Category Archives: M&A

AT&T Doubles Down on the Ampersand

Note: this blog is published by Jan Dawson, Founder and Chief Analyst at Jackdaw Research. Jackdaw Research provides research, analysis, and consulting on the consumer technology market, and works with some of the largest consumer technology companies in the world. We offer data sets on the US wireless and pay TV markets, analysis of major players in the industry, and custom consulting work ranging from hour-long phone calls to weeks-long projects. For more on Jackdaw Research and its services, please visit our website.

I recently spent a couple of days with AT&T as part of an industry analyst event the company holds each year. It’s usually a good mix of presentations and more interactive sessions which generally leave me with a pretty good sense of how the company is thinking about the world. Today, I’m going to share some thoughts about where the consumer parts of AT&T sit in late 2016, but I’m going to do so with the shadow of a possible Time Warner merger looming over all of this – something I’ll address at the end. From a consumer perspective the two major themes that emerged from the event for me were:

  • AT&T now sees itself as an entertainment company
  • AT&T is doubling down on the ampersand (&).

Let me explain what I mean by both of those.

AT&T as an entertainment company

The word “entertainment” showed up all over the place at the event, and it’s fair to say it’s becoming AT&T’s new consumer identity. From a reporting perspective, the part of AT&T which serves the home is now called the Entertainment Group, for example, and CEO Randall Stephenson said that was no coincidence – it’s the core of the value proposition in the home now. But this doesn’t just apply to the home side of the business – John Stankey, who runs the Entertainment Group, said at one point that “what people do on their mobile devices will be more and more attached to the emotional dynamics of entertainment” too.

That actually jibes pretty closely with something I wrote in my first post on this blog:

There are essentially five pieces to the consumer digital lifestyle, and they’re shown in the diagram below. Two of these are paramount – communications and content. These are the two elements that create emotional experiences for consumers, and around which all their purchases in this space are driven, whether consciously or unconsciously.

What’s fascinating about AT&T and other telecoms companies is that the two things that have defined them throughout most of their histories – connectivity and communications – are taking a back seat to content. People for the most part don’t have emotional connections with their connectivity or their devices – they have them with the other people and with the content their devices and connectivity enable them to engage with. AT&T seems to be betting that being in the position of providing content will create stickier and more meaningful relationships which will be less susceptible to substitution by those offering a better deal. And of course video is at the core of that entertainment experience.

The big question here, of course, is whether this is how consumers want to buy their entertainment – from the same company that provides their connectivity. AT&T is big on the idea that people should be able to consume the content of their choice on the device of their choice wherever they choose. On the face of it, that seems to work against the idea that one company will provide much of that experience, and I honestly think this is the single biggest challenge to AT&T’s vision of the future and of itself as an entertainment company. But this is where the ampersand comes in.

Doubling down on the ampersand

One of the other consistent themes throughout the analyst event was what AT&T describes as “the power of &”. AT&T has actually been running a campaign on the business side around this theme, but it showed up on the consumer side of the house too at the event. Incidentally, I recalled that I’d seen a similar campaign from AT&T before, and eventually dug up this slide from a 2004 presentation given by an earlier incarnation of AT&T.

But even beyond this ad campaign, AT&T is talking up the value of getting this and that, and on the consumer side this has its most concrete instantiation in  what AT&T has done with DirecTV since the merger. This isn’t just about traditional bundling and the discounts that come with it, but about additional benefits you get when you bundle. The two main examples are the availability of unlimited data to those who bundle AT&T and DirecTV, and the zero-rating of data for DirecTV content on AT&T wireless networks. Yes, AT&T argues, you can watch DirecTV content on any device on any network, but when you watch it on the AT&T network it’s free. The specific slogan here was “All your channels on all your devices, data free when you have AT&T”.

The other aspect here is what I call content mobility. What I mean by that is being able to consume the content you have access to anywhere you want. That’s a given at this point for things like Netflix, but still a pretty patchy situation when it comes to pay TV, where rights often vary considerably between your set top box, home viewing on other devices, and out-of-home viewing. The first attempts to solve this problem involved boxes – VCRs and then DVRs for time shifting, and then the Slingbox for place shifting. But the long term solution will be rooted in service structure and business models, not boxes. For example, this content mobility has been a key feature of the negotiations AT&T has been undertaking both as a result of the DirecTV merger and in preparation for its forthcoming DirecTV Now service. It still uses a box – the DirecTV DVR – where necessary as a conduit for out-of-home viewing where it lacks the rights to do so from the cloud, but that’s likely temporary.

AT&T’s acquisition of DirecTV was an enabler of both of these things – offering zero rating as a benefit of a national wireless-TV bundle, and the negotiating leverage that comes from scale. It also, of course, gained access to significantly lower TV delivery costs relative to U-verse.

Now, the big question is whether consumers will find any of this compelling enough to make a big difference. I’m inherently skeptical of zero rating content as a differentiator for a wireless operator – even if you leave aside the net neutrality concerns some people have about it, it feels a bit thin. What actually becomes interesting, though, is how this allows DirecTV to compete against other video providers – in a scenario where every pay TV provider basically offers all the same channels, this kind of differentiation could be more meaningful on that side of the equation. If all the services offer basically the same content, but DirecTV’s service allows you to watch that content without incurring data charges on your mobile device, that could make a difference.

Context for AT&T&TW

So let’s now look at all of this as context for a possible AT&T-Time Warner merger (which as I’m finishing this on Saturday afternoon is looking like a done deal that will be announced within hours). One of the slides used at the event is illustrative here – this is AT&T’s take on industry dynamics in the TV space:

ATT TV industry view

Now focus in on the right side of the slide, which talks about the TV value chain compressing:

ATT TV compression

The point of this illustration was to say that the TV value chain is compressing, with distributors and content owners each moving into each other’s territory. (Ignore the logos at the top, at least two of which seem oddly out of place). The discussion around this slide went as follows (I’m paraphrasing based on my notes):

Earlier, there were discrete players in different parts of the value chain. That game has changed dramatically now – those heavy in production are thinking about their long-term play in distribution. Those who distribute are thinking about going back up the value chain and securing ownership rights. Premium content continues to play a role in how people consume network capacity. Scale and a buying position in premium content is therefore essential.

