It’s a bag of mixed feelings and reviews as politicians, analysts and industries across both media and telecommunications weigh in on the AT&T – Time Warner deal. Some have called it too big too powerful a merger, while the two companies both cite offering consumers better services as a grounded case. In an interview hosted by CNN with both Randall and Jeff, CEO’s of AT&T and Time Warner respectively, Randall inferred the fun of looking into the future of how both companies figure out the management art of innovation. It’s a contemptuous deal, and as to whether it will happen is a matter of how Regulators eventually see it – even though it’s be widely true that vertical integration has somewhat been free to happen many-a-times.
The deal suddenly has awakened the industry, and telecom companies that didn’t pay attention to this strategy are now beginning to – at least I can confirm suddenly two of such companies brewing their strategy. It confirms in the least that the mindset and strategy changes with global Telco brands like Verizon, AT&T, NTT, Telefonica and co. will lead to chains of reaction – big or small and lead to re-calibrating classes of service providers. Telecommunication native Service Providers are now very fully committed to some radically new strategies that now looks into the vertical industry landscape to reshape their positioning. Media and the Ad space just mark the early days of growth.
We have all followed how AT&T and Verizon, especially, they have in their latest actions, actively consolidated assets and capabilities in the media space, and it’s quite remarkable watching the strategy storms, formation and race to boldly neutralize the cannibalization by disruptive OTT media and the likes of Netflix. Platform business is inherently one business Telco’s didn’t look at in a complete ecological way, but now is seemingly striking a chord or two with how many perceive themselves and their play into the emerging market. This move by AT&T can make it the most powerful electronic media content and Technology Company in the world when it’s possibly ratified in a years’ time – if it is at all. They just got started with Direct TV Now, an all-new strategy to offer pure OTT like cable experience with a new twist of cross media and service interworking. Will Twitter be another potential step to realize its integrated vision for technology, media and telecommunications? Perhaps for another blog.
Service providers without any form of new business ecosystems won’t be able to truly perform and lead in the changes across all industries. This is clear by way of the strategies both AT&T and Verizon have been executing. Converging an entertainment powerhouse together with a distribution network has been tried before when Comcast bought NBC Universal, and it was part of the logic behind AOL’s 2001 merger with Time Warner. It was simply a brilliant strategy at a wrong time and thus failed to stand the test of time. AT&T however, inherits it’s strategy at a time where media diversity and exponential consumption patterns showcase the future will be streaming content. With its satellite and mobile subscribers, it can serve up Time Warner’s roster of movies and popular television programs as well as reach out to the different segments of subscribers across TW’s business to expand business.
Once upon a time we saw large scale mega acquisitions that made the headlines around horizontal industry integration as a signal of potential change in the Telco space. My feeling were those of one school of thought that felt that at the rate of OTT cannibalizing the communication services market, the pressure would be on for consolidation in the market first, before diversification. This thinking was premised on cost arbitration by way of leveraging centralized operations and improved efficiencies in business and technology management as the first leg in the series of transformation that was to hit Telco’s. Such was the trends in Europe between 2011 – 2014 which hinted the demise of roaming business, and inherently removal of a lucrative revenue source of Telco’s. This was part of a series of regulatory moves that also touted the potential for some Telco’s to start merging with others in order to “hold their space”.
It is clear however with the trends that in part sense and part action, the telecom field will transform into three type of service provider businesses.
The Re-Classification era is starting
Class A – First class, those service providers who would become super power-houses for both vertical and horizontal service provider integration – usually along the domains of Telecom + Media + Technology businesses, while offering capabilities for partnership to emerge on their “back”. These class of Service Providers (SPs) will become integrated enablers for both producer, consumer and partners’ services. They will offer capabilities to enable community of services and products cross businesses and types of customers. They will become a new breed of Super Service Providers (SSPs) with global business platforms, global production ecosystems and as well an array of extensive global infrastructure to serve partners, producers and consumers altogether.
