As a result, operators in Europe are naturally sensitive to any strategic moves from the two American heavyweights, especially with respect to the content industry: what are AT&T and Verizon’s hoping for when investing in content?
Avoid being bypassed by streaming video by moving higher up the value chain, right up to production.
Because video has become the prime source of traffic on both fixed and mobile networks, operators can no longer content themselves with merely distributing other companies’ channels and programmes, especially if those companies decide to take the self-distribution route and comply with net neutrality rules. This strategy is akin to classic vertical integration.
Behind this ultimately defensive strategy, there may also be a more aggressive aim at work: play the OTT card for all it’s worth by freeing themselves from their footprint (and the Capex required to continually expand the number of homes passed) and going after customers on every fixed/mobile Internet access network, i.e. not only customers that rely on their own pipes. Therein lies real diversification since physical connectivity becomes secondary.
Beyond this, we have to keep AT&T and Verizon’s current situation in mind. Both are having to contend with a brutal decrease in growth which had been sustained almost singlehandedly by their mobile business for the past 10 years, while also playing second fiddle to cable in the residential fixed access market. With very few attractive prospects abroad – and up until now (under the Obama administration), antitrust bodies blocking M&A deals that would have allowed them to grow their share of the mobile market at home – while still very powerful, both operators have very good reasons for setting their sights on content as a way to maintain revenue and shareholder dividends. But here is where their paths diverge.
Being deliberately simplistic, one Verizon executive recently explained that AT&T wanted to gain a share of today’s TV market, whereas Verizon was going after the future video market that will be fuelled by millennials… in other words, rather than acquiring very expensive assets that are likely to be rendered obsolete by new video habits, Verizon is opting to slowly build up its expertise in the data economy that will underpin video (notably growing programmatic advertising revenue). What is certain is that the amount that AT&T will spend to acquire DirecTV and (provided they get the nod from the Trump administration) Time Warner is infinitely larger than what Verizon laid out for AOL, the Huffington Post, OnCue, several other start-ups (including Vessel) and probably Yahoo! But it is still too early to say which path is the riskiest.
How does this tie in with net neutrality debates?
The future Trump administration has done nothing to hide its radical opposition to net neutrality, up to and including reclassifying ISPs as common carriers under Title II of the Telecommunications Act. In theory, this is great new for telcos who remain hostile to the regulation put into place by the Obama administration: at the very least they can take it as given that, under the new administration, they will be able to maintain their zero rating policies on content, especially content delivered over wireless networks, such as those included in T-Mobile’s Binge On plan, Verizon’s Go90 and AT&T’s DirecTV Now products.
On these last two points, what could a repeal or relaxation of current net neutrality rules mean?
We can posit that, if net neutrality is done away with altogether, operators are back in the driver’s seat when it comes to being bypassed by streaming services sold by channels and SVOD providers. Will this go so far as to quash any desire to invest in content themselves? Not necessarily, as exclusivity can still be a real drawing card, and useful for standing out from the competition. But the biggest operators that are able to amortise massive spending on rights acquisitions thanks to their tens of millions of subscribers, can also enter the content fray with the prospect of being less heavily challenged by broadcasters and OTT heavyweights.
At the same time, however, doing away with net neutrality may also make playing the OTT card on third party operators’ networks more challenging…
Finally, let us not forget the other possible effects of the new administration in Washington:
- If corporate tax rates are lowered (from 35% to 20%, or even 15%), AT&T and Verizon’s cash flow will be bolstered from 5 to more than 8 billion USD…
- Meanwhile the rigour of antitrust authorities that blocked the AT&T/Sprint and later Sprint/T-Mobile mergers is likely to become far more accommodating, and so open the way for new M&A deals;
- As a result, consolidation could turn the tide on AT&T and Verizon’s shrinking mobile businesses, and make the process of staking out a claim in the content industry a less pressing concern.
So, here at the dawn of 2017, it really does seem like almost anything could happen…