In addition, AT&T executives at the event talked about the fact that the margins available on both the content and distribution side would begin to collapse for those only participating on one side as players increasingly play across both.

The rationale for a merger

I think a merger with Time Warner would be driven by three things:

  • A desire to avoid being squeezed in the way just described as other players increasingly try to own a position in both content ownership and distribution – in other words, be one of those players, not one of their victims
  • A furthering of the & strategy – by owning content, AT&T can offer unique access to at least some of that content through its owned channels, including DirecTV and on the AT&T networks. This is analogous to the existing DirecTV AT&T integration strategy described above
  • Negotiating leverage with other content providers and service providers.

Both the second and third of these points would also support the content mobility strategy I described earlier, providing both leverage with content owners and potentially unique rights to owned content.

How would AT&T offer unique content? I don’t think it would shut off access to competitors, but I could see several possible alternatives:

  • Preserving true content mobility for owned channels – only owned channels get all rights for viewing Time Warner content on any device anywhere. Everyone else gets secondary rights
  • Exclusive windows for content – owned channels like DirecTV and potentially AT&T wireless would get early VOD or other access to content, for example immediate VOD viewing for shows which don’t show up for 24 hours, 7 days etc on other services
  • Exclusive content – whole existing shows and TV channels wouldn’t go exclusive, but I could see exclusive clips and potentially new shows go exclusive to DirecTV and AT&T.

The big downside with all this is that whatever benefits AT&T offers to its own customers, by definition it would be denying those benefits to non-customers. That might be a selling point for DirecTV and AT&T services, but wouldn’t do much for Time Warner’s content. The trends here are inevitable, with true content mobility the obvious end goal for all content services – it’s really just a matter of time. To the extent that AT&T is seen to be standing in the way of that for non-customers, that could backfire in a big way.

On balance, I’m not a fan of the deal – I’ve outlined what I see as the potential rationale here, but I think the downsides far outweigh the upsides. Not least because the flaws in Time Warner’s earlier mega-merger apply here too – since you can never own all content, but just a small slice, your leverage is always limited. What people want is all the relevant content, not just what you’re incentivized to offer on special terms because of your ownership structure. I’ll wait and see how AT&T explains the deal to see if the official rationale makes any more sense, but I suspect it won’t change much.

The Problem With a Twitter Acquisition

As I’ve said before, I’m both a heavy user of Twitter and a critic of the way it’s currently being run. The lack of growth and the slow pace of change to the product are closely intertwined, and neither is good for Twitter in the long run. (See here for all my past writing on Twitter.)

Because of the slow growth and diminishing expectations of Twitter’s eventual size as a business, the share price is tanking, and that’s raising the prospect of an acquisition (recently, of course, the very prospect of an acquisition has been fueling a rise in the stock price).

Recode had a nice piece a while back breaking down the potential acquirers and arguing for and against each of them, with Kara Swisher and Kurt Wagner taking it in turns to present the pros and cons of each. My summary of that piece was as follows:

There’s a fundamental problem with all the potential acquirers, and that’s that none of them seem likely to do anything meaningful to solve the product problem. Among the potential acquirers are several companies who could create substantial synergies with their own existing ad businesses, including Google and Verizon. Others could do interesting things with the data. But none of them have the kind of track record in consumer social products that gives me any kind of reassurance that they would do better in evolving Twitter as a product than the current management. Let’s review:

  • Google – famously inept at creating successful social products, more likely to acquire Twitter with the intent of finally fixing its own social challenges than to add meaningfully to Twitter’s abilities in this area. Decent ad synergies though.
  • Salesforce – literally no experience in consumer-facing products. Yes, it recently acquired Quip and with it founder Bret Taylor, but one executive isn’t enough. Again, some interesting synergies in other areas, but zero on the end user product side.
  • Verizon – another play for ad synergies, when taken together with AOL and Yahoo (assuming the latter goes through now that the hack has been exposed). But Verizon has no history with successful web or social products (and see Go90 for a recent example of a non-telecom product…).
  • Facebook is probably the only example among those frequently cited that obviously does get social, but it seems so much more likely to be successful in aping Twitter’s features than as an acquirer, not least because of possible regulatory barriers, that this just seems plain unlikely.
  • Microsoft and Apple also seem unlikely. The former has done some interesting things with small app acquisitions lately in the productivity space, but not in true consumer apps, and again has no social chops at all. The argument for an Apple acquisition also seems thin, while it vies with Google for the title of least socially adept consumer technology company.
  • Private equity buyers would have the advantage of doing the turnaround work in private without having to report to public shareholders quarterly. But that only makes me worry that there would be even less urgency about the product changes that need to take place.

In short, the prospects for an acquisition that would actually help solve the fundamental product problems seem very poor indeed. Add to that the inevitable turmoil and further delays in execution caused by the acquisition process itself, and I’m still more hopeful that Twitter will finally get its act together as an independent entity rather than be acquired. It’s just too hard to see things getting better rather than worse under an acquisition scenario.

Cord Cutting Continues to Accelerate in Q2 2016

One of the data sets I maintain is a database on the major cable, satellite, and telecoms operators in the US and their pay TV, broadband, and voice subscribers. As such, each quarter, I dig through those numbers and churn out a bunch of charts on how those markets are performing, and one of the posts I do each quarter is a cord-cutting update. Here’s the update for Q2 2016.

TL;DR: Cord-Cutting Continues to Accelerate

This is going to be a longish post, in which I’ll dive into lots of the detail around what’s really happening in the US pay TV market. But the headline here is that cord-cutting continues to accelerate, a trend that’s been fairly consistent for quite some time.

Here’s the money chart, which shows the year on year growth or decline in pay TV subscribers across all the publicly traded players I track:

Q2 2016 Cord Cutting 560px All Public Players

As you can see, the trend is very clear, with a consistent pattern from mid 2014 onwards of worse declines each quarter (except Q4 2015), culminating in this a loss of around 834,000 pay TV subscribers at the end of Q2 2016 compared with the end of Q2 2015. As discussed in more detail below, these numbers include the positive growth Dish has seen from its Sling TV product, which has added around 800,000 subscribers over the past year or so. Without those subs, the picture looks even worse.