What’s “scary” about this class is they will become so powerful they’d actually become influencers of new and emerging strategies for Telco’s to re-assert their stance in services and customer ownership. The concept of smart pipe will be obliterated in their strategy dictionary, and in place of that, they’d rather become smart businesses fronts that seek out control of value chains over pure consumption within value chains. Comparing the two – AT&T and Verizon – media and technology strategies speak to this direction when you connect the dots. As AT&T builds up a media powerhouse, Verizon meanwhile, is building up an online advertising business model that maxims it’s knowledge of customers – a micro view, compared to a trend view taken by AT&T. Verizon, based on its 2015 acquisition of AOL, looks to rival Facebook Inc. and Alphabet Inc.’s Google in-web advertisements. For both, executing their strategies face challenges. AT&T on one hand has been hemorrhaging subscribers due to a growing “cord-cutting” trend, thus making its acquisition of DirecTV a tough sell. Verizon on the other hand needs to repair a weakened Yahoo impact on the youth, and seek out means to stir up uptake of OTT content again.
Class B – The second class adopt quasi Class-A strategies but not on a large scale. They rather loo to the Technology market and amass capabilities for a generalist first platform. Service providers who would become mid-ground platforms, or serving platforms that can spin off localization across their markets will fall into this class. Their platforms would include capabilities that allow for others to use “connected technologies” and “connected services” to enable “Internet of Everything”. On their platforms, services for digital Health, digital payment, specific regionalized media etc. will be offered. The core of their business model will be to “carry transactions” that are local to communities they serve, but using global-native platforms to harness the power of cloud and mobile technologies. Class B service providers will see the need to interconnect with the offerings from the Class-A Telco’s because of consumer demand and market pressure. They’re position in the market will be juxtaposed to the market they service or origin from – a case of natural business selection, and one that may so be as a result of their lateness to actually have made the right move at the right time.
Class C – The third strategy route will be service providers who are content at the edge of the urban fringes. They serve a mass market that requires very fundamental of services. Their business will become core to the business of being smart-pipes, and inter-work with both Class A and Class B for any extension of services to enterprises and multinationals. For these types of service providers, they’d look out for specific platforms that serve niche opportunities within their markets – e.g. telemetry, payments, commerce etc. Class A and B service providers will race to interwork with these Class C service providers due to the fact that they have last mile relationships with rural to semi-urban markets. Opportunities to be partnering or swallowed by the Class A’s or B’s will also lead to renegade engagements with pure OTT players. Sometimes, they may seed full control of their network even to either of the two in a bid to become just brand extensions, while relying on thin operating margins and smaller organizations to remain sustainable. They will play almost at the same level we find MVNO’s today, except their assets will determine the extent of reach and appeal to consumer they serve because of the physical presence they hold.
Media houses are under pressure to seek out alternative means to compete with the disruptive content that’s now generating more revenue and disturbing their monetization models. Verizon’s move as well as AT&Ts to become the next age of connected digital media platforms is bold and sustainable if their integration is innovative enough to meet the expectations of consumers. There is also a flipside to all this, that perhaps, and just perhaps soon, we will see OTT’s also become aggressive to acquire Service Providers in selective markets as a means to grow and become leading service brands. It won’t be surprising to see this happen from brands like Uber, Facebook or even Google. The ability for OTT’s to play into infrastructure heavy space as current Telecom service providers is a mixed one though.
Agile & Responsive vs. Size & Capital Assets
Netflix boasts a subscriber base of about 90 million after it expanded internationally. AT&T and Verizon both have 132million and 143million subscribers in the United States alone. With both having extensive telecom infrastructure which is now being supercharged with media platform capability. They could easily become major “disrupters of disrupters” unless we see a radical move by media companies like Netflix also looking to expand their capability to include “hard ownership” of last mile service provider capabilities.
