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Verizon rejects cable in favor of content, which could scupper its 5G ambitions

If one thing is clear about 5G, it is that it will be a wireline as well as a wireless platform. Its base standards may be taking shape in the 3GPP, the bastion of mobile industry power. But in reality it will hasten the death of the mobile-only operator which was such a star of the telco industry in the first decade of this century.

5G will as wireline as it is wireless – it will rely on high quality fiber to support dense networks and Cloud-RANs; in its fixed form it may fill gaps in wireline broadband deployments. More importantly, the enforced convergence of wireline and wireless links in 5G will enhance business model changes which are already under way with current technology – the consolidation of fixed and mobile operators to offer multiplay services. With 5G technology, that consolidation can extend from unified billing to actual unified access.

In theory, a mobile-centric operator could take that platform to increase its power, accessing fibre through leasing deals and offering the bulk of its quad play over wireless. After all, until recently, mobile was the only growth engine for the telcos, lumbered with their ageing copper networks and business models. But now, the balance of power has shifted. The telcos and cablecos have upgraded their wires and placed themselves at the center of the quad play. Vodafone, once beloved for its lack of wireline albatross, is scrabbling for cable investments (see separate item). Mobile-centric operators are trying to huddle together to gain scale (Hutchison’s various attempts for its 3 Europe subsidiaries, Vodafone and Aircel in India); or they are putting themselves up for sale to telcos (EE and BT in the UK).

This shift is seeing wireline operators, especially cablecos, not just getting closer to MNOs, but usurping some of their role in defining and driving next generation wireless platforms. In the US, major cablecos Comcast and Charter have agreed a pact on mobile developments and services, and Charter last week offered some details of its 4G and 5G trials. The US cable R&D arm, CableLabs, is taking an active role in 5G standardization.

Amid all this, however, Verizon is bucking the trend. By contrast with AT&T, Verizon has a small (if wealthy) wireline footprint so can really be classed as a mobile-centric operator. So repeated rumors that it was looking to acquire a major cableco – while also extending its fixed footprint by deploying 5G fixed wireless access (FWA) as early as 2018 – were logical.

Such is the resurgence in the value of fixed operators that some analysts, including our sister service Faultline and Online Reporter, argued that, a few years down the line, it might be the cablecos acquiring Verizon. Either way, the assumption is that consolidation around a fixed/mobile play is the way to go, in order to compete more effectively with AT&T (Sprint and or T-Mobile dance around the cablecos for the same reason).

But now Verizon claims it has lost interest in a cable merger and is looking for growth primarily from its activities in content. It is taking the gamble of expanding vertically, pushing its business model up the stack into content, media and services – no longer as a complement to extending its reach horizontally with cable deals to boost its wireline footprint, but as its main strategy. The acquisitions of AOL and Yahoo will be central to its growth plan, rather than that of Comcast or Charter.

CEO Lowell McAdam, speaking last week at the Goldman Sachs Communacopia conference, said he was no longer interested in a cableco deal and had “moved on” from that idea. The expansion of Verizon’s network reach would be done via tactical fiber purchases like the acquisition of Straight Path and the deal with Corning; by inhouse fiber deployment for 5G backhaul and fronthaul; and by focusing on the 5G network as a converged access medium. Enabled by that new-look infrastructure, the real financial growth would come from enhanced services, particularly content and media.

“I don’t think there is any debate any more that more and more things are going mobile and less and less things are going fixed line,” said McAdam. “And so we’re positioning the company to what I call skate where the puck is going, to be that digital media company that provides mobility services and high bandwidth speeds to customers, no matter where they are.”

The M&A strategy will focus on 5G and content – even from pure return on investment standpoints, McAdam sees better value in mobile-centric deals. “I think right now a lot of the fiber companies, their values are a little fluffy compared to what you can build it for yourself and so that’s the path that we’re on,” he said. “If you look at the amount of capital that’s moving into mobile; if you look at how every internet company is trying to get deeper ties to mobile; that is going to be the center going forward.”

And McAdam implied that Verizon had greater resources and flexibility to pursue a lateral M&A route because it did not need to spend heavily on new spectrum with any urgency, even with the strain on capacity inflicted by the renewed US shift towards unlimited data packages, spurred on by T-Mobile.

“Our network portfolio is great,” he said. “As far as getting into massive purchases, we don’t even really have to participate the next [spectrum] auction.” The company is making a big bet on millimeter wave spectrum to support high capacity fixed 5G wireless, and McAdam said recent tests in the 28 GHz band, using Verizon’s own pre-5G specifications, had managed to reach six floors and were “very encouraging”.

McAdam got the pundits whispering by saying he “would not be surprised” if Verizon announced another major content deal by the end of the month, following on from its big media purchases of AOL and Yahoo. After a troubled process, the Yahoo transaction was finalized in June and the two former Internet heavyweights have been consolidated into a new division called Oath.

