Differentiate with digital

The AT&T Merger With Time Warner Opens A New Chapter For The Telco Industry

Dan Bieler
Principal Analyst
October 25, 2016

With Laura Koetzle

On October 22, 2016, AT&T announced its intention to acquire Time Warner for an equity value of $85.4 billion. The deal is essentially about the combination of quality content and content distribution, as it transforms AT&T into a content producer and owner — rather than just a distributor of content. Many telecom regulators restrict revenue growth opportunities for telcos in highly regulated telco markets. As a result, telcos are increasingly looking outside their markets for growth opportunities. This deal is evidence of this trend.

Telco CIOs Must Become More Strategic To Prepare For The Content Opportunity

The AT&T-Time Warner deal deserves special attention by telco CIOs. The deal needs to be seen against a challenging backdrop for the telco industry, where revenue growth from traditional revenue sources is hard to come by. Yes, AT&T already operates the largest US pay-TV business through its ownership of DirecTV. The Time Warner deal — should it materialize — would enable AT&T to offer its own premium entertainment programming to its pay-TV, mobile phone, and internet customers. AT&T’s intention to acquire Time Warner opens a new chapter for telcos, because the combination of quality content and content distribution potentially helps telcos to:

  • Strengthen their financial footprint outside the highly regulated telco markets. Owning content production broadens telcos’ revenue and earnings growth profile. By gathering more detailed customer insights across TV, mobile, and broadband, telcos would be able to offer more relevant and valuable addressable advertising. In turn, telcos would become more attractive advertising partners, which would allow them to drive more advertising sales. In addition, such deals increase the potential to sell content with embedded connectivity. For instance, telcos could sell multimedia content to mobile users where the data volume for the content delivery does not count against their mobile data packages. The telcos’ balance sheet would also benefit because content businesses require very low capital expenditures. As a result telcos could improve their capital intensity ratio. For the telco CIO, this means that big data platforms to support mass-customized, ad-supported content models will be required.
  • Rebuild a stronger and more direct brand relationship with the consumer. Customer experience surveys, like Forrester’s Customer Experience Index, underline that most telcos urgently need to improve the end-to-end user experience that they deliver. One common pain point for telco customers when buying media content remains that they are often not able to access the same content via their TV, smartphone, or tablet — from anywhere and at any time. The combination of quality content and content distribution would enhance customer choices for content consumption, in particular around personalized mobile-first experiences and content sharing via social media. For the telco CIO, this means that they need to embrace multiplatform application development and data management platforms to bridge the words of online content and digital customer experience management.
  • Rebalance the type of multimedia traffic on telcos’ networks. Today, more than half of the multimedia traffic going through the telco networks stems from social media businesses like Facebook and YouTube that do not pay for the telcos’ network usage. Content ownership could prove beneficial to lessen the impact on telcos that OTTs have as providers of prime content. Content ownership would allow telcos to fill more of their own networks with their own prime content. For the telco CIO, this means that social content sharing capabilities and traffic management systems need to be strengthened to lift the percentage of telco-owned content.

But Regulatory Uncertainty And A Tough Content Business Will Make This Bumpy

Still, before any of these benefits can be obtained, telco CIOs ought to prepare for several challenges:

  • Mergers between content providers and telcos will be closely scrutinized by regulators. Regulators have a significant impact on telcos’ attempts to build a revenue bases outside their traditional segment, and it’s not always clear a priori which merger the regulators will object to. For instance, Comcast was allowed to acquire NBCUniversal, but not Time Warner Cable. For the telco CIOs this means that they need to prepare a plan B from the start of any merger talks in case the regulator blocks plan A or if certain conditions are imposed, such as spinning of certain assets. Further, on October 27, the US Federal Trade Commission (FTC) will vote on a set of rules that would significantly restrict the ability of firms designated “Common Carriers’” — like landline telcos and broadband ISPs — to monetize customer data. If approved, the new rules would likely constrain AT&T and Time Warner from capturing some of their planned revenue from advertisers.
  • The content business is outside the telcos’ core capabilities and experiences. Having the assets and expertise to act as a professional content distributor is one thing and within the remit of most tier-one telcos. Acting as a high-quality content producer is something else altogether. Content production is not in the telco DNA. Deutsche Telekom learned this years ago when its’s online division, T-Online, attempted unsuccessfully to build up content creation capabilities. Telcos that acquire content providers are well advised to operate these content divisions on a stand-alone basis and not get involved in content production. For the telco CIO, this means that they need to ensure common technology platforms for data and workflow integration between separately run businesses.
  • Telcos should be under no illusion that the grass is greener on the other side. The traditional media sector is under intense pressure from digital video groups such as Dish Network’s Sling TV, Amazon’s LoveFilm, Netflix, or Hulu. Venturing into content production will not automatically translate into organic revenue growth for telcos nor solve the ultimate telco challenges of having to transform their operational and cultural DNA. On the contrary, for the telco CIO, this means that he has to deal with an additional layer of digital transformation challenges.

So, should other telcos follow suit of AT&T’s content ambitions? Today, telcos are struggling to boost their revenues as traditional revenue models are stalling or even unravelling. New telco revenue opportunities like IoT and cloud computing are unlikely to offset the decline of traditional revenues. Therefore, I believe many telcos will increasingly look at buying content owners to open up new market opportunities. Most market observers would agree that scale would be needed in a fast-moving and mobile digital environment. It is no surprise that content providers like AMC Networks, Discovery Communications, and Scripps Networks Interactive have immediately become objects of speculation as to which telco might be eying them.

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