Read on for more in-depth analysis of these numbers and the trends behind them. Reporters who would like further comment or anyone who would like to know more about our data offerings can reach Jan Dawson at jan (at) or (408) 744-6244.

Avoiding false trends with a proper methodology

I’ve lost track of how many headlines I’ve seen over the last couple of years which posit that cord cutting is somehow slowing down off the back of a small number of providers’ quarterly results. This poor analysis is usually based on several key mistakes:

  • Focusing on quarterly net adds rather than annual changes – this is problematic because the pay TV industry is inherently very cyclical, historically doing much better in the fourth and first quarters of the year, and doing worse in the late spring and summer months, reported as part of Q2 and Q3. You have to compare the same quarter in subsequent years to see the real trends.
  • Focusing on one or two big players, instead of the whole market. One of the key trends that’s emerged in recent quarters is that the larger and smaller players are seeing quite different trends, so fixating on the large players alone is misleading.
  • Focusing on one set of players, such as the cable companies. Though “cable TV” is often used as a synonym for pay TV in the US, it’s not a useful one when it comes to doing this kind of analysis. Cable, satellite, and telecoms players are seeing divergent trends when it comes to pay TV growth, and you have to look at all sets of players to get the full picture.

On that basis, then, I focus on year-on-year change in subs, and try to cast the net as wide as possible when it comes to players. My analysis includes all the major publicly traded cable, satellite, and telecoms (CST) providers in the US, of which there are now 17 in my data set, ranging from AT&T/DirecTV at over 25 million subs to Consolidated Communications, with just 112,000. The only major player now missing from this analysis (following the acquisition of Bright House by Charter) is Cox, which has around four million subscribers. In some of the charts below, you’ll see estimates for Cox included.

Trends by player type

So let’s stark to break down that chart I showed at the beginning, to see what’s happening behind the scenes. First off, here’s a chart that shows the year on year subscriber growth trends by player type: cable, satellite, and telecoms:

Q2 2016 Cord Cutting 560px by player type

This chart illustrates perfectly why focusing on just cable operators is utterly misleading – they’ve actually been having a better time of things over the past two years, but largely at the expense of the major telcos, who have seen plunging growth during the same period.

A tale of two groups of cable companies

It gets even more interesting when you break cable down into two groups, large and small companies:

Q2 2016 Cord Cutting 560px large and small cable

As you can see, what’s really been happening is that the four largest publicly traded cable companies have been doing much better over the last two years, while the smaller ones have if anything been doing worse. A large chunk of that improvement by the large companies comes from Time Warner Cable’s impressive turnaround during 2014 and 2015:

Q2 2016 Cord Cutting 560px cable by company

However, Comcast has also had a meaningful improvement over that same period, moving from 200k net losses year on year to positive net adds in the last two quarters. Legacy Charter has also had a slight improvement, while Cablevision has been largely static.

AT&T and Verizon have shifted focus elsewhere

The rest of the market is dominated by two large satellite companies and two large telcos, but the story here is really about the shift in focus away from TV by the telecoms guys. In AT&T’s case, it’s about a shift towards satellite-delivered TV, while in Verizon’s case it’s about slimming down its wireline operations and shifting focus from TV to broadband.

The transformation at AT&T over the last two years has been dramatic. Since the announcement of its plans to acquire DirecTV in May 2014, AT&T has seen plunging net adds in its U-verse TV business, while post-acquisition net adds at DirecTV have been skyrocketing:

Q2 2016 Cord Cutting 560px ATT DirecTV

This is part of a conscious strategy at AT&T to shift its TV focus to the platform with better economics, in addition to its cross-selling and bundling of DirecTV and AT&T wireless services. The net impact is still a loss of subscribers across its TV business as a whole – around 250k fewer subs at the end of Q2 2016 than Q2 2015 – but the economics of the subscribers it’s keeping are way better than for the subs it’s losing.

Dish is suffering, despite Sling TV

The other major satellite provider, Dish, is seeing worsening rather than improving trends, despite its ownership of over-the-top TV service Sling TV. It reports Sling TV subscribers as part of its overall pay TV numbers, through they’re markedly different in many of their characteristics, but even so it’s seen subscriber losses increase dramatically this quarter. The chart below shows Dish’s reported subscriber losses in blue, and adds estimated Sling TV subscriber growth in dark gray to show what’s really happening to traditional pay TV subs at Dish:

Q2 2016 Cord cutting 560px Dish and Sling

As you can see, the year on year change in traditional pay TV subs at Dish looks a lot worse when you strip out the Sling subscriber growth. The company lost almost a million pay TV subs on this basis over the past year, a number that appears to be rapidly accelerating.

Of course, we’re also including Sling subscribers in our overall industry numbers, so it’s worth looking at how industry growth numbers look when we strip out the same Sling subscribers from the overall pay TV numbers (with the Sling reduction this time shown in red):

Q2 2016 Cord Cutting 560px pay TV plus Sling

As you can see, the picture here worsens quite a bit too, going from a roughly 800k loss to a 1400k loss over the past year. The trend over time is also even more noticeable and dramatic.

Broadband may be the salvation for some

We’ve focused this analysis on pay TV exclusively, but many of these players also provide broadband services, and these services have grown to the point where they now rival the total installed base for pay TV. Indeed, a number of the larger cable operators now have more broadband subscribers than pay TV subscribers. This is another area where the larger cable operators are outperforming their smaller counterparts, as shown in the chart below:

Q2 2016 Cord Cutting 560px broadband and TV

Besides those smaller cable operators, the other company that will fare worst from cord cutting is Dish, which we’ve already discussed. Though it has a few hundred thousand broadband subscribers, it’s not remotely competitive in this space on a national basis, and as TV subscribership continues to fall, it will struggle to make up the difference in other areas, increasing pressure for a merger or acquisition that will allow it to tap into the broadband market. DirecTV, of course, now has the AT&T U-verse and wireless bases to bundle with.

