T-Mobile ready to “Un-cable” the cable industry with Layer 3 buy

T-Mobile USA executives came out fighting, talking about “Un-cabling” cable, after buying Layer3 TV, a US start up which itself had promised to re-invent the cable experience, and which has raised $80 million in backing to create what it calls the “next generation of cable.”

The US MNO promised to bring out a disruptive service based on Layer3 TV during 2018, and CEO John Legere asked, “We have disrupted the market for the 2nd most hated industry, now why shouldn’t we go and disrupt the number 1 industry which its customers hate?” He cited 4,000 complaints a day filed on social media relating to cable companies or 1.5 million a year.

The pay TV market has 8 of the 10 least loved brands in the US, he said, and 53% of all cable customers surveyed said they would leave their supplier if only they could. “This is not a skinny bundle, people love TV, they don’t want to go on a diet of TV, but prefer a feast,” said Legere.

T-Mobile will throw its 70 million plus mobile customers and its 16,000 retail stores behind the promotion of the service, which is by no means a skinny bundle – Layer3 TV currently supports 250 linear channels and has partnerships to promote Netflix and Hulu. But the interesting thing is how the new combination plans to “Uncarrier” the service – by which T-Mobile means, better pricing, easier to use, better packaging, and no two year contractual tie ins. Mobile promised to build TV for people who are tired of multi-year service contracts, confusing sky-high bills, exploding bundles which get larger all the time, unworkable technologies, outdated UIs, closed systems and lousy customer service.

Layer3 TV is named after layer 3 of the OSI model, the networking layer which is where most of the routing in IP networks occurs. The service as it is today consists of a large bundle of streaming pay TV channels, in either 1080p HD or UHD resolutions, available to watch via a wireless set top, anywhere in the home. T-Mobile promised that it would overnight be delivered to connected TVs and through a variety of other devices such as Roku, Apple TV, Amazon Fire TV, Chromecast, tablets and smartphones.

The great thing about this is that the management team have already signed up all the broadcast channels that they figure they need, as well as key cable networks, trading on their previous standing in the industry. The team features an ex-Comcast CTO, an ex-President of sales at Fox, and a previous principal architect at Time Warner Cable, and they are led by serial entrepreneur Jeff Binder who founded Broadbus Technologies and sold it to Motorola for $200 million.

The content includes existing deals with Disney, ESPN, Viacom, ABC, NBCUniversal, Scripps Networks Interactive, 21st Century Fox, Time Warner, CNN, MTV, Bravo, SyFy, CBS, A&E Networks, Discovery, AMC, Bloomberg, HBO, Showtime and others. So questions thrown at Legere at the press conference fell on stony ground “What content do you need?” – “We already have it,” he answered.

But there is plenty left to find out as this story unfolds. T-Mobile promises a new UI, well Layer3 TV already had that, but it has to be now rolled out to new devices; it also promised AI based content discovery, and that was also working already at Layer3 TV, basically you get a lot of choice at first, but as you make your viewing choices it narrows the first level of choices, reduced down to those you are likely to like.

Will it be a subscription service or advertising driven? Well both, but yes it would include a subscription price. What is that price? Not telling yet as the service has not yet been fully defined. It says it plans to offer targeted ads the way they are currently sold over the internet. To Legere, everything should be IP, and 80% of the internet will be mobile this year, he said. It will have adverts which the consumer will appreciate, he added.

Financially, T-Mobile promised this would make no difference to this year’s numbers or guidance. And given that the average speed available to a T-Mobile phone is 30 Mbps (they claimed) this could be delivered over a T-Mobile signal or any other IP signal. “You just need a broadband line, and T-Mobile is a broadband supplier,” which implies that if your broadband supplier blocks it, T-Mobile will find a way to get the signal to your device over its own network.

This is critical on a day when the FCC was due to sit and cancel Title II for broadband, along with its adherence to net neutrality.

At Faultline we have said for the past 4 or 5 years that MNOs will be unable to differentiate themselves without their own video service and have predicted that MNOs will buy pay TV operators, content businesses and OTT bundles. As AT&T has produced DirecTV Now, it has changed the delicate balance that had T-Mobile wiping the floor with every MNO in the US, also as Comcast has come into the cellular market with an MVNO, and Charter is on its way, a combined video and mobile offering was always coming to the fore in the US and T-Mobile was conspicuous in having no great “edge” in video. Its best video move was to offer Binge-On followed by uncapped data, selling and distributing over 100 other video services. T-Mobile gave customers the freedom to stream as much video as they want with Binge On and T-Mobile One, and then gave T-Mobile One families a free Netflix subscription included at no extra charge. Where this leaves the hapless Sprint, which has no video service at all really, except an ancient MobiTV service, is anyone’s guess.

Now T-Mobile will have to work out its positioning vis-à-vis the Netflix and Hulus of this world, keeping them as partners, but essentially competing in some way for video hours. “This is not another Netflix, this is about cutting your cord,” was the frequent boast, but the precise video mix that will be offered is just out of reach right now – the Un-Carrier wants to add typical Millennial video services to the 250 existing channels, and add a thick slice of social media. Layer3 TV had already solved this too, and one key touch of its remote brings up Facebook and Twitter on-screen, to comment on shows.

Another question thrown at the team suggested that this was a “me too” skinny bundle late to the party, and that at least 5 others were there before T-Mobile – and while he handled the question with aplomb and his usual arrogance, this is a deal that patches a huge strategic hole in T-Mobile US, which could well have embarrassed Legere, and his relief is palpable in finding the right company to buy, one that has rights to the right content, and which has an experienced management team and some genuine innovation. There aren’t too many of those.

It is likely that a good premium on the Layer3 TV investments was likely in the acquisition price, which is not being given out, but we would be surprised if it was much lower than $300 million and will keep an eye on T-Mobile’s later filings to see if that number is borne out.

This leaves serious question marks over Sprint and its strategy, and leaves Verizon’s video approach (see separate article in this issue) severely in doubt.