EU, US Merger Barriers Will Change Growth Strategies

Though not every region necessarily will follow the pattern, big mergers--in either the European Community or United States--have come unstuck in a way that suggests regulators are going to resist them.

Most recently, the EC blocked a proposed merger of Telefonica’s O2 and Hutchison Whampoa’s Three in the United Kingdom. No further thinking about big mergers in the U.S. mobile market has been thought about since the blocked Sprint merger with T-Mobile US.

In 2011 an AT&T acquisition of T-Mobile US was blocked. In 2002 a merger of DirecTV and EchoStar has prevented.

The proposed Comcast acquisition of Time Warner Cable likewise was nixed in 2014.

Nor has big merger opposition been confined to telecommunications. Since 1997, Staples and Office Depot have tried to merge twice, and been rejected twice. In 2016, Pfizer Inc.’s takeover of Allergan and Halliburton Co.’s purchase of Baker Hughes also have been prevented.

To be sure, some deals--such as the AT&T purchase of DirecTV, or the Charter Communications buy of Time Warner Cable--have been approved. In the former case, assets acquired did not alter the market structure in either fixed line or mobile businesses, and shuffled, but did not measurably restrict competition in the video entertainment market.

In the latter case, the combination did not trigger foundation of a new firm with more than 30 percent access of U.S. homes, the traditional trigger for antitrust action in the consumer video or telecommunications business.

At least for the moment, the pattern of behavior suggests that one avenue of growth that has been crucial for big telecom providers over the last decade--growth by acquisition--is closed, at least within the ranks of leading providers in the U.S. and European Union markets.

That is going to be a problem. Unable to grow by acquisition, and facing negative growth in their core markets, the leading service providers are going to suffer a possibly-prolonged period of stringent revenue growth in their domestic businesses.

Sure, one can argue, new emphasis will have to be placed on growth by acquisition outside the home markets. And the already-intense search for brand new markets (Internet of Things, connected cars and so forth) will continue.

But nobody expects those new sources to have the bulk to displace eroding legacy revenue sources.

Hutchison is likely to fail in its bid to acquire Wind in Italy, as well.

But those are “within the silo” deals. It appears regulators are approving “outside the silo” deals.

In other words, AT&T could acquire the satellite video business of DirecTV because it was out of domain. BT could acquire EE for similar reasons (fixed line operator acquiring a mobile firm).

That suggests, at least for the time being, that leading telecom providers will not seek to acquire “in-silo” assets, but complementary out-of-silo assets. That might mean more fixed-mobile or mobile-video entertainment deals, across silos.

Alternatively, more acquisitions by access providers of content or app entities, non-facilities-based segment specialists (enterprise IT, non-consumer-facing assets, over the top apps and services) or growth internationally will happen.

But that path tends not to add much gross revenue, compared to what might be possible when an in-silo acquisition happens.

So firms might be forced to consider international acquisitions to increase revenue bulk, but avoid regulator opposition to a reduction of competition.

Within domestic markets, we are likely to see more acquisitions outside the legacy core.

CenturyLink Pondering OTT Video Service of Its Own: What are the Implications?

With the news that CenturyLink “is looking at offering an over the top video service, while AT&T has hinted it is certain to do so, we now have additional evidence not only of a fundamental shift in the video entertainment business model, but also an interesting twist on operating costs, with some possible implications for longer-term strategy as well.

To be sure, the main reason CenturyLink, AT&T and Verizon offer, or want to offer, streaming video is that the market is shifting in that direction. To remain relevant “triple play” providers, they need an OTT streaming option.

At a tactical level, there also are possibly-significant operating cost advantages, some incrementally helpful capital investment implications and at least a potential new opportunity to escape geographic limitations.

Consider the tactical considerations, which are important. Operationally, installing linear video now requires a truck roll that represents about 42 percent of the total cost of an install for a cable TV operator, for example.