Recent M&A leaves six large groups in control

Lastly, I want to touch on the recent merger and acquisition activity. We’ve already mentioned AT&T and DirecTV, but there have also been two other bits of consolidation: the creation of the new Charter from the combination of Charter, Time Warner Cable, and Bright House; and the acquisition of Cablevision and Suddenlink by French company Altice. It’s interesting to consider the scale of the groups formed by these various mergers in the context of the rest of the industry – these are now the six largest publicly-traded groups in the US pay TV market:

Q2 2016 Cord Cutting 560px Biggest groups

AT&T comes out on top, bolstered enormously by the DirecTV acquisition, while Comcast remains close behind despite not having been involved in the recent mergers (despite its best efforts). The new Charter comes in third, Dish in fourth, and then Verizon and Altice are way behind with a very similar number of subscribers a little under 5 million. After that, in turn, the companies get much smaller, with Frontier next at 1.6 million pay TV subs (including over a million recently acquired from Verizon), with no other publicly traded companies with over a million subs. And of course privately-held Cox is again excluded here, but would come in around the same size as Verizon and Altice.

This is a market increasingly dominated by large players, and that’s a trend that’s likely to continue, with Altice publicly suggesting that it intends to roll up more of the smaller assets. The four largest groups already own 78 million of the roughly 91 million owned by the publicly traded companies we’re tracking here, and the six large groups have 87 million between them. The rest of the market is becoming less and less relevant all the time, and as we’ve already seen has been suffering worse from cord cutting too.

Thoughts on the new AT&T

AT&T this morning held a conference for financial analysts in Dallas, at which it outlined both its strategy and its financial guidance following the closing of the acquisition of DirecTV a few weeks ago. The event was live-streamed, and the slides from the various presentations are available to download from this page (where I assume a replay of the conference will be available shortly too). In this piece, I’ll share my thoughts in some depth about some of the key announcements, and briefly hit a few highlights on some other items towards the end, before wrapping up with my conclusions on the prospects for the new AT&T.

Note: for broader context on the TV business that’s central to much of what’s below, see my post yesterday on cord cutting, which provides subscriber growth trends for the largest US pay TV providers.

Putting the new AT&T in context

Firstly, I think it’s useful to put the new AT&T in context, among the other large players it competes against. Here is the combined subscriber count for AT&T in the various retail categories it competes in (note that I’ve used retail wireless subscribers, which excludes connected cars, MVNO subscribers and other categories where AT&T isn’t selling directly to end users):ATT subscriber countsAs you can see, this is a formidable company at this point, with large numbers of subscribers across these different categories, with wireless by far the largest base. Verizon is the largest carrier by retail subscribers, with around 110 million, putting AT&T second, and far ahead of T-Mobile and Sprint. But in pay TV, AT&T is now the leader in both the US and the world, a dramatic change from its former position (note that “New Charter” represents the combined subscribers of Charter, Time Warner Cable, and Bright House following their merger, if successful):Pay TV subs post mergersThis combined scale, at almost five times AT&T’s previous standalone scale, is one of the two key benefits from the merger, and is something I’ll come back to below.

Cost synergies are significant, especially around content

The true definition of synergy is when two things come together and are greater than the sum of their parts, whereas the term is often used to mean cost savings that result when two things come together (indeed, AT&T talked up $2.5 billion of run-rate synergies from this deal, and that was entirely about cost synergies). However, AT&T also talked about the positive synergies that would come from putting these two businesses together, and they gave us some very interesting specifics around these.

On the cost synergy side, there are two major categories – content and operations. The content savings will come largely from the fact that AT&T can now leverage that combined scale in content buying – John Stephens (AT&T’s CFO) said during the conference that AT&T’s U-verse customers cost $17 per sub per month more for TV content than DirecTV’s customers. That obviously presents huge opportunities for reducing spend on content over time, and those savings make up a good chunk of the overall synergies. The other big chunk comes largely from consolidating operations across the two companies, getting to a single installation model and so on.

Revenue synergies could be far greater

However, to my mind the revenue synergies are much more interesting, and we got some interesting detail there too. AT&T broke out some of the cross-selling and up-selling opportunities as follows:

  • Of the 57 million households AT&T passes with its broadband service today, only 13 million have U-verse, and only about half could receive U-verse TV, whereas all 57 million could be sold TV now as part of a bundle from AT&T
  • 15 million households have DirecTV but aren’t AT&T Mobility subscribers, and so could be sold mobile services from AT&T
  • 21 million AT&T Mobility subscribers don’t take TV from either DirecTV or AT&T today, and so could be sold TV services
  • 3 million households in AT&T’s landline footprint have DirecTV but not AT&T broadband.

I’m actually somewhat skeptical of the benefits of a double play that simply combines TV and wireless, because it’s missing the broadband piece. As such, the two middle bullets there seem less compelling to me than the other two, which both involve a more traditional (and likely more appealing) bundle of TV and broadband. Landline/wireless bundles have never been popular, in part because they tend to offer small cost savings and little integration and in part because they make for very high monthly bills that many consumers would rather take in two chunks. In addition, the value proposition of a bundle that offers everything but broadband is not that appealing when customers still have to go to the local cable company for broadband, and are likely to pay more for it on a standalone basis than as part of a bundle. The reality is that the broadband/TV bundle is the one most people want to buy, and AT&T has good opportunities to cross sell these two products, and that’s the most interesting part of this to me.

Hints at new products and services

One of the most intriguing things to me was several hints from executives that new products, services, or ways of delivering existing services would be coming at some point in the future. Some of the things that were hinted at included:

  • Going over the top with a video service. There were several references to providing video over both managed and unmanaged networks, and the context was such that this didn’t seem to just be talking about TV Everywhere-type extensions to classic services. I’m very curious to see if this means we’re going to see either DirecTV or U-verse branded video services being sold to subscribers that can’t or don’t want to buy the traditional services from either company.
  • Providing optimized video services for AT&T Mobility customers. The implication here – especially given a comment about being in compliance with merger conditions – was that AT&T might offer its mobile subscribers some special access to U-Verse or DirecTV content, or possibly use the Sponsored Data model AT&T already has in place to provide zero-rated access to this content.
  • New business models for TV Everywhere authentication and sharing. There were lots of references to millennials using their parents’ pay TV login details to watch linear TV without their own subscriptions, and the opportunities to use the Mobile Share model to deal with this. That, to me, implied some sort of model under which TV subscribers would pay on some sort of per-device basis for additional streams, such that AT&T would monetize this sharing of credentials. I wouldn’t be surprised if we see more of this kind of thing from pay TV players and content owners going forward. However, TV Everywhere solutions already have a poor reputation for usability, and AT&T made portability of content a huge selling point today, so I’d expect them to tread carefully with this.

