Why Content and Access Mergers Still Make Sense
There is good news and bad news in the global tier-one telco business. Between 2009 and 2015, most telcos, perhaps as many as two thirds, experienced revenue growth. The bad news is that up to a third of tier-one telcos saw negative revenue growth, especially in Europe.
The issue is “why?” that pattern exists. One line of thinking is that continent-specific factors are at work (market fragmentation, heavy regulation, wholesale policies, lack of incentives for investment to create new products). Another line of thinking is that, as a “mature market,” Europe points to inevitable revenue erosion in all legacy services (fixed voice, mobile voice and data), as well as modest returns from relatively-new services such as internet access.
We will know a bit more over the next decade, if revenue growth begins to “go negative” across a broader set of geographies or countries. Asia, which now drives most of the global growth, has one singular advantage: lots of people to convert as customers of new internet access services. That also applies for Africa. Those two continents will be, on the whole, the last to see any revenue pressures from market maturation.
Those trends might help explain why AT&T proposes to buy Time Warner, and 21st Century Fox wants to acquire the remainder of satellite broadcaster Sky that it does not already own, or why Verizon seems determined to establish itself as the default buy for advertisers who want a choice from Google or Facebook venues.
It might also be fair to again ask why firms such as Comcast choose to buy assets such as NBCUniversal.
The traditional arguments for blending distribution and content assets in the cable TV business had to do with revenue growth more than synergy within the ecosystem (we used to call this “vertical integration”). In part, the revenue growth would come from scale; in part from the ability to create new products; in part from diversification (the distribution business was mature, both in terms of products and regulations on additional growth).
Ownership of complementary assets arguably is useful, but programming rules prevent a distribution entity from restricting sale of its programming assets to rival distributors, or applying non-standard rates when the distribution entity buys content from the programming entity.
When Comcast bought NBCUniversal, in 2009, it was a revenue growth play. Comcast in 2004 had tried to buy Disney, for the same reasons.
As we near 2017, a newer set of justifications exist. One way of describing Comcast’s transformation from “content distributor” to “content owner,” in substantial part, is the notion that doing so allows Comcast to benefit from at least some of the content it delivers over its distribution networks. In other words, Comcast benefits from the revenues generated by the content assets used by customers of its access networks.
That, in a sense, also underlies Verizon’s attempt to fashion a major role for itself in internet--and especially mobile--advertising. As would other access providers, Verizon gains from customer use of applications enabled by its access operations.
To be sure, diversification of revenue sources is seen as valuable. Access and content or app providers are in distinct industries, so multiple roles provides some protection from sector downturns. Beyond that, the content and apps businesses are growing, while core telecom access products are mature and declining.