Agility factor is key
AT&T and Verizon both have circa 240,000 and 200,000 employees each. Based on recorded statements Netflix Inc. is currently employing 3100 people. This is at most 1.3% of AT&Ts employees, 88.54% lower than that of the Services sector, and 76.98% lower than that of CATV Systems industry. The Number of Employees for media companies is 70.88% higher than Netflix (Source: Macroaxis.com). This presents a huge opportunity for Netflix by way of being nimble and as well able to manage costs exceedingly better. Its key costs though will come by way of creating the content on its network and in royalty fees, an area that in itself is a challenging space. My thinking is that as AT&T, Verizon and co embark on these wild acquisition programs, integration of new businesses into existing business is either very well thought through or at least meant to drive overall cost of opportunities / innovation to consumers down.
As AT&T consolidates media production capability with its just announced $80+ billion deal with Time Warner, it could possess key attributes of Netflix today along with its Direct TV now offering – this includes the ability to now have its own production chain and further more diversify its content creation as well as begin to improve its media services margins. AT&T triple play offering – U-verse – is currently available in 21 states in the U.S. With the move by AT&T to unbundle U-verse programming into full OTT variations through ownership of some of the programming, it stands the chance to also reach a larger global population as well as its own subscribers, thereby being able to extensive offer B2B media solutions as well as reach ordinary OTT-hungry users.
AT&T already sells a combo package of wireless plus DirecTV satellite TV. The company is preparing to launch DirecTV now to let people stream TV channels using a new business model – flat fee for anything consumed. By owning Time Warner, AT&T hope it would acquire solid sources of content that are relevant to consumers and with a network excite new business models – through new bundles of offerings without a need to extend its primary last mile network. Both types of networks – Cable and Telco – are having sever pressure on revenue, subscribers and margins.
The addition of Time Warner could also give AT&T a big advantage over Verizon as both companies run out of ways to grow wireless. Media, programming and advertising platforms present new ways to grow and yet there are huge challenges in the media industry, as partly seen with Time Warner move to sell. Perhaps also, Telecom Media and Technology under one roof makes sense after all in what is now a new age of content, platform and mesh business models. Verizon’s show of interest in owning both content and the technology that controls digital advertising through purchase of AOL and its purchase of Yahoo show a seismic shift from one cost model to a lighter cost model compared to AT&T, however, while both of those deals have very similar strategies aimed at media, it also shows how the service provider space is becoming re-organized to take advantage of the volatility with rise in technology and disruptive models, and what the future means for consumers.
Structurally, an OTT TV and video business can be run as an integrated part of the current organization or as a standalone company. But for Service Providers that envision a TV and video solution like Verizon, NTT, SK Telecom, China Telecom and AT&T that tightly link their broadband and mobile offerings – integration is key. They will need to keep product development, marketing, and sales for these products in sync — which means understanding and running the business outside and yet from within the existing organizations.
What AT&T’s Randall says about this integration is the need to keep both businesses separate and yet to integrate offers – which supports the case of separate business entities maintained even when it’s the case of an acquisition. Service Providers that have lesser ambitions for TV and video, mostly in the Class C therefore, may also make possible and sustainable the option of playing a multimarket space. Maintaining a separate TV and video unit, with talent, skills, and tools culled from telecommunications Service providers with full global presence, can facilitate knowledge and resource-sharing far more easily than a loose coalition of country-specific organizations (Case of Class A SP’s like AT&T and Verizon).
Consumers are already discovering, and seizing, the advantages of OTT content. They are streamlining their TV bundles — and their TV needs according to their budgets. In the process, they’re gaining more value: paying for the content they want. For service providers, OTT TV and video can bring significant rewards as well, helping them compete in a promising, fast-changing space and grow their broadband business while they’re at it. That’s a path telecommunication service providers are not willing to miss out on – and one that is now becoming prevalent. As the trend continues, secondary businesses of CDNs, Aggregators, Transcoders/decoders etc. and modular/niche technical providers will also emerge and further commoditized the video industry into “lego blocks” of services that can help grow producers, consumers and partners.
What are your classification for service providers in the future? Share your ideas and thoughts with me…
PS. Credit of pictures to their respective sources.