A realistic view of trends in TV

One of the things that was most refreshing about the AT&T executives’ comments during the morning was that they seem very much on top of the actual trends in the industry and not afraid of articulating them, even those that don’t necessarily bode well for traditional players. The excerpt below is from my on-the-fly notes (no transcript is available yet) based on John Stankey’s remarks on trends in the TV industry:

Pure play standalone offerings increasingly challenged. OTT will continue to grow and mature as a distribution alternative to managed networks. % of cord cutters, shavers and nevers will continue to grow. Premium content will migrate to OTT and skinny bundles. As these things occur, traditional TV advertising moves to other forms, pressuring content providers especially those with smaller audiences and less compelling content.

That seems to me both a decent summary of the trends and threats facing the traditional TV industry and a frank assessment of the implications. It’s good to see that AT&T isn’t in denial about all this (in contrast to some recent remarks from other players in the industry) and that it’s factored these trends into its projections for the combined business. In the Q&A at the end of the day, Randall Stephenson dealt with some questions on this and basically said that yes, pay TV was going to decline, but slowly, and that AT&T thought it could both grow fast enough to offset that market decline, and adapt its offerings so as to achieve similar profits off smaller TV bundles if necessary. That’s easier said than done, but given the details above about cross-selling and up-selling, it doesn’t seem too far-fetched, at least for the time being.

Two other quick notes

I don’t want to go into too much detail on this stuff, but a couple of other things were worth noting:

  • AT&T’s new advertising platform and products. AT&T has now combined its old AdWorks unit with the DirecTV advertising platform, and can offer both the scale of DirecTV and the local targeting capabilities of U-verse (and will use LTE where necessary to provide targeted advertising to DirecTV subscribers). It’s interesting to see both AT&T and Verizon investing in cross-platform advertising, albeit in very different ways (Verizon through its AOL acquisition).
  • John Donovan’s segment on AT&T’s technology platforms. John Donovan has been one of the best additions to the AT&T executive ranks over the last few years – he’s presided over a major overhaul of AT&T’s technology operations over the last few years, and that transformation is still going. During the conference, he talked through how AT&T is trying to match and then compound the benefits of Moore’s Law as it seeks cost efficiencies in network performance – it’s well worth a watch.

The new AT&T’s prospects

There’s so much more to talk about, and I haven’t even touched on AT&T’s Latin American strategy. But I just wanted to take a step back and summarize my view on AT&T as a company. I’ve said previously that when it comes to the mobile business, AT&T is the company most focused on what’s next. It began investing in connected cars, home automation, and a variety of other businesses years ago and is now reaping the benefits of its early start, capturing a significant share in connected cars in particular and driving significant net adds through that business. Even as the traditional phone business is saturating, AT&T is tapping into new growth areas better than its competitors, and that’s been important as its own traditional growth has slowed.

Today’s event, though, highlighted the fact that AT&T is still perfectly willing to compete in traditional areas too – the pay TV business in the US, and traditional phone services in high-growth markets like Mexico. Of course, that means exposing itself to some of those negative trends in TV, and Mexico is arguably just a few years behind the US and will eventually hit the same sort of saturation that the US has. However, in the US, its focus in the consumer market is going to be about putting together the different components of its offering in new and different ways. I expressed skepticism above about double play wireless-TV bundles, but I’m much more bullish about AT&T expanding its share of broadband-TV bundles in the AT&T footprint, especially as that footprint expands. At the same time, AT&T’s evolving technology foundation should give it the infrastructure it needs to pursue these opportunities with increasing cost efficiencies, while improving the end user experience. And on the business side, it’s continuing to build what’s arguably the strongest set of global assets for pursuing enterprise customers.

That’s a heck of a lot of moving parts, and there’s plenty of places for things to go wrong, but I’d argue that AT&T is easily the best positioned of the US carriers given its combination of assets and its strategy, and if it can execute well it should have a really good few years ahead of it.

Making sense of Google’s Alphabet move

This afternoon, Google announced a restructuring of its business which will eventually see the current core Google business sit as a subsidiary within a new parent company called Alphabet. Google’s blog post about the move is here, and the SEC filing with some additional details and legalese is here.

Berkshire Hathaway remarks in context

This move finally puts the comments Larry Page made recently about Berkshire Hathaway in context – I wrote about those remarks previously here. As a reminder, Page had said to some shareholders that he saw Berkshire Hathaway as a model for Google to emulate, and in that piece I wrote about all the ways Google isn’t like Berkshire Hathaway, and why that model would be wrong for Google, and yet here we are facing the prospect of a conglomerate called Alphabet owning Google and a variety of other unconnected businesses.

The reasons for the move

There are two ways to explain this move. The first can be described as personal: Larry and Sergey have quite clearly been increasingly uninspired by merely running a search engine and advertising business, and this finally aligns their job titles with what they actually want to spend their time doing. It also gives Sundar Pichai a well-deserved promotion and presumably prevents him from leaving for a CEO job somewhere else. However, it would be an irresponsible thing to do to restructure a company as huge as Google simply to give three individuals the jobs they want.

Hence, we have to look at financial reasons, and I think there are a couple of them here. Firstly, this is kind of like Amazon’s recent AWS move in reverse. When Amazon broke out AWS in its financial reporting recently, it took a small but rapidly growing part of the business that was buried in the overall financials and allowed it to shine in its own right, rather eclipsing the core business in the process. Google has to some extent the opposite problem: its core business is massively profitable, but it has a growing number of non-core businesses which are masking its true performance. By breaking out the core Google business and the rest in its financial reporting, Google allows the core business to shine (I’d expect that core business to have better profitability and potentially growth numbers than Google as a company reports currently). By contrast, it will finally become clear quite how large and unprofitable all the non-core initiatives at Google are, which might well increase pressure from shareholders to exit some of those businesses. I suspect that the positive reaction in the stock market to today’s announcement is a sign that Larry Page and others have signaled to major shareholders that something like this would be happening.

