There has been a growing trend for a while in the European telecom and broadband markets where companies have been selling bundles. This phenomenon is known as Triple Play or Quad Play. These bundles generally have home broadband, Pay TV, wireless and landline, all bundled together. The US had long resisted bundles. Although some companies did provide two or more services, very few tried to be an all in one destination. That has all started changing since the past year or so. Now, not only is the US market moving towards a bundle-like structure, but they’re taking this bundle a step forward by involving content in it as well.
How did this Convergence start?
It all started with content related acquisitions that two of the largest telecom operators in the US have been making. It’s important to note that there is quite some difference in the intensity of acquisitions of these two telecom operators which are Verizon and AT&T. Verizon started by acquiring AOL and Yahoo. AOL was acquired for its ad tech and Verizon is now in the process of acquiring Yahoo which still gets hundreds of millions of page views every month. For Verizon, it’s the Go90 app which is the main content driver and which it plans to monetize via ads.
Now Verizon has just spent around $9.2 billion in acquiring AOL and Yahoo. As a standalone figure, this seems quite big, but pales in comparison to what its biggest competitor has bid. AT&T has bid around $49 billion for DirecTV and would spend around $80 billion in acquiring Time Warner. While Verizon has spent a total of $10 billion approximately, AT&T will be spending a total of $130 billion. AT&T is spending as much as 13 times more than Verizon on content related assets. Clearly, while AT&T is betting the company itself on content, Verizon is taking a more cautious approach.
Why the sudden splurge on content?
This is mostly diversification of revenue streams. AT&T and Verizon are primarily telecom service providers in the US. But America’s telecom market is already saturated. Then there is T-Mobile, that’s been growing its revenue and subscriber base like crazy. For the past few quarters, both AT&T and Verizon have been either losing subscribers or making minimal gains at best. The real problem is that the price war with T-Mobile would make depending on telecom alone a risky proposition. That’s why in order to hedge their bets or differentiate themselves from operators like T-Mobile (and to some extent Sprint), AT&T and Verizon are investing heavily in content.
Both AT&T and Verizon don’t want to remain mere dumb pipes. It is true to say that they own the distribution channels to the end consumer but they now also want to own the content that flows through that channel. The end goal over here is to own the distribution as well as content that flow on it and become a one-stop destination for all the entertainment needs of end users. In my opinion, this will have interesting effects on the American telecom as well media sector going forward and I am going to discuss some of that over here.
There are three companies that I feel are very well placed to enter the convergence of content and distribution. They are Verizon, AT&T and Comcast.
In my opinion, AT&T is best placed to mix content and distribution. Let’s start from the distribution side of things. Distribution is basically the channels through which you are going to spread your content and for AT&T, this is a strong point. In my opinion, as of now, there are three channels available for the distribution of content, these are wireless, Pay TV and fixed broadband. AT&T is well positioned in wireless by virtue of being the second largest telecom operator in America. When it comes to Pay TV, AT&T is once again at an advantage thanks to its DirecTV acquisition. This is actually double sided benefit. Not only does AT&T get Pay TV distribution via DirecTV, but the distribution that DirecTV provides also helps AT&T in content negotiations. When it comes to fixed broadband, AT&T is once again having quite some significant presence with around 15.6 million U-Verse subscribers.
When it comes to the content side of things, AT&T is once again having a very formidable portfolio. The acquisition of DirecTV gave it access to already present content deals with various broadcasters. AT&T has now put this to good use with the launch of their $35/month DirecTV Now streaming app. But the real boost to its content portfolio will be its $80 billion Time Warner acquisition. With Time Warner, AT&T gets access to HBO, Turner, DC and various other content rights. HBO already has its own OTT app in the form of HBO Go. Either AT&T can let HBO Go survive or integrate its content to the $35/month DirecTV Now OTT app.
There are interesting things that AT&T can accomplish now especially on the wireless side of things. Cord cutting is rampant in the US. The TV bundle is entering into a spiraling death. With a wireless network and a roster of premium content at its disposal, AT&T can create a full fledge OTT app that can compete head to head with apps such as Netflix and Youtube. Content wise, AT&T doesn’t have a particular edge. Sure Time Warner will be a great purchase (when completed) but even Netflix is pouring billions on creating content and the number of YouTube creators is almost unmatched. The differentiating factor for AT&T would be its wireless network. AT&T hardly provides unlimited plans except for people who have subscribed to DirecTV and are ready to pay $100/line. In such a scenario, AT&T can easily zero rate DirecTV Now and make it the favorable candidate amongst others like YouTube and Netflix for watching content on the go. Apart from the wireless network, it has U-Verse broadband offering where AT&T can once again zero rate their content offerings.
Although AT&T is solidly positioned with a lot of video content and a dominant distribution strategy across all channels, the same is not true for Verizon. Let’s start with the distribution side of things. Verizon is the number one telecom operator in the US. But despite that, they seem a little bit of laggard when it comes to Pay TV and broadband. Verizon has just 7.03 million broadband and 5.83 Pay TV subscribers which is much smaller than behemoths such as AT&T, Comcast and Charter. But Verizon’s lead in wireless should be of great advantage. As I said, the TV bundle is already facing death and Verizon’s 5.83 million Pay TV subscribers don’t mean much. If I am to look from a distribution perspective alone, then the 7.03 million broadband subscribers are also not a big deal as Comcast provides a 1TB data cap and Charter has no data caps at all. So if in future Verizon needs to push its content over broadband, then it should be a non-issue.
