Behind the mega-mergers…
The mega-mergers that are in the works in the United States offer an interesting way to explore the “natural” paths of markets.
I am talking about two deals that, if green-lighted, would result a) in the merger of the country’s number one (Comcast) and number two (Time Warner Cable) cable companies, which includes a side deal to transfer a large number of customers to Charter (making it the number two player if the deal goes through) and b) in the merger of DirecTV – America’s biggest satellite TV provider and second biggest pay-TV provider behind Comcast – and AT&T, the country’s largest landline telco and second largest mobile operator in terms of revenue, behind Verizon.
For the moment, then, we will set aside the situation in Europe where rumours abound over possible mergers and acquisitions, but where there are still no solid answers over how to put an end to the checkerboard of 28 national markets without severely affecting the state of competition.
So what should we know about these potential mega-deals over in the US?
The Comcast merger is an interesting case on several fronts:
• Because it would accelerate cable market concentration, with all of the classic benefits that the expected economies of scale will bring in helping to amortise technical developments (set-top boxes, TV everywhere; Internet infrastructure).
• Even though it would lump together close to a third of the country’s subscribers, the deal would not directly reduce consumer choice in the cable market, as cablecos in the US rarely compete against each other in individual local markets.
• Comcast is already the country’s leading ISP, and the new entity would be by far the leading provider of triple play bundles in the residential market.
• Comcast recently acquired TV network NBC and owns a number of channels, including local sports channels which are a major drawing card for pay-TV packages. In addition to the assets these holdings represent, the size of the newly-formed conglomerate will no doubt influence future negotiations with channels and studios. So the operation is a source of concern not just for Hollywood, but also for other distributors (DBS, cablecos, telcos, internet companies).
• And, finally, Comcast heads up a consortium of operators that is investing massively in Wi-Fi, which have roaming agreements with one another and which, some day soon, will either adopt MVNO status or work towards a merger with Sprint or T-Mobile (if the two have not already merged beforehand).
The AT&T-DirecTV merger appears to have been a reaction to Comcast – and possibly to a potential merger between DirecTV and Dish. This is probably what led AT&T to abandon its plans to capitalise on Vodafone’s various operations in Europe by taking control of the biggest mobile operator on this side of the Atlantic.
• Why? AT&T is more involved in residential landline calling than Verizon. It operates a larger number of phone lines, and is overhauling its infrastructure over a larger footprint – opting for a hybrid technology (fibre +VDSL boosted by vectoring) in its U-Verse service areas. It has more than 5 million triple play customers, with a monthly ARPU of 170 USD.
As the second largest provider of triple play bundles, behind the new Comcast behemoth, AT&T can hope that its merger with DirecTV (and its 25 million pay-TV customers) will give it substantial clout when it comes to negotiating with channels and over programming, along with the capabilities to produce its own programmes, in the same vein as Netflix. But AT&T is also a national operator, thanks to its mobile networks – and, like Verizon, owns a powerful national and international fixed infrastructure. Combine this with the fact that TV viewing is becoming an increasingly individual pastime, and video accounts for a growing percentage of mobile internet traffic.
• So by reading between the lines of press releases pertaining to the deal we infer, on the one hand, that acquiring a major pay-TV provider could help the telco monetise its investments in superfast mobile systems, and give it access to locations not currently covered by U-Verse using hybrid solutions that combine DBS (live channels) and LTE (high-speed internet).
• This is also the impetus behind Verizon’s acquisition of Intel’s OTT video technology: namely creating a common platform for its FiOS fibre networks (with over 6 million video customers) and its national LTE network.
We would be wrong, however, to see this deal as a simple vertical integration strategy. The future could be full of surprises. The real departure would be to see Comcast begin selling its TV and video plans to users other than its own customers. Ditto for AT&T and Verizon.
I’ll wrap up by inviting you to delve further into these issues by picking up a copy of the 2014 DigiWorld Yearbook. Just released by IDATE, the Yearbook provides readers with vital industry figures and invaluable insights into our tumultuous digital world.
IDATE’s latest report explores telecom carriers’ strategies with respect to Content delivery networks (CDN). It analyses the impact of telcos’ arrival into the CDN value chain, especially with respect to pure-player CDN companies and equipment suppliers.It concludes with an analysis of the market that telcos can expect to capture over the long term, especially in the realm of mobile solutions which today are few and far between.
Telco CDN: strategic business for telcos and two-sided market enabler
As internet traffic continues to grow, spurred in large part by video consumption, most incumbent carriers have become engaged in a strategy to deploy their own content delivery network (CDN), which is integrated into their access network. Telcos will use a fixed CDN for their internal purposes, to improve the quality of the content services they distribute. This allows them to earn revenue from users, notably on managed services like IPTV, to offload traffic and to reduce their network expenditures. As to mobile networks, we have not really seen any native mobile CDN solutions as yet, but rather fixed solutions adapted to mobile systems. We are nevertheless starting to see initiatives from mobile equipment suppliers such as Samsung and Ericsson, in partnership with Akamai.
Operators are using telco CDN as a way of shoring up their two-sided market strategies, by generating new revenue streams, notably from OTT vendors. In other words, operators are looking to to be both a both technical and economic solution to their development issues. But the way they are positioning their CDN is somewhat tentative, and they are struggling on the sales end of things when targeting media or internet companies, as both have a range of alternatives for distributing their video services, such as paid peering.
