Wednesday, June 10, 2015

How Important are Tier One Service Provider "Venture Capital" Initiatives?

It always is possible that a great many venture capital investments will fail to earn a return. That is part of the process.

It likewise is possible to argue that telcos, cable companies and other Internet service providers should “stick to their knitting” and do what they do best, rather than diversifying into other lines of business.

But it also is possible to argue that unless telcos and cable TV companies engage in a serious pursuit of massive new revenue streams, they are destined to fail. The reason is simple enough: every large legacy revenue stream is declining, mature or soon to become mature and begin declining.

My own rule of thumb is that service providers must prepare to replace half their current revenue every 10 years.

Given that view, the only question is where to look, which bets have the highest potential return, and how much to spend in pursuit of the new opportunities. Whether venture funds created by a growing number of firms ever will have outsized return is unclear. But, one might argue, clarity always is unobtainable.

On the other hand, given the need for scale, one always can argue that venture funds generally cannot provide enough new revenue, fast enough, to meet the new growth requirements of a tier one service provider.

Near term, venture investments will not add to the bottom line fast enough. That might not suggest such investments are unwise. They might be a vital part of the revenue replacement process. But venture investing likely will not produce the revenue mass other tactics can.

That is why, whether creating venture funds or not, near term results will be gotten by acquiring already-sizable assets. Anything else simply does not move the needle.

In other words, any service provider needing to replace half its current revenue in 10 years, and perhaps every 10 years, has to look for big, proven businesses to acquire, even if such firms also are committed to innovation by the venture capital process.

That is why AT&T buying DirecTV, or mobile assets in Mexico, has more near term value than its venture fund efforts, such as the Otter Media joint venture between AT&T and Chernin Group.

Otter Group might eventually provide scale returns. but it cannot help AT&T in the near term. Comcast arguably has taken the biggest steps into “new lines of business,” when it purchased NBC Universal.

So far, no initiatives by other tier one providers in the U.S market have approached the “present revenue” scale of that move. Most other tier one service providers have taken the form of acquisitions that provide more bulk in existing lines of business.

Nor should that be unexpected. To the extent that the bundled triple play or quadruple play is the new “anchor offer” for many tier one service providers, nothing boosts present revenue so much as acquisitions of customer bases, domestically or internationally.

Discovering or creating huge new lines of business is mandatory, though. That is one reason why venture bets related to Internet of Things likely are fruitful. Even there, however, one would be safe to predict that many growth initiatives will be based on acquiring important assets in the IoT space, not developing them “in house.”

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