The other financial reason is that separating subsidiaries in this way loosens the organizational structure and allows much easier addition and subtraction of those entities – in other words, acquisitions and spinoffs. Until now, any large acquisition contemplated by Google had to be absorbed by the core business or awkwardly separated out as Motorola was during its brief time at Google. Neither is ideal, but allowing acquisitions to sit in an “Other” bucket at Alphabet corporate level while leaving Google intact and separate might be a more attractive way of managing acquisitions going forward. At the same time, any subsidiary that either becomes so successful that it’s worth spinning off as its own company or comes to be seen as non-core is much more easily disposed of because it’s already operating somewhat independently.

A conglomerate needs an investment strategy

As I mentioned in that earlier piece, one of the biggest problems with seeing Google as a conglomerate is that it doesn’t share one of the key characteristics of other conglomerates: its subsidiaries are able to operate independently. Yes, it’s clear that Larry Page wants Google’s various subsidiaries to be operationally independent, with their own CEOs making decisions about their businesses, but it’s also clear that in the vast majority of cases they won’t be able to financially independent. In other words, those CEOs who are supposed to be independent will be going cap-in-hand to Alphabet management every quarter asking for more money to fund their operations.

But to my mind the bigger issue is that, as Google shifts from being a single company to a conglomerate, a mission statement such as organizing the world’s information needs to be replaced by an investment strategy, and it also needs an investment manager. One of the defining characteristics of Berkshire Hathaway is that it’s very transparent about the principles on which it’s managed (see the Owner’s Manual written by Buffett in 1999). Its management is both highly skilled in making investments but also highly focused on achieving specific financial goals with those investments. By contrast, it’s not clear that Larry Page or any of the other senior managers at Google has this skillset, or that there’s any investment strategy here other than doing things that Larry and Sergey find personally interesting or “important and meaningful” (to borrow the phrase they use in the blog post). That’s a poor guide to an investor as to how to think about the company and its financial performance going forward. The restructuring won’t happen until later this year, but one of the things that Google’s management will have to do between now and then is explain what their investment strategy is.

A quick note on transparency

I’ve seen some people suggesting that Google will provide more reporting transparency as a result of this move. That’s true, but only insofar as Google will now report the part of the company that’s still called Google as a separate entity from the rest. As Mark Bergen reports at Recode, only Alphabet and Google will report their results – the rest will presumably just be in a big pile called “Other”. I’d assume that the Google segment will continue to break out the Google Websites, Network, and Other buckets as at present, but anyone hoping for more data on the performance of Android, YouTube, or other bits of that Google business will likely be disappointed. It’s going to continue to be as opaque as it always has been, I suspect.

DISH T-Mobile makes sense except for broadband

The rumors of a DISH-T-Mobile combination make a lot of sense. This is the comment I sent to several reporters last night:

This deal makes perfect sense. Given the increasing consolidation in the market, T-Mobile and DISH were in danger of becoming the lone single-service providers left in the market, with everyone else combining TV, broadband, and wireless. T-Mobile has a growing subscriber base and network but not enough spectrum, while DISH has lots of spectrum and no network, so their assets are very complementary. This merger would also go some way to overcoming some of T-Mobile’s lack of scale compared to its larger competitors, AT&T and Verizon.

Ina Fried had a more colorful formulation of the same basic idea in her piece over at Recode:

A deal between Dish and T-Mobile is akin to two people who hook up because they are the last ones left in the bar at closing time.

I think there’s a lot of logic to the deal, and it also fits with something John Legere said on T-Mobile’s Q1 earnings call about the synergies between wireless and pay TV:

I have always said on consolidation, it’s not a matter of if it’s when and how and now I’m going to add and who, because I think as we think ahead you need to think I still reiterate that in five years we will think it comical that we thought about the industry structure as the four major wireless carriers and as I said before and as Mike says many times as content and entertainment and social are moving to the internet and the internet is moving mobile, these industries, the adjacent industries are in the same game that we’re in. So whether it’s what you see Google doing. What you see the social media companies is doing or as you start to see cable players trying to move content Wi-Fi integration with mobile network et cetera, these are individual customers that are looking at both offer sets. So I think you need to think about the cable industry and players like us as not competitors but potential partners and alternatives for each other in the future.

So I think once you broaden the definition of things and I think in my mind the fixed wire and home broadband industry is the one that was of a concern there, but when you start to broaden the definition as I said of content and entertainment and video going to customers on fixed and mobile devices together and you start thinking of that industry is a far more broad set of potential partnerships integrations and mergers that the United States could be looking at and in that case I think you will see consolidation of a much broader set.

I’ve been somewhat skeptical of T-Mobile’s Un-Carrier moves, as I’ve written about quite a bit here in the past, but there’s no denying it’s disrupted the industry and created some useful innovation for consumers. Now imagine that same attitude applied to the pay TV market, and things could get really interesting.

Broadband is the elephant in the room

However, I think the elephant in the room here is broadband. Yes, T-Mobile’s LTE network is growing all the time, but wireless networks simply aren’t an efficient way to deliver broadband to the home, especially if users are expecting to be able to stream video services at increasingly high quality. Even with the combined spectrum of the two companies, there’s no way they can provide the 100-200GB of monthly bandwidth many consumers are going to be consuming. So, T-Mobile and DISH together can provide a useful bundle of mobile voice and broadband together with pay TV, but if consumers want to use Sling TV or any other over-the-top video services, that combination isn’t going to cut it, and neither mobile nor satellite broadband technology is going to solve that problem any time soon. So that’s my biggest question about the merger. I’m curious to see how the companies plan to address this if they end up announcing something.

Importantly, AT&T-DirecTV faces to some extent the same problem, but AT&T does have broadband in a significant part of the US, so this is a regional, rather than national problem. So it’s not quite the same.

Why Verizon’s AOL deal makes sense

Note: I’ve added an addendum at the bottom of this post about the content angle specifically.

Verizon buying AOL isn’t a complete surprise – there were rumors of a deal back in January, but now they’ve been confirmed. But it also makes good strategic sense for Verizon as part of a broader strategy that’s been emerging for some time now.