An increasingly complex CDN value chain
The direct competition that telco CDN are facing has more or less required them to embrace coopetition, and create partnerships with their rivals. Traditional CDN players developed their solutions to target telcos, offering CDN resale and managed CDN solutions as well as licensing schemes. Some operators, such as AT&T and Orange, stumbled when initially rolling out their own CDN, before turning to more long-established CDN players as partners, in particular via distribution deals.
So CDN market competition has heated up since telcos entered the fray, and become full-fledged links in the newly revamped CDN value chain. They are part of what is now a complex ecosystem where players often occupy dual positions:
• telcos are both rival and customer for long-established CDN players, in both the retail and wholesale markets;
• with respect to internet companies, telcos may be both their wholesale supplier and their retail market competitor;
• equipment manufacturers are also positioned in the value chain, targeting client telcos and competing with traditional CDN companies.
The CDN market is in the throes of a second wave of consolidation, which will result in an even more competitive environment as telcos acquire traditional CDN players, a case in point being Verizon’s recent takeover of EdgeCast.
Expected boost from mobile traffic and non-video services starting in 2016
Telco CDN accounted for a mere 0.7% of the global CDN market in 2013. But the long-term outlook is good, and they are forecast to grow by 90% annually over the next five years. 2016 is expected to be the year that operator CDN really take off, spurred by growing distribution on mobile networks and distribution of non-video content. By being indispensable players in the mobile ecosystem, telcos will be able use CDN to optimise traffic on cellular systems. The creation of CDN federations also opens up new opportunities for CDN market players to expand their footprint.
Tiana RAMAHANDRY, Consultant
Net neutrality : From one extreme to the other or the great transatlantic divide
Should we take legal measures (and if so, which) to prevent internet service providers (ISP) from becoming the web’s gatekeepers, and undermining the open internet?
The question is apparently far from resolved, and recently gave rise to two completely opposite set of events on either side of the Atlantic.
In the United States, two potential game-changing moments have occurred. First is the decision from the federal Court of Appeals in Washington that seriously undermines the principles laid down by the FCC. Once again, judges have ruled that FCC provisions forbidding operators from blocking access to lawful sites, or slowing a connection when they decide that generated traffic is preventing the network from running efficiently, have no legal foundation. If they do not contest the FCC’s power to regulate the internet (and have admitted the legality of the obligation to be transparent in the commercial information provided to consumers), they decided that the federal agency’s stipulations cannot go beyond that, once ISPs’ services are not governed by the principles of common carriage (which are imposed on telecommunications services and forbid any form of discrimination).
We should also remember that cable companies have always refused to bow to common carriage rules, including when they began to provide broadband access via cable modem. The FCC did not want to introduce asymmetrical regulations when telcos began providing ADSL access, and confirmed at the time that internet access would be considered an information service. Even if it wanted to, the FCC today would have little chance of persuading Congress from changing its mind about this. It does, however, have some power when it comes to imposing remedies as conditions for approving mergers or acquisitions (as it did on Comcast when it took control of NBC).
Which brings us to the second major bit of news: the interconnection agreement between Comcast and Netflix. In the past, the SVOD service – which is thought to account for a quarter of internet traffic during peak hours – had consistently refused to negotiate any paid peering agreement with telcos and cable companies, preferring to use the services of the transit operator in charge of its content delivery network (CDN) and managing peering locations with ISPs. Hence the surprise over the deal with Comcast, even if we do not know exactly how much Netflix has agreed to pay (as the deal is a commercial one) or what we should make of it. Some are seeing this as the natural outcome to the Washington court ruling, and its de facto eradication of net neutrality rules. Although, in fact, interconnection agreements have never been covered by the FCC’s guiding principles. What we can take away is the clout that the number one ISP in the US was able to wield over Netflix. But we may also discover an agreement that is in fact advantageous for the SVOD service. One that allows it to avoid having to got through a transit operator, and improve the quality of access to its programming in the bargain. Some market watchers are saying that the planned merger between Comcast and Time Warner Cable, which is currently being scrutinized by antitrust authorities, may have forced the cable giant to offer proof of its ability to play well with a major service provider.
So what happens next? Comcast is not the only ISP, so we are waiting to see what kind of deals Netflix might strike with the markets other two heavyweights, AT&T and Verizon. And Netflix is not the only content provider. In addition to ISPs’ services, we need to remember the competition brewing between the various TV access device providers (Roku, Amazon Fire TV, Chromecast, Apple TV…) and online media (video, game, music) stores that combine their own content and access to third-party services. A few days after the Comcast – Netflix deal was announced, we learned that Apple was negotiating a deal with Comcast to have guaranteed bandwidth for the supply of its own VOD service…
Meanwhile, on the other side of the Atlantic, the game changer came from the European Parliament. Taking up the report released by Ms Kroes last September, it sought to strengthen Europe’s net neutrality legislation. Rather than sticking with a balanced text that gives NRAs the power to oppose ISPs’ discriminating against content and application providers, it adopted a definition of net neutrality that we had thought confined to only its most stringent proponents: ““Net neutrality” means the principle according to which all internet traffic is treated equally, without discrimination, restriction or interference, independently of its sender, recipient, type, content, device, service or application” (amendment 234, retained). Under these circumstances, the ability to differentiate access offers or to charge extra for preferential treatment on ultra high-speed fixed and mobile (1) networks will have been nipped in the bud.
Of course, it is likely that the European Council will want to make changes to the text before it is passed into law. But it is curious to see how the Kroes report, which was supposed to focus on creating investment incentives, resulted in this proposal.
And astonishing to see such extreme and opposite directions taking shape at the same moment on either side of the pond.