AT&T Might Already be Poised to Disrupt Video Markets

AT&T argues its acquisition of Time Warner will help it disrupt video markets. Even in advance of the proposed acquisition, AT&T appears to be doing so. DirecTV Now, the new steaming service, will offer 100 channels for $35 a month, a price point that is disruptive for the streaming video market.

In significant part, the price point seems to suggest one key advantage for over-the-top services, compared to traditional linear services. DirecTV Now will not require a technician visit, a dish installation or use of in-home customer premises equipment.

The truck roll along represents costs upwards of $100. The traditional install also requires the installation labor, hardware and then in-home decoders (one to several). It might not be unreasonable to suggest such costs represent $600 or more, in operations and capital investment, for each new install.

DirecTV Now will have none of those costs.

Google Fiber Head Departs, What Will Google Fiber Do?

There are at least a couple conclusions one might draw from new developments at Google Fiber. Some suggest Alphabet has given up on Google Fiber. Others argue, based on Google Fiber’s own statements and actions, that it instead is looking at business models that include  fixed wireless.

As Google Fiber has been saying, as it “paused” the extension of Google Fiber to new cities, the organization is looking at “new technology and deployment methods.”

It seems clear enough that actual uptake of Google Fiber was less than Google Fiber, and many other outside observers, expected to see. So given the cost of fiber to the home, a look at alternate access platforms would make sense, at a time when a number other leading entities, including AT&T and Verizon, plus Facebook, have signaled they are actively researching the use of such technologies.

It remains possible that even the new fixed wireless business models and deployment methods will not work to Google Fiber's satisfaction.

But it might be fair to suggest Google Fiber has learned one important lesson. In competitive local access markets, when market share can top out below 20 percent to 40 percent, the business model is extremely difficult, and might not often support three sustainable, facilities-based providers.

In the Cloud Era, All Plumbing is Commoditized

The idea of what we now call cloud computing is not new, with the concepts dating back more than a half century. But it was largely an idea, back then. Over the past 20 years we have moved faster, though.

Remember “application service providers?” Those turn-of-the-century efforts to supply remote versions of enterprise shrink-wrapped software mostly failed. Salesforce was the successful model. Amazon Web Services was the modern precursor, launched in 2002. So the cloud era--as a commercial reality--is less than two decades old.

Most consumers use cloud computing without knowing it, every time they use an Internet-delivered app. That is a key point: use of software and “applications” now is something users invoke from remote servers, not a bit of software locally resident on their appliances.

In parallel fashion, the move of computing resources “into the cloud” has had key implications for use of computing infrastructure by enterprises, government, schools, hospitals, smaller business and and consumers.

Less hardware is needed “on the premises.” More money is spent on services and access. Local area networks no longer are primarily about structured cabling and local servers, but Wi-Fi, for example.

To a large extent, that has meant hardware is commoditized. Local area networks now simply involve ensuring that Wi-Fi is available. “Computing” or “application access” now increasingly means enough bandwidth to reach the cloud-based app sources. All that means less capital is spent on local hardware and software; more on cloud-based replacements purchased as services.

In the telecommunications business, the implications have been vast, as well. Applications once created and sold by service providers have become--in large part--applications consumers or businesses can consume as cloud apps (Skype displaces voice; OTT messaging displaces SMS; Netflix replaces HBO or increasingly, linear video).

Cloud computing means more demand for bigger pipes. But the retail cost declines, either on a cost-per-bit basis or in absolute terms.

In other words, most computing infrastructure and communications has been, and will keep being, commoditized.

The fortunes of firms and the fate of industries will be shaped by that fundamental reality.

Would You Rather Sell Locally or Globally?

Global versus local, or “outside footprint versus inside footprint,” now is becoming a bigger strategic issue in the communications business, in ways beyond the obvious move of carriers into new international markets.

In fact, the “sell outside my existing footprint” trend has been seen for the last 20 years, even for suppliers who operate only regionally in the U.S. market.

The basic change is simple to describe. In the past, service providers have sold services to potential customers only in certain defined geographic areas. That limitation was imposed by regulators who authorized operations within a city (cable TV franchises, for example); regions (the seven Baby Bells created in the wake of the Bell system breakup in 1984) or parts of a city or community (competitive local exchange carriers who sell only to some business customers).

Increasingly, in the cloud computing era, apps and services are sold nationally or internationally, with fewer restrictions than in the past, even if national regulators still are important.

When incumbent telcos created CLEC business units to sell outside their geographic footprints, that is one example of the trend. Cable TV companies traditionally do not compete with each other.

But mobile is going to change that relationship, for the first time. In principle, a Comcast or Charter Communications selling mobile service, even if initially focused on “in region” customers, is in a “national” business, and eventually will move in that direction, by necessity.