Delivering an OTT video service does not. To the extent a truck roll costs  no less than $150 to $200, and could range much higher, the ability to turn up a service without a truck roll saves the provider money. Costs for cable TV providers are likely to range closer to $150, while telcos likely routinely spend closer to $200 for each install.

That is the cost of the truck roll for physical activation, not the cost of other hardware.  To turn up a video service requires one or more decoders, representing capital investment of perhaps $700 or more for set-top decoders. The investment varies with the number of decoders required at each location.

So, for starters, an OTT “install” can be done without a truck roll, and without the cost of a decoder, since the consumer likely uses their already-purchased Internet access modem and Wi-Fi (integrated into the modem, increasingly).

So OTT saves a great deal of money in the form of truck rolls, ancillary hardware and decoder costs, assuming the customer already has purchased fix network Internet access from any Internet service provider.

"As others are doing, we're also looking at an over the top product that we could deliver either some of or all the content we have today," said Stewart Ewing, CenturyLink CFO. "This is a product that we'll trial in 2016 that we believe we can get to the customer without a truck roll so it could help us decrease the cost of delivering the video to the customer."

CenturyLink logically would seek to use OTT video to reduce its capital and operating costs across the areas where it already operates fixed networks, and where, at a minimum, 10 Mbps downstream speeds routinely are available.

So far, only Verizon has intentionally structured an OTT service designed to work on “any mobile network.” But that is the final strategic angle.

Assuming advantage can be gotten, can a geographically-bound former telco create market-leading over the top services in other areas? Over the past decade, many tier-one fixed network telcos have pondered the value of providing OTT voice or messaging services, with relatively limited success.

More recently, mobile service providers have begun adding voice over Wi-Fi features that essentially make voice an OTT app.

The broader strategic issue is how much further OTT can grow, as a business strategy, for access providers and ISPs, and where the opportunities are greatest.

Verizon’s go90 can be viewed by any mobile phone with data access. Telefonica’s Tu Me was designed to be used globally, but was shut down, as the business model did not work.

The Internet access function, as it turns out, remains the sole area where a facilities-based approach (retail or wholesale) is required, and mandatory. All other “apps” are designed to run independently of the underlying physical layer, though they might be bundled with the physical layer access.

Still, any OTT service able to gain traction might not necessarily have to be limited to use “on my network only.” In fact, that would be non-sensical for any other app provider.

Service providers (retail fixed or mobile) have not yet seen major success operating over the top, out of region, with the exception of the MVNO business, perhaps.

So far, the pattern has been to expand by buying facilities outside of the historic core region.

Whether that “always” is the pattern is the larger question.

France Telecom Joins T-Mobile, Telefonica in Embracing Carrier-Owned OTT VoIP

Orange is betting on carrier-owned over the top VoIP as a strategy for competing with Skype, WhatsApp and Viber. "Libon" offers free calling between Libon users, but charges for calls to landline and mobile  numbers. 

At some level, the determination is simply that Orange needs to remain relevant as a supplier of communications services, whatever the danger of cannibalizing at least some of its own voice and messaging revenue. T-Mobile has taken a similar approach. 

In principle, supplying its own over the top voice app also means Orange can supply people with communications outside the areas of the world where Orange operates its own facilities. 

The main reason service providers do not like “over the top” services and applications is that they generally represent direct competition. In other words, over the top apps are substitutes for key products service providers sell.

But that is one key to how things will change in the future. If a major reason over the top apps and services are disliked is that they pose a threat to revenue, then a major reason for adopting an over the top approach is if doing so can create new revenue opportunities.

The business decisions are tricky. In some ways, over the top apps always will represent some danger of cannibalizing existing revenues. But service providers already understand and have embraced other ways of building new revenue streams by going “over the top.” They just haven’t used the term.

Instead, it has been more common for service providers to go “out of region,” as when acquisitions are made in areas where a given firm does not already provide service. European telcos buying assets in Africa provide examples. Cable companies buying other firms in different regions is another example.