Verizon’s traditional business

Verizon, of course, has its roots in a very different business – landline and wireless telecommunications services. Those make up the vast majority of its revenues today, and its landline business has been going through an interesting transition recently (as I outlined in an earlier post), and in the landline business this means shifting the base from old copper lines to fiber. To be clear, there’s growth left in this business, but it’s highly dependent on the combined value proposition of broadband and pay TV.

A shift in TV viewing requires a hedging strategy

However, the writing is increasingly on the wall for traditional pay TV – disruption is coming, and this quarter marked the first time in recent memory that the major pay TV providers actually saw a decline year on year in TV subscribers:Screenshot 2015-05-11 12.31.47

Verizon recognizes this, and in a previous post I wrote a little about Verizon’s response to this threat to the pay TV business. That response takes the form of a hedging strategy, which allows it to take advantage of the video business even if the traditional pay TV side begins to suffer. I outlined in that post a three-part strategy here (quoting now from that earlier piece):

  • Sell classic pay-TV services to as many of the 15 million households where FiOS is available as possible. It’s only sold about a third of those so far, and the number is creeping up pretty slowly, so though there’s growth left, it’s not going to be huge. Competition from cable and satellite remains fierce, so there’s incremental growth here at best. Verizon will continue to evolve the offering here to make more and more content available on more and more screens, but this will be largely a competitive differentiator rather than a source of significant revenue growth.
  • Sell a range of wholesale content delivery and related services to third-party content providers like HBO. This is unbounded by the FiOS footprint or even Verizon’s overall broadband footprint, so it could grow significantly from where it is today, though it will always be a much smaller market than consumer video services.
  • Sell over-the-top video services to consumers independently of the FiOS offering. This is exemplified by Redbox Instant today, but could well expand into something more. Verizon already has great relationships with all the major content providers through FiOS, and through broader licensing agreements could easily create a sort of unbundled FiOS TV offering to be sold nationwide.

Where AOL fits

AOL fits firmly in the third pillar of this strategy, but also broadens it in several ways:

  • It takes the over-the-top content strategy beyond video into news and other forms of content, including Huffington Post, TechCrunch, and so on (it remains to be seen how AOL’s news-focused employees respond to the acquisition, especially given the strong negative reaction to Verizon’s own “news” site a few months back)
  • It takes Verizon beyond subscription content and heavily into the advertising sphere, which both provides a more varied set of revenue streams around content but also offers opportunities to provide converged advertising campaigns, retargeting and other attractive elements of a multi-screen advertising platform. It’ll take time to build these linkages, but in time they could be quite powerful for advertisers (see the Cablevision ESPN deal this reported this week).
  • It takes these content services beyond the Verizon brand – though Verizon has a national brand, it’s not associated directly with quality content, and though it owns FiOS and therefore a video service, it’s not national. It also doesn’t have a position yet in shorter-form video content. AOL extends it into some of these new areas, and using a different brand that may be more familiar to some potential customers.

The AOL brand

Now, the AOL brand is in some people’s minds forever going to be associated with yesterday’s technologies (my wife’s first reaction to hearing about the deal this morning was “what does AOL do anymore? I just think of “You’ve Got Mail”). But the reality is that AOL remains one of the top online brands in the US in particular, and one of only a handful of companies that reaches over half the US online population with its content each month. AOL, both through its own brand and through powerful sub-brands such as Huffington Post and TechCrunch, is a much more powerful content player than Verizon on a national and especially international basis than Verizon. Yes, there’s some baggage that comes with that, but for the most part the AOL brand family is a great boost for Verizon.

Risks and uncertainties

Despite the strategic sense behind the deal, there are of course risks and uncertainties. There will undoubtedly be a strong culture clash between the two companies – Verizon’s an enormously conservative company in many ways, and although there are pockets of startup mentality, it’s far from the norm across the company. And it’s an absolutely enormous company, much closer in size to AOL Time Warner in its heyday than AOL today. It will be easy for AOL and its culture to be lost or squashed in the course of the acquisition. And although there are lots of synergies (including those described above) on paper, the devil is in the details and it will take a lot of work to identify how these pieces really come together in practice to provide value for the combined company, its customers, its advertisers, and its shareholders. However, on balance I think it’s a good thing that Verizon is willing to take risks as it seeks to navigate uncertain waters in the TV and video space, and this is certainly a much bigger bet than its peer AT&T’s joint venture with Chernin around Otter Media. That, of course, could end up being brilliant or very costly.

Addendum: not just an ad tech play

I’m seeing a lot of people assuming that this deal is entirely about advertising and/or ad tech, and that the content side is either incidental or will be sold off down the line somewhere. However, I’m not as convinced about that, or that the content business at AOL looks the same under Verizon ownership as it did on a standalone basis. Here’s why:

  • Verizon is building up to the launch of an over-the-top mobile first subscription video service in the summer. Huffington Post content in particular seems like a great fit in such a service (it may well have been one of the content partners even without an acquisition). With over a hundred million of its own wireless subscribers to market such a service to, Verizon has a great new shopfront for some of the AOL content
  • Verizon also provides FiOS within its landline footprint, and some of AOL’s video content could be a great fit there too, as part of traditional bundles, as part of Custom TV (should it survive legal challenges), or in some other form.
  • Verizon’s insight into its own users and the 70% of Internet traffic that traverses its network at some point could also allow it to add a very important targeting layer to AOL’s advertising around its own content – the challenge for all online advertisers is how to extend their reach beyond the sites they own – Verizon provides a significant depth of insight about users AOL could never glean itself. This goes the other way too – Verizon can gain insight about users from the time they spend on AOL’s content, even if  they can’t monetize that usage directly.

In short, I think AOL’s content businesses have a better shot and a better role under Verizon than they did at AOL, and I’m not convinced they’re just going to be spun off once the merger closes.

Microsoft and Mojang: where’s the strategic rationale?

Microsoft finally announced today its intention to acquire Mojang, the maker of the Minecraft game, after days of rumors. Throughout the last few days, I’ve been wondering why Microsoft would want to buy Mojang, and now that the news is official, and we have commentary from Microsoft, I’m none the wiser. This is a somewhat baffling acquisition, unless it’s been made purely as a financial investment, and there are much better uses for that money in building Microsoft’s business and ecosystem.