AT&T and Verizon both believe they will be able to leverage new 5G network capabilities to sell “fixed network services” even outside their geographic footprints, operating as CLECs.

So the strategic context changes. In the past, the effort has been to create services to sell to potential customers “who live or work in my footprint.” We are moving increasingly towards a market where it is possible and desirable to sell apps and services to people and businesses “outside” the legacy geographic areas.

AT&T 3Q 2016 Results Illustrate Why Time Warner Ownership Matters

AT&T’s third quarter 2016 financial results might be confirmation that the DirecTV acquisition, heavily criticized in some quarters, is working for AT&T. To wit, AT&T consolidated revenue grew 4.6 percent, year over year, principally because of DirecTV revenues, AT&T said.

More significantly, some might say, the generally flattish growth profile in the quarter shows why AT&T is moving into new lines of business, and how ownership of Time Warner matters.

Net income also grew four percent, year over year.  Operating income grew 8.2 percent, year over year.

Most of the mobile segment account gains of 2.3 million net subscriptions came from connected devices, the Mexico market and Cricket additions.

U.S. mobile postpaid churn was 1.05 percent. AT&T says it gained 700,000 U.S. branded smartphone accounts and 323,000 U.S. DirecTV net adds and 171,000 IP broadband net new accounts.

AT&T also reiterated confidence that it will meet its full-year guidance.

None of that is going to be top of mind, though, as the focus now is on prospects for AT&T’s acquisition of Time Warner. That move sometimes is said to be an effort to lower AT&T’s content acquisition costs, but is incorrect.

Owning Time Warner will not cut the fees AT&T pays to Time Warner for use of its content. AT&T would get price discounts based on volume, as will all other distributors who buy Time Warner content.

During the recent Spectrum Futures conference, mention was made of the fundamental strategy U.S. cable operators will take to “move up the stack (value chain).” Simply, the idea is that “you have to own at least some of the content that flows over your pipe.”

The Time Warner deal appears to be a perfect example of that same strategy, employed by a telco instead of a cable company.

The issue is that all triple-play providers sell a mix of services, ranging from “dumb pipe” Internet access (“tickets to Disneyland”) to applications such as voice, messaging, video entertainment or home security.

But to avoid being reduced simply to a “dumb pipe,” an access provider has to own at least some of the content, some of the apps, some of the services its customers want to use.

In other words, in addition to selling “dumb pipe” Internet access service, which under competitive conditions is subject to price per unit reductions and price competition generally, service providers must become owners of at least some of the new apps and services that its customers want to use.

It is not complicated: that is the strategy for “adding value” and “moving up the stack.” To be sure, there are some tangible benefits. As a major buyer of content from Time Warner, AT&T now at least is able to “pay itself.”

AT&T also now earns more from video than voice services.  

How AT&T benefits from owning Time Warner is a complicated question. Some might think AT&T could win by changing Time Warner content distribution, and making that content exclusive to AT&T.

AT&T will not be able to do so, at least for those networks routinely sold on linear video services.

U.S. rules force content networks that sell content to linear video distributors to sell to all such providers. There is no exclusivity. On the other hand, there are some content services--largely selling only online, that are not covered by the rules.

The interesting example is DirecTV’s NFL Sunday Ticket service, broadcasting football games. NFL Sunday Ticket is not covered by the rules pertaining to programming networks, presumably in large part because the NFL is not directly a programming network, and simply licenses the rights to show games.

Likewise, some new mobile streaming services do not seem to fall under the rules covering linear video programming networks.

At least in principle, some content (programming, rather than networks) could be developed for “direct-to-consumer” delivery, not using the linear video distribution system, and therefore be free of mandatory wholesale rules that pertain to linear video distribution.

But AT&T does not seem to prefer the “unique content” strategy in any case, at least for the moment. That strategy is very expensive, and AT&T seems to prefer the sale of “widely-viewed content” on networks that are themselves widely viewed.

There is some benefit in the area of content acquisition costs, but not direct impact. As programming fees rise, AT&T has to pay more for such content. Owning Time Warner will not change that. But AT&T will gain--as a content owner--from the fees it earns from all other distributors.

But AT&T does seem determined to acquire additional content assets as well, just as it intends to create connected car or eventually other Internet of Things applications and services that also use its network.

What is important, though, is to note that the objective is to “own at least some of the content and applications that flow over the access pipe,” not the desire to create unique walled garden assets available only to AT&T customers. That is a crucial distinction.

The same strategy would seem to apply to other services, in other industries. Connected car services, for example, where AT&T supplies the actual end user service or platform to a car manufacturer, provide one example.

Instead of supplying simple mobile network access, AT&T will seek to become the owner and supplier of connected car services (content, security, vehicle monitoring).

There is a clear strategy here, pioneered by cable TV companies. In a business increasingly anchored by “dumb pipe Internet access,” where there is much competition for any app--voice, messaging, video, utilities, content, transactions--an access provider has to own at least some of the useful apps people want to use.

