Is There a Grand AT&T Video Strategy?

Otter Media, a venture between The Chernin Group and AT&T, has purchased a majority stake in Fullscreen, a global online media company. That investment is a concrete step in the direction of creating the ability to deliver entertainment video over the top and on demand.

Otter Media was established by AT&T and The Chernin Group to invest in, acquire and launch over-the-top (OTT) video services.

Fullscreen, founded in January 2011, works with more than 50,000 content creators who engage 450 million subscribers and generate four billion monthly views.

But that move is only part of what AT&T is doing in entertainment video. AT&T obviously would like higher take rates for U-verse video. But AT&T also wants to buy DirecTV as well.

All that should raise questions about the possible grand strategy. Could DirecTV eventually become AT&T's "standard" linear video platform, while the fixed and mobile networks become the platforms for on-demand, streamed video?

Of course, perhaps there is no unified grand theory, at least, not yet. Perhaps U-verse video remains an essential part of the fixed network triple-play value proposition. Perhaps DirecTV really is an out-of-region platform.

The DirecTV acquisition creates a national video footprint outside AT&T’s fixed network footprint, and in any case throws off significant cash flow, valuable in its own right, some would argue.

And, since virtually all observers see a more-important role for OTT entertainment video over time, investing in alternative enabling platforms makes sense as a hedge, if for no other reason than to free up bandwidth on the fixed network.

Some might argue that, eventually, AT&T might be tempted to rely primarily on DirecTV for linear video, thus freeing up more bandwidth on fixed networks that do not already have U-verse video.

Some might even speculate that AT&T might, at some future point, and especially if the shift to OTT accelerates, decide that U-verse video does not make sense, if it can bundle DirecTV in region.

That wouldn’t necessarily be an easy transition. But majority technology and business model changes rarely, if ever, are easy.

Times of technology and business model transition are difficult for incumbents: they have to protect and harvest a declining product or products, using an older technology base, while simultaneously nurturing growth of a new set of products, built on the new technology base, that might actually cannibalize the existing business.

That largely explains the behavior of linear TV distributors including cable TV, telco and satellite TV providers. Even if all see an eventual disruption of the linear model, all will strive mightily to protect revenues from the current model as best they can, creating hybrid products that add value to the legacy product set and provide a hoped-for bridge to the future.

That is why “TV Everywhere” requires that customers first buy the traditional linear product before they are able to use the streaming features.

The evolution of the consumer services market to a bundled product business (triple play, quadruple play) likewise is why both Dish Network and DirecTV have made moves to transition from satellite-only to hybrid or integrated models where a bundled product can be sold.

Verizon and AT&T arguably will do so as well, defending and harvesting linear video as long as possible, while investing in over the top, on demand delivery and revenue models.

That explains the investment in Otter. It is a hedge on a different future.

To some extent, the acquisition of DirecTV is an effort to gain significantly-greater share in a business producing significant cash flow, in the belief that the ability to bundle with mobile and other fixed network services.

Perhaps DirecTV is not even seen as an essential part of the future network transition to OTT delivery. But it might be helpful in other ways, such as creating content buying power.

Still, at least some might suggest an eventual AT&T move to end or limit support for U-verse video. Much would hinge on when that happens, and how strong consumer demand remains.

So long as linear video demand remains largely intact, there arguably is little need to do anything disruptive.
The big questions would come if linear video begins to decline fast, consumers opt to watch video entertainment OTT and content suppliers decide to support OTT in a big way. Then no linear video supplier would be able to avoid asking how much should be invested in delivering a product with rapidly-declining demand.

Under those circumstances, no linear video supplier would be able to avoid evaluating the value of linear video and network resources devoted to delivering linear video.
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