But the new unit, while it provides a major advertising and online media platform, is in bad need of content assets to compete with AT&T’s purchase of DirecTV and Time Warner, and T-Mobile’s disruptive ‘Straight to Netflix’ partnership, which offers subscribers to the T-Mobile One family plan free subscriptions to the video streaming service with unlimited data.

Some analysts believe Verizon’s counter will be a deal with Google’s YouTube, but that might be compromised by the operator’s attempt to move into Google’s advertising turf. This was signalled by the two acquisitions and the formation of Oath, which highlighted
Verizon’s increasing ambition to marry its telecom and wireless businesses with a portfolio of digital advertising and publishing brands. But there’s little reason to think Verizon can successfully build out a digital media empire to compete with Google and Facebook from the corpses of two 90s-era online media companies. So it may have alienated a potentially powerful partner – Google and Verizon have cooperated in many areas since the early Android era – in return for an over-ambitious tilt at the mobile media market.

Verizon will make the usual telco argument about its access to a large base of subscribers and its deep knowledge of their habits, making targeted advertising and context-aware services a natural model. The carrier has some 108m wireless subscribers and 7m wireline broadband subs, to whom it can deliver targeted digital and advanced advertising. Verizon is hoping to leverage the unique monthly users and subsequent data to bolster its own advertising across mobile devices. Verizon could also beef up its advanced advertising offerings delivered to its 4.7m FiOS pay-TV households – thanks to the FCC, which recently revised rules to allow ISPs to use browser data to sell ads.

And thanks to the digital real estate occupied by both Yahoo and AOL, Verizon will now be able to extend its advertising business to consumers across non-Verizon devices and platforms. HuffPost, Yahoo Sports, AOL.com, Makers, Tumblr, Build Studios, Yahoo Finance, Yahoo Mail and other sites are now all housed within Oath.

But traffic across Yahoo properties has been in steady decline over the years, and while AOL had maintained itself admirably during the online video revolution with Tim Armstrong at the helm, that progress has been stifled since its acquisition by Verizon. AOL’s efforts were redirected towards supporting the telco’s ill-fated mobile-first video service, Go90.

At this point, the only positive thing Oath has going for it is that Armstrong has been appointed CEO of the new company. Armstrong outlined a strategy for the new digital media company in July, saying: “We’re building the future of brands using powerful technology, trusted content and differentiated data. We have dominating consumer brands in news, sports, finance, tech, and entertainment and lifestyle coupled with our market leading advertising technology platforms.”

But to make any headway in digital advertising, Verizon will have to come up against the twin giants in the space: Google and Facebook. Yahoo and AOL still reign supreme in display advertising, but that has itself been on the decline as click-through rates have dropped, pricing has fallen thanks to automated buying, and more ad dollars have moved to social networks and digital video. Google and Facebook completely dominate the online advertising space, particularly in video. It’ll be a tall order for Verizon to compete with either of them in the video space.

For one thing, Verizon’s scale isn’t anywhere near Google or Facebook. Those two can each easily reach 2bn users every day, while estimates peg Verizon can now reach about 1.3bn users daily. Armstrong says he can reach 2bn consumers by 2020, and hopes that Oath will be generating revenues in the $10-$20bn range by then, too. That, too, is terribly optimistic outlook for a new media company comprised of two older and declining media companies.

While AOL and Yahoo both dabbled in scripted original series, most of the traffic stems from news-related content. Armstrong appears to want to make Oath primarily a news content media company. Jared Grusd, CEO of another member of the Oath portfolio, Huffpost, has predictably claimed that news will form the nucleus of Oath. “News is the thing that forms daily habits, so it really serves as the anchor tenant of how we think about introducing consumers into the flywheel of the media organization that we’re building. News is actually driving the behavior, both on the consumer tech companies and on the media companies. We’re sitting on the terrific opportunity to become the most relevant, leading content provider of news in the world,” he said at an event in Cannes, France in July.

So Verizon’s plan seems to be that as Facebook grapples with the rise of fake news, and Google grapples with questionable content on its platforms, Oath can become a brand-safe environment for advertising across a number of verticals, spanning news, sports, lifestyle and entertainment and, of course, online video.

Ironically, this isn’t too far from what Yahoo’s departed CEO Melissa Mayer tried to do, bringing in a slew of award-winning journalists, including Katie Couric, to head its news vertical, but her efforts didn’t gain much traction among consumers.

All this hardly seems enough to compete with TMO’s Netflix deal – hence McAdam’s hunt for a larger content transaction, presumably. Indeed, while Armstrong has said he considers Yahoo a “very, very powerful asset for the future,” he’s already begun gutting its top performing news sites, like Yahoo Finance and Yahoo Sports. Key journalists from both were part of the 2,100 lay-offs announced when the acquisition was closed. Armstrong has gutted some of AOL’s news assets, too. A handful of AOL’s top journalists, including David Wood, who won HuffPost a Pulitzer Prize in 2012, were recently handed pink slips.

