UBS analyst Eric Sheridan suggests a mid-term threat: "Were
GOOG to build out substantial networks in each of the markets
mentioned, we believe the cable industry would begin to see an
impact to fundamentals within the next 4-5 years."
The question for investors: At what point will cable industry
share prices start to reflect the emerging pressures that Google
Fiber (and perhaps those airborne approaches) represent? As it
stands, cable companies are suffering from a slow attrition of TV
viewers, as consumers "cut the cord." For a company like Comcast,
which already has $44 billion in bonds, it will eventually have
to pay off (before the assumption of
Time Warner's (NYSE:
debt), the prospect of diminishing cash flows is unwelcome.
Risks to Consider:
As an upside risk, cable companies will likely keep raising
your TV and broadband bills until true competition emerges. So
2014 and 2015 forecasts may get upwardly revised.
Action to Take -->
Shares of Comcast have risen 300% over the past five years,
doubling the gain of the S&P 500.
Charter Communications (Nasdaq:
is up a whopping 400% in that time. But storm clouds are
beginning to form for this industry, and though they are unlikely
to impact financial results in 2014, they may start to lead
investors to question whether these companies are really
positioned for strong cash flow in the years ahead.