AT&T may have just been approved to acquire their “killer app”. Of course, it’s still early days but the AT&T merger with Time Warner could usher in a new era of carrier-driven digital innovation and competitiveness that has eluded the telecommunication industry for more than a decade.
AT&T’s acquisition of Time Warner presents the company with a unique opportunity to create an innovation and commercialization engine for what could bring about the next evolutionary phase of the digital media industry and compelling market drivers for 5G. Given the unexpectedly difficult challenge that operators around the world continue to have in figuring out where the next big growth and margin opportunities are in a Facebook/Youtube/Netflix-dominated world, the timing could not be better.
Finally, A Real Opportunity To OTT The OTT Players And Digital Natives
Telecommunications majors and traditional cable operators have been on an ongoing journey to revitalize their businesses that have suffered at the hands of OTT (Over-The-Top) communications and digital media companies such as Facebook, Alphabet/YouTube, and Netflix (a.k.a. digital natives), which have brought about significant unbundling of traditional models of content distribution and a phenomenon the industry has dubbed “cord cutting”. AT&T’s DirecTV satellite service saw a 3.4% drop in subscribers year-over-year in Q4 of 2017 with flat subscriber growth over the last four years, while Netflix has almost tripled its subscriber base from 36.3 million in Q1 2013 to 125 million in Q1 of 2018.
As consumers continue to cut the cord, telecom operators have struggled to find the killer application, the monetization models and markets that will pay for the massive investments needed to build out the 5G networks, data centers and edge infrastructure that will enabled the next-generation data and content services. Operators are not safe from the digital native threat in their own backyard with Google and Facebook eyeing the communications market with Google Fiber and Facebook’s recent project, Terragraph, both piloting millimeter wave wireless fiber services, a core 5G technology.
OTT messaging (SnapChat, Apple, WhatsApp/FB) and social players (Facebook, Tencent) have also cut into the core voice and texting businesses of carriers, which used to garner healthy margins and steady revenue growth in the past. In their quest to replace the fast-waning growth, revenue and margins of their traditional voice and messaging businesses, operators have been experimenting with a number of adjacent market plays in media and entertainment such as Comcast’s acquisition of NBC in December of 2009 and Verizon’s acquisition of Yahoo! finalized in June of 2017 in the hopes of capitalizing on the data bonanza upon which digital natives are making a killing with their OTT platforms and services. To date, no operator has been able to successfully convert their media and content strategy into a play that effectively counters the OTT threat presented by digital natives who are leading the transformation of the digital media landscape.
Vertical Integration = The Digital Experience Supply Chain
As Akshay Sharma of neXt Curve stated in 2016 when the news of the AT&T Time Warner deal was first announced, the deal is about AT&T trying to become smarter. “Instead of being a dumb pipe provider, now it’s all about content and user experience,” he said. AT&T is positioned to benefit in a unique and powerful way from the acquisition of Time Warner with their film and television studios, gaming assets and massive library of content and media brands. AT&T is one of two multi-modal U.S. carriers with a full portfolio of fixed, satellite and mobile communications infrastructure and services for consumers and enterprises. In an increasingly multi-modal computing world, it will be vital for the next generation of digital leaders to have tightly integrated content creation and content delivery supply chains, which we call the digital experience supply chain, which will enable the rapid and consistent deployment of new digital services and media experiences in the coming 5G world.
AT&T is one of the few carriers that owns the entire stack of infrastructure and technologies that will eventually become the future 5G network. AT&T will be able to holistically control and manage the quality of content delivery services across consumer touch points and digital interfaces whether they are conventional devices such as the smartphone or newer devices such as a viable consumer VR device. Akshay Sharma of neXt Curve states, “AT&T will eventually be able to dynamically shape tailored experiences for their customers optimized for the communication and computing mode of the application.”
Building An Innovation Engine Through Vertical Integration
Despite the hype and fanfare shrouding 5G, it still suffers from the lack of a killer app. Is it the autonomous vehicle? It depends on how dumb you think the car will be and how dependent it will be on the cloud or the edge. What we do know today is that media content is the “killer app” that drives data on the wire and over the air. Highly anticipated 5G applications such as VR and AR media and gaming will require the 5G promise. But more importantly, they need content and a captive consumer market that will drive adoption of these new 5G media applications. The AT&T and Time Warner integration can create that perfect storm that makes the consumer 5G promise a reality.
- Assets such as HBO and DC games provide AT&T with a global, pan-operator end market of consumers who are actively engaged with Time Warner content brands such as HBO’s “Game of Thrones”, and Warner Bros. Studios’ “Wonder Woman.”
- With the acquisitions of some of the leading film, gaming and television studios, AT&T can drive the mass adoption of new and emerging digital media technologies and services such as VR, AR, and next-generation interactive video formats and drive the creation of compelling, branded content.
- Content and next-gen media applications can be delivered across computing environments (mobile, portable, fixed) and devices (e.g. smartphone, tablet, PC), with exclusive media experiences offered to AT&T customers who have access to what will likely be first-of-a-kind content delivery platforms.
- AT&T will have the ability to go-to-market with innovative, new digital services and applications much quicker and scale than competitors if they can realize tight vertical integration from network to endpoint media application.
- AT&T will be well positioned to drive demand for new network and converged IT/CT services that will be required to enabled demanding but differentiating 5G applications for consumers and enterprises such as VR, AR, real-time gaming, ultraHD video and next-gen mixed media applications and highly reliable UC (Unified Communications).
Implications for Business Leaders
- Network operators should understand the threats to their core business in the form of accelerated commoditization of traditional voice, data and media services. They should also consider what types of capabilities, technologies and partnerships will be need in order to fast-follow the new generation of digital leaders. They should also revisit their digital transformation strategies to consider the threat and opportunities presented by integrated digital experience supply chains such as the one that will likely be an outcome of the AT&T and Time Warner integration.
- Telecom and enterprise network vendors should understand the implications of the integrated digital experience supply chain on their product and business development strategies. Vertical industry expertise among vendors is a significant gap that should be addressed quickly as merger activity (such as Comcast’s bid for Fox assets) ramps up. The integration of media and communications assets will likely yield a significant opportunity for integration services and new technologies.
- Media companies should consider the broader trend of converging content production and distribution across industry segments (gaming, film, television) and the importance of developing an extended digital experience supply chain. Quality of service will become a critical factor as imminent digital leaders such as the combined AT&T/Time Warner entity differentiate on new experiences, not just on content.
- Digital natives should assess the potential threat of converged media/telecom plays such as a combined AT&T/Time Warner or Comcast/NBC/Fox and their impact on the economics of freemium business models and online advertising.
Contact us if you would like to discuss how neXt Curve can provide unique market insights and perspectives that could be critical for your business and its digital future.
Managing Director, neXt Curve
Principal, neXt Curve
June 13, 2018
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