America’s top four mobile operators agree on the ends, but not the means, of a content strategy.
With traditional revenue sources drying up and OTT players flourishing, US telcos are focusing their future strategy around content, and particularly video.
“Telcos fear being regulated into dumb pipes, with more spectrum in the hands of other players [such as Dish] and with tech companies increasingly providing competing communications services. They therefore have less ability to differentiate,” said a New York-based TMT banker.
So far, cableco Comcast is the only telecom operator to bridge network and content, thanks to its acquisition of NBC Universal in 2011.
But the jury is still out on whether or not mobile operators’ efforts will finally be successful, say experts, noting past “walled garden” attempts to create content.
Wealthier AT&T and Verizon have opted for big entries, respectively acquiring and building content expertise.
T-Mobile US and Sprint, on-again-off-again candidates for disposal by their overseas parent companies, are instead eyeing partnerships so they can focus on their network capabilities. What’s more, this expertise – and more manageable size – is exactly what continues to make them attractive to Dish, and also to cablecos, say market observers.
Jumping in head first
After a regulatory charm offensive, AT&T this year shelled out US$48.5bn for DTH operator DirecTV, with chairman and CEO Randall Stephenson describing the deal as “giving customers more choices for great video entertainment integrated with mobile and high-speed internet service”.
“We’ll now be able to meet consumers’ future entertainment preferences, whether they want traditional TV service with premier programming, their favourite content on a mobile device, or video streamed over the internet to any screen.”
Speaking at the Goldman Sachs Communicopia conference in mid-September, AT&T CFO John Stephens sought to dispel concerns that a linear TV acquisition is unwise given the popularity of video streaming services. He argued that the combined company’s scale, robust networks, relationships with content providers and, particularly, integrated platforms (satellite, broadband, wireless and IPTV) will differentiate it from rivals.
Stephens said the company is developing new mobile, video and internet bundles to be offered to an expanded customer base. He was keen to stress the cross-selling opportunities presented by the DirecTV purchase, noting that some 21 million of AT&T’s wireless customers are not DirecTV subscribers.
“[The integrated model] allows us to transform or transition, just like we have in the past, to a mixture of the model, including over-the-top.”
If you build it, the millennials will come
Verizon, for its part, is focusing on content creation, particularly mobile video and advertising. This summer, it bought AOL for US$4.4bn purchase of AOL and launched Go90, an ad-funded mobile video streaming service.
With AOL, the cellco aims to boost its LTE wireless and video strategy by building content such as The Huffington Post, AOL.com and original OTT videos into its subscription business and advertising platforms. Mobile ad and app monetisation provider Millennial Media, which it subsequently bought for US$238m, will further bolster its capabilities in mobile ads.
Go90, set to launch this month, will distribute the acquired content, ads and partner content, targeting the 18-34 prime cord-cutting demographic. Partners including Viacom, DreamWorks’ AwesomenessTV, ESPN, CBS Sports and ACC Digital Network. The service, which allows users to share clips via social media, will be available to customers of all wireless carriers.
The revenue model, according to Wells Fargo analyst Jennifer Fritzsche, includes monetising data usage and moving users to larger bundles, targeted advertising and upgrading users to a premium service.
At Communicopia, Verizon CEO Lowell McAdam acknowledged that the pivot towards digital might not pay off until 2017.
Giving customers want they want, through partnerships
However, it remains to be seen whether mobile customers want their carrier to curate the content they consume, noted T-Mobile US CFO Braxton Carter in an interview with TelecomFinance.
“Most wireless carriers don’t have expertise in, say, negotiating with broadcasters, rights or distribution – this just isn’t in the DNA of telcos,” said Carter.
And furthermore, he asked, “Is there a business case for this, or a proper return for shareholders?”
At T-Mobile US, we believe that internet is going mobile, and that data will be primarily dispersed over the internet. We will look at more strategic partnerships and relationships, and some of these could one day extend to M&A. But we will not try to develop expertise.
For now, continues Carter, T-Mobile US is luring 25% of mobile video traffic in the US, thanks to its unlimited data offer.
Network is king
Sprint president and CEO Marcelo Claure says strengthening the network is his company’s top priority.
“Our job is going to be to build an amazing network, an amazing data-rich, video-rich network,” he said. “And you can afford to do that because, when you have 200MHz of spectrum, the size of the pipe is going to be bigger than any of the other carriers,” he said at Communicopia.
Sprint recently reported its lowest churn rate in 19 years, which Claure attributed directly to investment in the network and customer service. In his view, the most important factors for customers are network quality, pricing and handsets.
Sprint has no plans to buy or develop its own video content, but that it is in talks with OTT players about potential partnerships, noting that Netflix is among Softbank’s many successful partnerships.
Applauding his rivals’ willingness to innovate, Claure commented that carriers which had tried to act like OTTs have “miserably failed.”
Fixed/mobile convergence will yield true content strategy
It is possible that this do-over by mobile operators is a good starting point, but it may take future M&A for them to become true full-service communications giants.
“Cable/wireless convergence is an interesting theme, especially given Altice’s entrance into the US,” notes Carter.
“While mobile carriers have historically lacked content expertise, broadband providers do have some expertise in purchasing and distributing content, for example. What broadband lacks, though, is the ubiquitous footprint, which can only be achieved with mobile.”
Fixed/mobile convergence, which has been a major M&A theme in Europe for some time, may soon come to the US, believes the New York-based banker.
“The big weakness of cable is the lack of wireless. What is likely, over time, is that Sprint and T-Mobile will be bought by Comcast, or another cableco.”
In the meantime, telcos still have an edge on their flashier rivals, the OTTs, the banker says.
“What’s hard to replicate is the access,” he observed, referring to efforts by new entrants seeking new means of access, such as Google Fiber and other tech companies working with satellites, balloons and drones.
That said, it won’t necessarily be smooth sailing, he continued.
“The problem these carriers have is that they are network engineering companies – they are not nimble or entrepreneurial. Despite their billing relationships, they have had some epic failures, they have lost this game nearly every time.”