The point is that buying assets out of region is similar in principle to some forms of over the top service. Incumbent local exchange carriers have created competitive local exchange carrier operations to sell services “out of region,” for example.

Over the top is trickier for the simple reason that customers and non-customers can use the apps or services, so there always is some risk of substitution for existing services a provider sells. But over the top also can represent an “out of territory” growth strategy.

Think of it as a shift of focus from “selling services to current customers, where we have network” to “selling services to non-customers who are out of territory.” That’s a big shift, as traditionally service providers have operated on a territorial basis, with licenses or franchises that specify where they can build networks and provide services.

Over the top changes all that. As Google apps can be used by any person with web browser and broadband access, so too can a telco-owned app be used by anybody with a web browser and broadband access, in territory or outside it.

Sooner or later, service providers will figure out how to do so on a broader scale. Telefonica, T-Mobile, Deutsche Telekom and others have invested in their own over the top apps. In part, that has been a defensive move in markets where use of over the top apps are a major part of consumer behavior.

But over the top also has been viewed as a way of creating new customers out of region or out of territory.

If you think about it, the Verizon and Coinstar joint venture to create a streaming version of Redbox is part of a pattern at Verizon and elsewhere, namely that over the top services increasingly are being viewed as a way to sell services to “non-customers.”

In essence, the new streaming service will reach beyond the footprint of Verizon fixed network customers and appeal to all 30 million Redbox customers who have been renting DVDs from the Redbox kiosks.

According to Verizon Communications CFO Fran Shammo, Verizon was looking to create a streaming service that would extend “outside of just the FiOS footprint, utilizing the content that FiOS has and bringing that into the rest of the United States.”

Some think something similar will happen as Verizon’s agency agreements with Comcast, Cox Communications, Time Warner Cable and Bright House Networks develop, as well. Those efforts so far have had each of the partners co-selling cable TV, fixed network broadband access and fixed network voice, plus wireless service, outside the Verizon fixed network footprint.

In essence, Verizon is using the agency agreements to sell services to “non customers” outside the Verizon fixed network footprint.

Likewise, T-Mobile USA has found much the same results with its “Bobsled” over the top VoIP service.

Since April 2011, more than 10 million calls have been made on the over the top Bobsled application made available by T-Mobile.

Of the millions of Bobsled calls made to phone numbers, 80 percent originate from outside the United States, though messaging seems to be a U.S. phenomenon. Although Bobsled Calling has seen significant international usage, Bobsled Messaging users are predominately U.S. based, with 90 percent of messages sent domestically.

Usage statistics also show one of the key present realities of over the top apps sponsored by communications service providers, namely that usage might often be by "non-customers."

Of the more than one million Bobsled Calling users, 95 percent are not T-Mobile wireless subscribers, T-Mobile says.

That should suggest one key strategic difference between a carrier-offered app or service, and an over the top app, namely that in some cases the OTT apps do not necessarily cannibalize current customer use of carrier services, but essentially are an "out of region" service that gets used by non-customers.

T Mobile Launches "Clever Connect" Mobile VoIP in United Kingdom

Clever Connect is a new T-Mobile mobile VoIP calling service available in the United Kingdom. It is similar to “Bobsled” in the United Kingdom and Telefonica’s “TuMe.”

T-Mobile’s  Bobsled service initially allowed smart phone owners to call their Facebook friends from their mobile devices, and had expanded to provide free calls to any mobile or landline number in the United States, Canada or Puerto Rico from anywhere in the world, by using a desktop browser.

Working with Danish mobile communications company Vopium, T-Mobile in the UK created Clever Connect, available now for iOS and Android devices on the U.K. Everything Everywhere (T-Mobile parent company).

At the moment Clever Connect is only available by invitation.

