The biggest cable companies have been successful in recent years in bundling cellular service with broadband and cable TV. Comcast and Charter have been at this the longest, but most of the next tier of cable companies are also now offering cellular service.

The cable companies launched their cellular products by operating as an MVNO (Mobile Virtual Network Operator). That’s another industry acronym to remember that means that the cable companies purchase and resell cellular minutes, texts, and data from one of the big cellular carriers.

This MVNO business plan works for cable companies for two reasons. First, they know that a huge percentage of cellular usage is made from home. When  a customer is at home with a cellphone, the outgoing cellular calls, texts, and data can use the customer’s WiFi to connect to the cable company broadband – meaning the cable company doesn’t have to pay for the usage to the underlying cellular company.

The biggest cable companies have also selectively started to install their own cell sites in their busiest neighborhoods to totally bypass the cellular carriers. For example, Comcast purchased a lot of spectrum that can be used for its own cellular service. Over time, they will probably move a lot of cellular traffic directly to their own network – although they will always need the MVNO service to cover customers who make connections outside the reach of a cable company cell tower.

The cable companies have collectively been very successful. They are selling cellular service at a low price, with the primary advantage to use cellular bundling to reduce churn – a customer who wants to drop broadband also has to find a new cellular service.

Smaller ISPs are now being offered the same bundling opportunity. The National Content & Technology Cooperative (NCTC) has been offering white-label cellular service to members. This uses an MVNO arrangement that buys cellular minutes, text, and data from AT&T.

Small ISPs share the same primary advantage as cable companies in that they can hand a lot of cellular traffic through the landline network. However, smaller ISPs who buy this service are not likely to ever be able to find the spectrum needed to directly get into the cellular business with their own towers.

Today’s blog is to warn small ISPs about the risks of this business plan. One of the advantages of having been in the industry for a long time is that I have seen similar arrangements come and go several times over the years. Where the big cable companies probably have the economic power to keep these contractual arrangements for many years, smaller ISPs, even collectively, have no negotiating power with the big cellular carriers.

I refer to the MVNO business as arbitrage. This means that an ISP offering the resold cellular services has zero network to back up the business. The small ISP is completely at the mercy of the big cellular companies to continue the relationship – and that cannot be guaranteed.

I recall twenty five years ago that a lot of my clients had AT&T cellular stores and resold AT&T cellular service – until the day when AT&T decided to pull the plug on the business line and stranded my clients with a big inventory of cellphones. I recall numerous clients that had a similar arrangement with Sprint, and some of them went so far as to jointly build towers with Sprint. That relationship also came to an abrupt end. I recall that even before Spring pulled the plug on the MVNO business, it changed the profit-sharing arrangement to the point where small ISP partners made no profit.

My advice to an ISP that enters the MVNO business is to not make it central to your business plan. Use cellular as a bundling opportunity, but know that it’s almost inevitable that the relationship and product will end some day. It might be two years or ten years, but arbitrage opportunities inevitably come to an end – I can’t recall one with staying power. At some point an executive at the underlying cellular company will decide the profits from the arrangement don’t justify the cost and effort and will pull the plug.

Rural carriers should be particularly cautious about putting their name on a cellular network with poor coverage. In much of the country the cellular coverage in rural areas is abysmal. Putting your brand name on a lousy cellular network can hurt your brand name more than the benefit of picking up the cellular bundle.

I am not recommending that ISPs should avoid the cellular opportunity. If it makes money and helps to sell broadband then give it a hard look. My caution is that a small ISP in an arbitrage arrangement has zero market power, and that the arbitrage opportunity can stop abruptly at any time. The folks trying to talk you into the opportunity probably won’t mention this possibility.