The two largest U.S. cable operators are going to work together to take on the wireless telephone industry. Comcast (NASDAQ:CMCSA) and Charter (NASDAQ:CHTR) entered an agreement that will allow them to collaborate as they both expand into wireless service. Comcast announced that its wireless service, Xfinity Mobile, will launch later this year. Charter may launch a similar service next year. Both will use Verizon's (NYSE:VZ) wireless network as well as public WiFi hotspots.
The agreement stipulates that neither party can make an acquisition related to the wireless industry without the other's consent. So, if Comcast wanted to buy T-Mobile(NASDAQ:TMUS), for example, it couldn't do so without Charter signing off on it. It will also allow them to innovate more quickly since they'll share research and development, and leverage their combined forces in negotiations with Verizon or other wireless distributors for better rates.
IMAGE SOURCE: COMCAST.
The reason this agreement works is because Comcast and Charter will only sell their wireless service in the same markets where they sell television and internet service. That allows them to take advantage of existing marketing campaigns. Note that the service will work nationwide.
The main strategy behind Comcast's Xfinity Mobile is to lock customers into bigger bundles and reduce subscriber churn. The pricing strongly incentivizes subscribing to Comcast's preferred bundle. Charter will likely offer something similar.
The distinct territories in which Charter and Comcast operate means they won't be competing against each other for wireless customers. But their combined near-nationwide footprint means that they make a formidable competitor to the established nationwide wireless carriers like Verizon and T-Mobile. That makes the partnership not only viable, but a very smart move on the parts of Comcast and Charter.
No surprise acquisitions could result in a surprise acquisition
The stipulation that neither Comcast or Charter can make an acquisition without the other's consent means it's very unlikely either will get a deal done. It does open the door for a joint acquisition of a wireless provider, but that's somewhat farfetched.
Importantly, it forces Verizon to look elsewhere for a tie-up. In the past, the company has been linked to both Charter and Comcast in merger and acquisition rumors. Ultimately, it should make Dish Network, with its treasure trove of wireless spectrum, that much more attractive to Verizon.
That said, Verizon's management did recently say its network strength is just fine despite comments from T-Mobile's CEO that its network is slowing after launching an unlimited data plan.
The move by Charter and Comcast also means T-Mobile isn't as big of a buyout candidate. Removing the cable giants from the table means it may try to merge with Sprint once again. The FCC blocked a merger last time, but the new administration has already proven to be much more lenient.
It'll be interesting to see how the market plays out over the next year or so, now that companies are free to explore mergers and acquisitions following the quiet period induced by the FCC's 600 MHz spectrum auction. Investors hoping for an acquisition for either Verizon or T-Mobile just saw two big buyers practically take themselves out of the market. That's one reason it's always best not to invest based on acquisition rumors.
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