Wireless is a $200 billion market, and the largest players have margins that approach 50%. In a new report, the telecommunications team at Jefferies estimates the cable operators actually carry more consumer wireless data on their networks that the mobile operators, yet cable generates $0 directly attributable revenue from wireless. With consumers increasingly frustrated by the cost of wireless service, the analysts also expect widespread testing of concepts by cable to be public as early as the second half of next year.
The CableWiFi confederation has tripled its hotspot count to more than 150,000, from 50,000 when the initiative was launched 12 months ago. Ultimately there will be millions around the United States. A protocol called Hotspot 2.0, branded commercially as Passpoint, will alleviate much of the log-in and authentication hassle with current public Wi-Fi. Hotspot 2.0 also eventually will allow roaming between contiguous hotspots for credentialed users. All network gear being deployed today is Hotspot 2.0 enabled. The Samsung Galaxy S4 currently has the protocol preloaded. Jefferies expects all smartphones going forward to have the technology.
Jefferies says to buy the top cable companies before they are full-fledged wireless providers and watch their earnings explode.
Comcast Corp. (NASDAQ: CMCSA) recently announced that it potentially will build out millions of neighborhood Wi-Fi hotspots through gateway devices in the homes of its almost 20 million Internet subscribers. The company recently announced that it had deployed these gateways in about 100k homes as a trial in the New Jersey and Pennsylvania markets. The Thomson/First Call price estimate for the stock is $48. Investors are paid a 2.0% dividend.
Time Warner Cable Inc. (NYSE: TWC) has announced the launch of an authenticated online service that will allow subscribers of Starz and Encore to watch content online and on mobile devices. The consensus price target for the stock is $104. Investors receive a 2.6% dividend.
Charter Communications Inc. (NASDAQ: CHTR) is a company to watch closely. Billionaire and cable pioneer John Malone’s Liberty Media Corp. (NASDAQ: LMCA) recently purchased a 27% stake in the company paying $2.6 billion dollars. Many think that Malone’s plan will be to challenge Comcast for U.S cable supremacy. There also has been speculation that a purchase of Time Warner Cable is the ultimate goal and reason for Malone’s Charter purchase. It is also important to remember that Paul Allen still holds a 6.5% stake in Charter. The consensus price target for the stock $110.
Cablevision Systems Corp. (NYSE: CVC) is the smallest of the four major cable companies and also could be a strong takeover candidate. Cablevision always has been viewed as the most likely cable operator to do something disruptive on the wireless side, but recently, Cablevision’s CFO and vice chairman, Greg Seibert, disclosed at a conference that the company has shelved its entry into the wireless market for the time being. The consensus price target for the stock is $16.25. Investors are paid a very solid 4.0% dividend.
The Jefferies report also included equipment companies that stand to benefit from a push by the cable companies to offer wireless service.
Ruckus Wireless Inc. (NYSE: RKUS) is a leading Wi-Fi access point manufacturer and stands to be a player. Their ZoneFlex 7781CM systems are easy to install and ideal for cable companies establishing multiple Wi-Fi hotspots. The consensus price target for the stock is $18.50. A move to the target would represent a gain of almost 50%. The company also may be an attractive takeout candidate.
Cisco Systems Inc. (NASDAQ: CSCO) will be firmly in the Wi-Fi mix. The company was part of a consortium of firms in the Hotspot 2.0 Task Group within the WiFi Alliance. In June 2012, the WiFi Certified Passpoint program based on the Hotspot 2.0 specification was launched. The new standard will run on a new Wi-Fi standard dubbed IEEE 802.11u. The goal of the new technology is to make Wi-Fi as secure and seamless to use as the mobile network. The consensus price target is $26 and investors are paid a 2.8% dividend.
Qualcomm Inc. (NASDAQ: QCOM) will be making the chips for the Samsung Galaxy S4 that will be able to access Wi-Fi hotspots anywhere. The S4 is already enabled with the Hotspot 2.0 capability known as Passpoint. This give Samsung a huge advantage over the Apple Inc. (NASDAQ: AAPL) iPhone because of its closed operating system. Clearly Apple will adjust if Wi-Fi becomes more predominant. The consensus price target for Qualcomm is $77. Investors receive a 2.3% dividend.
The Wall Street Journal and other news sources recently have published several articles on the impact rising cell phone bills are having on families. For instance, a September 28, 2012, Wall Street Journal article, “ Cellphones Are Eating the Family Budget,” which focused on the rising cost of wireless bills, discussed how consumers were cutting back on dining out and entertainment, as well as slowing things like clothing purchases, to afford their cell phone bills. Wireless bills have climbed to a level where they are increasingly seen as affecting consumer budgets. Wireless subscribers rated their satisfaction with the value of their wireless service at just 1.75 out of 5 for the four national carriers. A family of four can expect to pay $230 per month plus taxes and fees. The cable companies have a wide open market and a disgruntled consumer base ready for an alternative.