Weekly Reads
Weekly Reads - December 4, 2023

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The recent success of fixed wireless has captured investor attention, but the success of the service could be short lived with a suspect business model and long-term capacity issues preventing the service from capturing any meaningful national market share in the long run.

The success of fixed wireless can no longer be debated with the service used in over 8 million homes across the country. The service has become a thorn in cable’s side promising lower prices, solid speeds, and better customer service to millions of consumers who have become tired of dealing with cable companies throughout the years. The market has already deemed fixed wireless a long-term winner in broadband providing an incremental growth driver for the telecom companies as fixed wireless takes share from broadband over time. Yet telecommunications expert Craig Moffet disagrees with this take offering his own perspective that the cable companies continue to be in the driver's seat in the convergence story of broadband and wireless. Cable, not fixed wireless, has the structural advantage of winning market share away from the telecom companies in wireless while retaining market share in broadband. Fixed wireless is a means to an end with fixed wireless leader T-Mobile expecting to cap out at just 8 million homes with their current capacity situation a fraction of the 60+ million homes currently served by just Comcast and Charter alone. Some investors would argue that T-Mobile could buy more spectrum to support fixed wireless growth, but the economics of the fixed wireless model don’t support this perspective. Broadband usage in the U.S. is rapidly increasing with the average household, that utilizes streaming, using 700GB in data a month (T-Mobile reports 450GB average per user). This is over 40x more data usage than an average mobile user who uses 14GB of data through a wireless network per month. Broadband plans are only 20%-30% more on average than a mobile plan meaning that telecom companies generate higher revenue per byte of data under mobile plans than fixed wireless. Why would a telecom company expand spectrum capacity just for fixed wireless when mobile remains the better business? Fixed wireless is incrementally positive in circumstances of excess capacity but when capacity is strained (likely the case if data usage continues to increase) the investing case gets cloudy with spectrum better allocated to mobile. Aside from the economics of fixed wireless expansion, the whole idea of bundling broadband and mobile for telecom companies isn’t feasible. With the ability to only serve a fraction of their mobile base with a fixed wireless offering telecom companies are at an inherent disadvantage compared to cable who can serve their entire customer base with wireless. By leveraging the telecom’s own wireless network Comcast and Charter can bundle wireless and broadband in any region at a competitive price. Digging deeper into the economics of fixed wireless and mobile alongside the growing usage of data shows a different picture than what the market is painting with fixed wireless likely existing in the long run as a fringe service strictly in high-density markets.

Uber’s inclusion into the S&P 500 is a big milestone forthe company and is an important step in the company’s quest to change itsreputation from a money-losing tech company into a long-term compounder.

Uber is set to join the S&P 500 index on December 18 marking an important milestone for the company. The news sent Uber shares soaring with shares nearly back at their all-time high as investors look to ride the stock’s momentum. Inclusion into the S&P can often be a big boost for a stock because the S&P index is tracked by many other funds that mirror the S&P holdings. This leads to many funds outside the index buying Uber shares sending the stock higher. While this momentum may entice short-term investors, the company’s inclusion in the S&P is far more important to the long-term vision of the company. Since Uber’s inception, the company has been highly unprofitable investing in low-return projects and promotions/discounts in a bid for market share. Today, Uber is seen through the same lens by many investors who still see the ridesharing and delivery business as extremely competitive and unattractive. With Uber meeting the S&P criteria of sustained profitability Uber is legitimizing their current strategy of improving profitability while growing market share in the most attractive markets. Investor sentiment is often more important to the success of an investment than actual operating performance. Uber is on track to becoming the long-term compounder investors were expecting when the company went public over four years ago.

Alaska’s acquisition of Hawaiian is another domino to fall in the consolidation of the airline market post pandemic as the strongest airlines look to take market share in key destination hubs.

Alaska Airlines is planning to acquire Hawaiian Airlines for $1.9 billion a deal that would expand the 5th largest U.S. airline operations. This deal seems like a win-win for both companies with Alaska enlarging its West Coast network, expanding its presence in tourist destination Hawaii, gaining access to Asia, and acquiring key assets like planes, pilots, and support staff to support growth. Alaska is keeping the Hawaiian name post-merger, a departure from its approach in their previous acquisition of Virgin America which was absorbed into the Alaska name. The combined entity will offer services to 138 destinations with the option of nonstop flights from the U.S. to Central America, Australia, and the South Pacific. Most importantly, the deal creates a more benign competitive market in Hawaii with the combined entity holding an estimated 38% market share, more than double the next closest competitor. This will undoubtedly help pricing and reduce competitive pressure in one of the top tourist destinations in the world. There is concern that regulators could shoot the merger down with previous deals such as JetBlue acquiring Spirit currently being litigated for antitrust concerns. While the Alaska-Hawaiian deal will receive push back from federal regulators the proposed merger should see less resistance than the JetBlue-Spirit deal. Alaska and Hawaiian have little overlap between their routes (compete in only 3% of their routes) and the deal size is half the size of the JetBlue-Spirit merger. Alaska and Hawaiian also offer similar services and charge similar prices making this a merger of similar business models that is unlikely to change the competitive environment materially. The Alaska-Hawaiian merger is the likeliest merger in recent history to pass without any significant pushback from regulators.