AT&T Shows Ir Understands How to "Move Up the Value Chain"

AT&T’s purchase of Time Warner might not make sense to some, but it illustrates a very simple strategy for “moving up the value chain.” In fact, the move matches the general way cable TV companies approach strategy related to its “dumb pipe” Internet access operations.

Simply, the strategy is that “you have to own at least some of the content delivered over your pipes and used by your customers.” That was the thinking when Comcast purchased NBC-Universal, for example.

That strategy obviously now is at least partly embraced by AT&T, which now is the largest supplier of linear video TV service in the U.S. market. Like Comcast and other cable TV operators, AT&T faces slow attrition in the core linear TV business. So linear video suppliers are transitioning to a different market, where over the top video is dominant.

For obvious reasons, mobile service providers are more optimistic about the role of mobile-consumed video than cable operators are willing to admit in public.

In any case, OTT means pressure in the “dumb pipe” Internet access business (prices per unit are falling) can be partially offset if pipe operators also own and benefit from revenue generated by ownership of content.

That also suggests an approach to other applications and services as well, outside the content area. Large Internet service providers will want to explore how they can become owners of at least of the popular apps used by people.

An analogy:Today, ISPs sell tickets to enter a theme park. What consumers want is the theme park attractions (all the things one can do on the internet). By owning at least some of the content or applications people want to experience inside the theme park, ISPs can avoid become sellers of tickets to enter the park, when competing with others who also sell admission tickets.

That is not to downplay the need to operate and upgrade the core “dumb pipe” access business. Indeed, high speed access will eventually become the foundation service for any service provider, even if “applications” also are key products (voice, messaging, content).

Historically, the ability to use such apps “untethered” also has been a value and revenue driver. Mobile voice has value beyond that of fixed voice, and will continue to hold that value over time. But there are now other ways to gain untethered access, including Wi-Fi, that diminish the formerly-exclusive value of mobile access.

So ISPs now operate in a context where they are multi-product suppliers. There is a distinct “Internet access” or dumb pipe business (tickets to the theme park) as well as the separate application and content businesses (voice, messaging, video, content, banking or payments).

AT&T’s Time Warner purchase is an example of it following the principle that “you have to own at least some of the content delivered over your pipes and used by your customers.”