One-hit wonders abound, but Minecraft is different

There are lots of one-hit wonders in the mobile gaming market in particular – King, Zynga, Supercell and others have had one huge hit and have thereafter struggled mightily to repeat the success of that one game with subsequent releases. Mojang is also a one-hit wonder, but Minecraft is very different from FarmVille, Clash of Clans or Candy Crush Saga, in several ways:

  • It’s not just a mobile game, though it’s one of the highest-grossing in that category. It’s also available on PCs and consoles
  • It’s not a flash in the pan like some of those other games – Minecraft appears to have real longevity, having launched in 2009 and showing little sign of slowing down yet
  • It has a totally different monetization model from those other games, booking essentially all its revenue from a customer up front with a high-ticket one-off purchase, rather than in-app purchases or advertising
  • Its customer base likely skews significantly younger than most popular mobile games (and perhaps games in general), in that it is very popular among kids of all ages as well as adults
  • Minecraft is to a far greater extent than other games an ecosystem rather than just a game, with hundreds of books and digital material helping players to learn how to use it effectively.

So, this acquisition isn’t the same as buying one of those big mobile game makers – Microsoft clearly isn’t buying into a one-hit wonder and hoping to replicate its success. And it’s a good thing, too, since the founders are all moving on with the acquisition. But what is Microsoft after?

Bringing content in-house has rarely worked out well

There’s a long history of platform owners bringing certain content in-house, for a variety of reasons:

  • Generating exclusivity around the content for the owned platform, which is in fact what Microsoft did with the Halo franchise. That’s clearly not the intention here, however.
  • Bringing content to an owned platform the current owner won’t bring it to. For example, bringing Minecraft to Windows Phone. However, this is an enormously expensive way to achieve that objective, and Microsoft could easily have covered the costs of porting and maintaining Minecraft on Windows Phone for far less.
  • Wanting to capture more of the revenue opportunity associated with popular content, rather than splitting or even handing over all the revenue to the content owner.

None of these really make a great deal of sense in the context of the Mojang acquisition, except possibly the last one. But that’s hardly a strategic rationale – rather, a simple financial transaction. Perhaps Microsoft heard that Minecraft might be for sale, and didn’t want it to end up in the hands of major competitors who might withhold it from the PC or Xbox platforms. But that seems a little far-fetched, and none of the other reasons really make a lot of sense. Continue reading

Techpinions post: potential acquisitions for Apple, Google and Microsoft

This week’s Techpinions column was prompted by a tweet from Alex Wilhelm of TechCrunch, who asked which companies Apple, Google and Microsoft should acquire next. I fired off a quick response, but decided that this would make an interesting post in its own right, and spent some more time drawing up a list. I also added Amazon to the list of potential acquirers just for fun. Here’s what I came up with:

  • Apple – Bose, Broadcom’s baseband business, Yelp
  • Google – Spotify, Jawbone/Fitbit/Withings, Pinterest
  • Microsoft – Here, Foursquare, Everpix/Picturelife
  • Amazon – Hulu, Pandora, Etsy/Shopify.

You can read the full post, which includes my rationale behind each of these choices, over on Techpinions.

Where do Sprint and T-Mobile go from here?

After a couple of days of talking to various reporters about the Sprint and T-Mobile news from this week, I thought I’d take some time to write up my thoughts on the situation. I already posted some thoughts on Dan Hesse’s tenure at Sprint here. This has turned into a longish post, so here are some signposts for you: the first section deals with why the Sprint-T-Mobile merger made sense, the second deals with where Sprint goes from here, the third deals with where T-Mobile goes from here, and at the end I talk about other issues relating to T-Mobile, namely the other potential merger offers, T-Mobile’s claim to be the largest prepaid carrier in the US, and its goal of catching Sprint by the end of the year (each of those hyperlinks will take you to the relevant part of the post).

Why the merger made sense

I did a long post previously about why the Sprint-T-Mobile merger made sense. If you haven’t read that, I suggest you do, because I won’t cover the same ground in detail again here and the basic arguments haven’t changed even if some of the numbers have. In brief, Sprint and T-Mobile both suffer from their small scale relative to Verizon and AT&T, which manifests itself especially in advertising spend, network costs, retail distribution and purchasing power. Sprint and T-Mobile have attempted to overcome their ad spend disadvantage through various means, Sprint with its Framily plans, which create a viral effect as people try to sign up friends, family and apparently complete strangers; and T-Mobile with its heavy use of social media for marketing. And SoftBank’s acquisition of Sprint and Brightstar has allowed the combined company to generate greater purchasing power in devices and accessories. But a fundamental and significant gap remains.

This is evident nowhere so much as in the various companies’ margins, as shown below (this chart is an excerpt from the deep dive on US wireless operators’ Q2 performance which I’ll be publishing early next week. A preview is available on FierceWireless now):

Screenshot 2014-08-07 09.57.12As you can see, both T-Mobile and Sprint are languishing in the single digits, while AT&T and Verizon were at around 25% and over 30% respectively last quarter. This is a direct result of their lack of scale, and slow organic increases in subscribers won’t solve this problem anytime soon. This is the single greatest argument for a merger between the two, and nothing else can solve this fundamental problem. The fifth company in the mix there is Tracfone, which is a mobile virtual network operator (MVNO), which piggybacks off the carriers’ networks. Most of its costs are variable rather than fixed, and as such it doesn’t have the same scale disadvantages, but it has to pay wholesale rates to the carriers, which doesn’t allow it to be as profitable as AT&T and Verizon either.

Ultimately, though, the merger faced enormous regulatory opposition, and it was by no means a certainty that it would go through. US regulators would apparently rather see a short-term continuation of the current market structure than a more sustainable long-term competitive environment. I suspect that will come back to bite them a year or two from now. The challenge is that neither Sprint nor T-Mobile is exactly on the brink of collapse today, and so it’s easy to argue the situation isn’t urgent. However, each company faces fundamental challenges beyond those related to scale, and I’ll address those below. Continue reading