Saturday, August 18, 2018

Software Drives Hardware Demand; Video Drives Internet Access Demand

“The value of software to stoke demand for new hardware was as old as personal computing itself,” says says Daniel Eran Dilger, who writes for AppleInsider.  “Everyone in the industry was already aware that Apple II systems first sold in the 1970s because of VisiCalc; that PageMaker had initially driven sales of Macs in the 1980s, that Office had primed Windows PCs in the 1990s.”
LIkewise, one might argue that Apple’s content ecosystem was among the reasons for Apple’s possibly improbable ascent and longevity in the consumer hardware business.

So it might be an unusual stretch to argue that efforts by telcos and cable companies to move from “mere” distribution to  “content ownership,” as Apple has moved from “mere” hardware to software ecosystem, are similar. Content and apps drive sales of hardware. Perhaps likewise, content drives sales of internet access (bundles, for example) and mobility (streaming video bundled with mobile internet).

Whether the path of application (content) ownership, or simply curation, is “better” might be a bit beside the point. Apple both curates and owns apps. It distributes through iTunes without ownership of content, but it also creates and owns Siri and other apps. On the other hand, creation of original content seems to be assuming new importance for Apple as it has for video distributors.

A distributor can wring only so much revenue and profit out of content that is freely licensed to multiple distributors. And Netflix now has demonstrated the power of original content to drive subscriptions.

Netflix also has shown the power of occupying multiple roles within the ecosystem: a “studio” (developing content) as well as a “network” (Netflix the branded “channel” like HBO) and also distributor (Netflix as a replacement for cable TV subscriptions).

In that sense, Verizon and AT&T are emphasizing different strategies with regard to video, for reasons related to their existing assets and positions in the current ecosystem. Verizon does not appear to believe that the video distributor business (linear or streaming) is as strategic as does AT&T.

There may be internal cultural factors at work. Some might argue that neither Verizon or AT&T have had overwhelming success with their homegrown video services, linear or over the top.

Verizon always has emphasized the “quality of its network” (fixed and mobile), it arguably has been difficult for organization priorities to deviate much from the “best network” mindset, with its emphasis on the network.

AT&T arguably has had the reverse problem: it has so many locations, and so many that are rural or low density, that it has struggled to develop a consistent business case for fiber to home upgrades, when capital has been needed to support the mobile business, which has driven growth for more than a decade.

The point is that opportunities for revenue growth in the near term are different. Verizon can grow by taking market share away from “bigger” competitors (in the fixed network business). AT&T, as the largest linear video distributor, cannot do so. For AT&T, diversifying elsewhere in the ecosystem offers higher returns.

Geographic coverage therefore explains and shapes strategy. Verizon’s fixed network passes far fewer households than AT&T, Comcast or Charter Communications. So strategy might follow beliefs about assets. Verizon might believe it will not benefit as much in the upside from such ownership as others might. AT&T, Comcast and Charter each pass between 50 million and 65 million U.S. homes. Verizon passes perhaps 27 million. Verizon has the smallest footprint of those four fixed network firms, by far.

That also means Verizon’s ability to create an base of subscribers--and audience--is smaller. Though all the firms believe video offerings are important, AT&T arguably has more to gain in the video area. It already is the largest U.S. video linear services provider, and with Comcast, are the biggest in content asset ownership.

So if a video subscription business benefits from scale, Verizon benefits less than AT&T, Charter or Comcast in the video subscription product segment.

On the other hand, Verizon can realistically hope to grow its revenues by taking video share and internet access share away from those other competitors as it deploys its 5G networks (fixed and mobile). Fundamentally, that was the strategic rationale for cable TV operators in the voice market: cable operators could simply take market share from telcos in an existing business where the telco had nearly all the market to itself (mobility aside).

But all four U.S. national mobile service providers now believe video services play an important role in their 5G strategies, with a range of views based on where each firm sees its own assets.

AT&T and Verizon believe advertising is going to be an important revenue driver for them; Sprint and T-Mobile US do not. That makes sense, so far, as AT&T and Verizon have much-larger customer bases, and “eyeballs” matter for advertising.

AT&T clearly believes most in content ownership; its strategy resembling that of Comcast most. The other mobile companies do not believe they can viably pursue that role, and Verizon claims it does not believe content ownership is necessary.

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