Exclusivity is not required. Branding is not constrained to the “service provider” brand, in all cases. If people want to use a particular app or service, and that is widely used, it makes sense to retain the retail brands, and not force the use of the access brand.

This is a shift in model. In the past, all services were branded under the parent’s name--AT&T X, Y and Z. In the future, what will matter is the revenue, cash flow and profits generated directly by the end user services and apps, even when--or especially because--those apps and services are in high demand by end users.

In essence, AT&T and Comcast become multi-industry conglomerates, to an extent, making money in several different industries whose common focus is that they require Internet or mobile access.

Moving up the value chain does not always require full branding under the legacy access provider name. It does require ownership of some of the assets.

Strong T-Mobile US 3Q Results Aren't Even the Story

T-Mobile US reported what CEO John Legere calls “historic” results for its third quarter of 2016, adding two million total net adds, including 851,000 branded postpaid phone net adds as well as 684,000 branded prepaid net adds.

Long term, as well as T-Mobile US performs, it will not, in one major sense, actually matter for the broader dynamics of the U.S. mobile industry. That is likely to be true even if T-Mobile US continues to gain subscriber share.

But the quarterly performance was quite strong. T-Mobile US branded postpaid phone churn was 1.3 percent.

Service revenue of $7.1 billion service revenues was up 13.2 percent, year over year.

Total revenue was up $9.2 billion total revenues, up 17.8 percent, year over year. Net income was up 165 percent, year over year.

Forward guidance--what is expected to happen--is in many ways more important than the quarterly results. On that score, T-Mobile US now predicts it will gain more branded postpaid net adds than previously expected, and has increased its forecast to 3.7 to 3.9 million net postpaid adds, up from the prior estimate of 3.4 to 3.8 million.

But T-Mobile is not forecasting net income, though it raised its adjusted EBITDA target to $10.2 to $10.4 billion from $9.8 to $10.1 billion.

Those results are in keeping with strong results over the last few years. Predictably, Legere suggested AT&T was in danger of losing its focus in mobile, that T-Mobile US would be very active in the 600-MHz spectrum auctions (in large part because it will not face competition from Verizon and AT&T for much of the spectrum it wants to buy), and that T-Mobile US can achieve many of the same synergies AT&T seeks by its acquisitions, in other ways.

One might argue Legere easily can make those arguments, for reasons related to the expected changes in market structure for the mobile industry in coming years. The biggest coming change is that at least a couple of cable TV operators will enter the U.S. mobile market.

Since “owner’s economics” matter, it is expected by some of us that neither Sprint nor T-Mobile US will survive, long term, as independent entities. In that sense, neither Sprint nor T-Mobile US can afford, nor need to, spend time, capital and effort creating the multi-product new entities that Verizon and AT&T are working to build.

Both essentially will become the mobile arms of other triple-play providers, probably owned by cable TV operators.

Also, In a CNBC interview, Legere pointed out that coming 5G mobile networks will represent fixed broadband substitution. That suggests a growing view that fixed Internet access networks will face new competition, directly from mobile networks, on a relatively wide scale basis, for the first time, once 5G launches.

That is likely one reason why a couple of the largest U.S. cable operators (Comcast and Charter Communications) will want and need to own mobile assets of their own.

Value of $1 of Revenue is Why Access Providers Want to Own Content, App Assets

If you had a choice, would you rather “be Facebook” or “be AT&T?” In terms of revenue growth, equity value or physical asset intensity, many would choose to be Facebook. In other words, many would rather operate an over-the-top application business than an Internet access business.

Globally, a “telco” might be valued at 4.4 times enterprise value divided by earnings (EBITDA). Content companies might be valued at 11 to 12 times EV/EBITDA. Facebook might be valued at 16 times EV/EBITDA.

Netflix, the over-the-top streaming service, has a price-earnings ratio as high as 398. At the same period of time, cable TV operator Time Warner Cable (a separate firm from Time Warner) had a 28.7 P/E multiple. Comcast had a 17.4 P/E multiple.

You can see the huge disparity. A dollar of revenue earned by Netflix is worth nearly 14 times that of a dollar generated by Time Warner Cable, or 23 times the value of a dollar earned by Comcast.

In other words, a rational person would rather own an asset worth four times that of a telco, when there is a choice.

Telco executives have limited options, unless they want to sell their assets and go out of business as independent entities. But there is one obvious strategy if they wish to stay in current lines of business, and yet reach for higher-valuation revenue streams: they can own more assets of the higher valuation type.

In other words, they can augment lower-multiple access businesses with higher-multiple content or application businesses. That “move up the stack” or “move up the value chain” strategy is simple enough, if execution risk exists.

And that explains why AT&T would want to own Time Warner.

source: Netflix