Both the AOL and Yahoo acquisitions were all about ad tech, not content. Oath could become a powerhouse for Verizon’s digital advertising business, but it won’t operate at the scale of Google or Facebook, who have sucked up all the oxygen and ad dollars out of the space. If McAdam is serious about content, he will need more deals.

Of course, he is not only having to take on Google and Facebook, but keep an eye on AT&T, which is also pursuing a content and advertising strategy. AT&T does not have the same dilemmas about whether to invest primarily in the network or the services – it already has an almost-nation fixed/mobile base and while it is trialling fixed wireless in millimeter wave bands too, its main 5G interest is in enhanced mobile services (see Wireless Watch September 11 2017).

AT&T’s CEO Randall Stephenson was also talking at the Goldman Sachs event, and touting his own ambitions to be an advertising superpower. He cited the 200bn-a-year advertising impressions which the combination of AT&T and its DirecTV acquisition carry, claiming that they brought in about three times as much per impression as the 750bn which Time Warner sells every year.

By using big data analytics to make sense of the information that AT&T and DirecTV have about their customers, and by selling advertising mostly online and programmatically, Stephenson said he felt the one trillion advertising impressions the combined companies would have after the Time Warner merger, could triple the current Time Warner ad revenue over time.

“This value accretion comes from taking an incredibly rich trove of data that exists in these communication companies, and taking advantage of that in the media company, and this data is all centered around viewership data. And we have some amazing viewership data. When you have the largest pay-TV business in the US, and you have a mobile business where people are streaming media continually on their mobile devices, then you have great data,” he boasted.

He claimed that the combined companies deliver data at the device level and the location level, and was also keen to present AT&T’s platform as brand-safe, after recent mishaps at Google and Facebook.

In August, AT&T brought on board Brian Lesser of GroupM to head up its efforts in addressable and programmatic advertising. Lesser built up Xaxis to a $1bn business before selling out to GroupM, and is charged with maximizing the value of media investments for many of the world’s largest advertisers.

Stephenson talked about gaining as much as $10 more per subscriber in advertising – $10 of revenue that could then be harnessed to discount to the consumer, to take share and drive down churn.

Like Verizon, he would also look to spend those advertising dollars on original content. HBO is already one of the biggest spenders in the world on this, though recently overtaken by Netflix, and both Apple and Facebook have recently pledged $1bn each in original content for next year. Though of course, the beauty of the Netflix model is that it does not rely on adverts – which users generally hate – but on subscriptions (hence the strong marketing message of the TMO arrangement).

Stephenson summarized his approach to an overcrowded space, ruling out bids for expensive sports rights and saying: “Creating a lot of great content, and then just licensing it out, is probably not that interesting to us in the long run, but taking our content and distributing it broadly, and selling it to other distributors… we think is really, really important.”

As for DirecTV, over the coming two decades, AT&T aims to phase out the satellite dish and deliver all content over broadband, wireline or wireless. The main benefit of buying DirecTV was to gain a stronger negotiating position with content companies, as well as to support cross-selling opportunities with the core AT&T business, and a future multiplay.

He said: “If you are a household and you have our wireless, there is an all-out push to make sure that you have one of our video products as well and there’s been an incredible push to make this reality since we closed DirecTV and the success we are having has been really, really good. The number of people that walk into one of our stores and add wireless service, the percentage of those that add some form of video into the household is really high.”

Which is why AT&T’s wireless churn is at record low levels, claimed Stephenson, which is leading to record margins. The next step is the begin to take back market share in the wireless market, using DirecTV and potentially Time Warner and especially original content. One phone package that AT&T is planning will include HBO in the price of the package and the ability to add DirecTV Now for just $10. If AT&T gets more customers, but spends less getting them, and keeps them for longer, then the lifetime value of each customer goes significantly higher.

Telstra focuses on optimized, personalized content:

It is not just the US telcos which are investing in content. On the other side of the world, Australia’s Telstra is also trying to become more content-rich.

It has been expanding its content offering over the past two years, with a heavy focus on sports including the two Australian football leagues, AFL and NRL, plus Netball. Specific sports-related video data traffic has grown by 130% over two years, says the operator.

Its main focus, however, is on personalized content rather than huge investments in more sports rights or in original offerings. The company has developed an in-depth recommendation model, which not only targets content more accurately to users’ tastes, but plans how to deliver it to minimize the strain on the mobile network, using edge-based techniques like mobile caching.

Telstra is harnessing a mixture of technologies including artificial intelligence, LTE-Broadcast, device-based and edge-based content caching, and Multi-access Edge Computing (MEC). It has already seen up to 40% efficiency gains on the network, it claims, plus its most recent trials of combined technologies could deliver three times better average bit-rate or start-up time, or five times lower buffering ratio. Telstra says that getting the balance of techniques right can deliver a mobile video experience which is similar to that of traditional TV (though battery drain issues are still a problem).

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