AT&T’s proposed purchase of programming giant Time Warner is perhaps not principally about vertical integration, synergies, bundling, churn reduction, entering the content business or lower programming costs, though all those are factors.
The deal is not principally about creating a new mobile streaming service that creates value, reduces churn and drives new revenue, though those also are potential benefits.
The principal driver is business strategy for any supplier of “dumb pipe” Internet access. In simple terms, the strategy is that any big access provider “has to own at least some of the content it delivers.”
This is not an unfocused “portfolio” strategy (creating a conglomerate), nor an effort to create a walled garden of attractive content. It is an effort to benefit from big content or application revenues that require use of a mobile network for delivery, irrespective of any walled garden or programming cost considerations.
At a high level, the access business is being commoditized. To preserve both gross revenue and profit margin, any big access provider has to create or acquire big new sources of revenue.
The logical thing to do is create or acquire stakes in apps and services that use the dumb pipe, which is to say, any service or app accessed using the Internet.
And that is what is driving AT&T’s proposed acquisition of Time Warner.
Many voices will be raised about whether AT&T’s bid to buy content powerhouse Time Warner should be pursued at all. Some will argue that the deal has little “synergy.” That view often hinges on the notion that the deal would somehow lower AT&T’s programming costs.
That is probably not the issue, as the deal will not actually directly affect what AT&T pays for Time Warner content rights.
Others just think the additional AT&T debt load is unwise, in large part because of the new debt AT&T will have to take on. But that was precisely what was said about the DirecTV deal as well, and at least so far, that is proving to be a positive development.
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.”
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.
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