Clever Connect appears to be aimed at growing T-Mobile’s out of region customer revenue, and potentially as a tool for customer acquisition, more than a way to compete with over the top mobile VoIP providers in its current areas of operation.

Why Telcos Will Go "Over the Top"

The main reason service providers do not like “over the top” services and applications is that they generally represent direct competition. In other words, over the top apps are substitutes for key products service providers sell.

But that is one key to how things will change in the future. If a major reason over the top apps and services are disliked is that they pose a threat to revenue, then a major reason for adopting an over the top approach is if doing so can create new revenue opportunities.

The business decisions are tricky. In some ways, over the top apps always will represent some danger of cannibalizing existing revenues. But service providers already understand and have embraced other ways of building new revenue streams by going “over the top.” They just haven’t used the term.

Instead, it has been more common for service providers to go “out of region,” as when acquisitions are made in areas where a given firm does not already provide service. European telcos buying assets in Africa provide examples. Cable companies buying other firms in different regions is another example.

The point is that buying assets out of region is similar in principle to some forms of over the top service. Incumbent local exchange carriers have created competitive local exchange carrier operations to sell services “out of region,” for example.

Over the top is trickier for the simple reason that customers and non-customers can use the apps or services, so there always is some risk of substitution for existing services a provider sells. But over the top also can represent an “out of territory” growth strategy.

Think of it as a shift of focus from “selling services to current customers, where we have network” to “selling services to non-customers who are out of territory.” That’s a big shift, as traditionally service providers have operated on a territorial basis, with licenses or franchises that specify where they can build networks and provide services.

Over the top changes all that. As Google apps can be used by any person with web browser and broadband access, so too can a telco-owned app be used by anybody with a web browser and broadband access, in territory or outside it.

Sooner or later, service providers will figure out how to do so on a broader scale. Telefonica, T-Mobile, Deutsche Telekom and others have invested in their own over the top apps. In part, that has been a defensive move in markets where use of over the top apps are a major part of consumer behavior.

But over the top also has been viewed as a way of creating new customers out of region or out of territory.

If you think about it, the Verizon and Coinstar joint venture to create a streaming version of Redbox is part of a pattern at Verizon and elsewhere, namely that over the top services increasingly are being viewed as a way to sell services to “non-customers.”

In essence, the new streaming service will reach beyond the footprint of Verizon fixed network customers and appeal to all 30 million Redbox customers who have been renting DVDs from the Redbox kiosks.

According to Verizon Communications CFO Fran Shammo, Verizon was looking to create a streaming service that would extend “outside of just the FiOS footprint, utilizing the content that FiOS has and bringing that into the rest of the United States.”

Some think something similar will happen as Verizon’s agency agreements with Comcast, Cox Communications, Time Warner Cable and Bright House Networks develop, as well. Those efforts so far have had each of the partners co-selling cable TV, fixed network broadband access and fixed network voice, plus wireless service, outside the Verizon fixed network footprint.

In essence, Verizon is using the agency agreements to sell services to “non customers” outside the Verizon fixed network footprint.

Likewise, T-Mobile USA has found much the same results with its “Bobsled” over the top VoIP service.

Since April 2011, more than 10 million calls have been made on the over the top Bobsled application made available by T-Mobile.

Of the millions of Bobsled calls made to phone numbers, 80 percent originate from outside the United States, though messaging seems to be a U.S. phenomenon. Although Bobsled Calling has seen significant international usage, Bobsled Messaging users are predominately U.S. based, with 90 percent of messages sent domestically.

Usage statistics also show one of the key present realities of over the top apps sponsored by communications service providers, namely that usage might often be by "non-customers."

Of the more than one million Bobsled Calling users, 95 percent are not T-Mobile wireless subscribers, T-Mobile says.

That should suggest one key strategic difference between a carrier-offered app or service, and an over the top app, namely that in some cases the OTT apps do not necessarily cannibalize current customer use of carrier services, but essentially are an "out of region" service that gets used by non-customers.