Coming to the content side of things, Verizon nowhere has the prowess that AT&T has. With its acquisition of Time Warner and DirecTV, AT&T is now a giant when it comes to the media space. Verizon acquired AOL mostly for its Ad tech and even Yahoo hardly has much dominance when it comes to video. Verizon rather seems to be betting on Go90 with short snippets of video from a host of content providers. Again, just like AT&T, Verizon has the opportunity to zero-rate the video content of Go90. But Verizon’s advantage ends there and unlike AT&T’s DirecTV Now, I don’t think Verizon has a solid content offering at its hands.
Verizon is also trying its hand at the converging media and communications but its effort in doing so is minuscule when compared to what AT&T is doing.
Comcast is an interesting scenario. It has the content by virtue of its ownership of NBC Universal. But its problem is that of distribution. Comcast is the largest cable TV (Pay TV) provider in the US as well as the largest broadband provider. Cord cutting is both a boon as well as a bane for Comcast. Now cord cutting does mean that fewer Pay TV subscribers for them but cord cutting also means that more and more people are now turning towards OTT apps such as Netflix and Hulu for their entertainment needs. Now these OTT apps require internet and Comcast by virtue of being the biggest broadband provider is a direct beneficiary. As more and more households buy 4K TVs and with 4K content, the demand for faster speeds and larger cap data plans will only increase and Comcast would end up being the beneficiary considering that in many places of America they seem to be having a big monopoly.
But the problem for Comcast that now occurs is AT&T’s acquisition of Time Warner. AT&T has already released DirecTV Now which provides close to 100 channels for just $35/month, I expect AT&T to make DirecTV Now even more attractive by adding content from the recent Time Warner acquisition. Now even Comcast has a lot of content since it has NBC Universal but what Comcast doesn’t have is a wireless channel through which they can distribute their content.
AT&T and Verizon will continue to zero rate their own video offerings which are DirecTV Now and Go90 but they won’t be zero rating Comcast’s OTT app and this is a huge barrier to distribution for considering that video on mobile is going to be the future and that AT&T and Verizon account for around two-thirds of cellular subscriptions in the US.
The potential consequences
I have already explained the convergence of media and communications with the help of AT&T, Verizon and Comcast. Now there can interesting consequences to what’s happening in the market right now.
First of all, it’s necessary to keep in mind that how much success AT&T gets will be crucial in determining the future steps of Verizon and Comcast. AT&T, as I explained above, is fully loaded with both the content front as well as distribution front for the convergence of media and communication. By comparison, Verizon lacks the content front and Comcast lacks the distribution front. AT&T, as of now, is the only one that has both content as well as distribution nailed down.
AT&T has gambled the entire company betting on the convergence. If this fails, AT&T will have a hard time recovering from it. There are a lot of naysayers to the AT&T and Time Warner deal. Most people are drawing comparisons to the AOL and Time Warner merger that had failed miserably. I’m not going to predict whether this merger will succeed or fail, but in case it does, then I expect the following to take place in the years to come –
Zero rating and FCC
Although FCC has approved Net Neutrality rules in America, they largely covered throttling and access. Zero rating was left as a gray area that FCC said it would review on a case by case basis. This has led to the creation of programs such as Binge ON and Music Freedom by T-Mobile. One could make an argument that Binge ON and Music Freedom are actually not all that harmful considering that there’s no monetary exchange between T-Mobile and the content providers and that every content provider is welcomed on board as long as they meet certain technical standards. This is proved to some extent by the fact that even the Go90 app (Verizon’s video app) is a part of T-Mobile’s Binge ON program even though Verizon is a fierce competitor.
Although T-Mobile has taken a neutral approach to zero rating, the same is not the case with Verizon and AT&T. AT&T will only zero rate DirecTV Now for free and Verizon will only zero rate Go90 for free. This obviously creates an anti-competitive behavior and puts companies such as Netflix and YouTube at a disadvantage. How the FCC would tackle this would be interesting to see. I see this ending up in the courts for the most part.
Comcast might try to buy T-Mobile
When it comes to the convergence of media and communications, the only thing that’s separating Comcast and AT&T is a wireless network. Comcast has NBC Universal for content, AT&T has Time Warner. Comcast is already the largest broadband provider in America and AT&T is also amongst the top four. Comcast and AT&T are some of the biggest Pay TV providers in America. But while AT&T has the second largest wireless network in America, Comcast has no wireless presence at all.
Comcast is said to opening up an MVNO of its own via Verizon but in the longer term it would always makes sense for it to have its own wireless network because after all even Verizon is planning to enter into the media and communications convergence game and would become a direct threat to Comcast. When running an MVNO, you’re almost always at the mercy of the MNO. T-Mobile is a rising star of the US wireless industry and has neither broadband nor Pay TV business. T-Mobile needs low band spectrum which Comcast is said to be buying in the ongoing 600 MHz auction.
If Comcast acquires T-Mobile, they’ll finally have a wireless distribution channel through which they can distribute their content. Also since T-Mobile and Comcast have almost no overlapping businesses, I expect that the deal would face almost no regulatory hurdle.
Verizon and Netflix
Verizon has the distribution side of things pretty good by the virtue of being America’s largest telecom operator. What Verizon doesn’t have is content. Sure they acquired Yahoo and AOL but that hardly gives them much video content and nothing that can rival NBC and Time Warner’s portfolio. Netflix meanwhile has been spending billions both licensing content as well as investing in original programming. But Netflix lacks control over any distribution channel. They don’t have a broadband nor cellular network. As you can see, Verizon by having distribution and Netflix by having content can combine and create a strong rival to AT&T and Comcast.
The convergence of media and communications is a growing trend in the US for the past couple of years. Different companies are adopting different strategies. While some are just testing the water, others are going full throttle. It would be interesting to see how this pans out. If the convergence is indeed successful, then we shall see the rise of superoperators. These would be the one stop entertainment providers.
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