Do Britain’s telecom companies need to reinvent themselves as media companies? It is not such a strange suggestion given how fast things are suddenly changing in the mobile and broadband industry.
BT, once just a home phone and broadband operator, has already launched a TV operation, BT Sport, with exclusive Premier League football, that has helped the company to reverse a trend of falling revenues and build up its consumer business. Now BT is about to launch in mobile and is considering buying one of Britain’s two biggest mobile networks, O2 or EE, to get a jump-start.
Vodafone, Britain’s other big mobile network, is expanding in the other direction. The cash-rich phone company has said it will launch in residential broadband and pay-TV next year amid signs it might buy exclusive programming rights too.
In both cases, BT and Vodafone have concluded that offering TV and media content can help them sell their telecom services. BT Sport, which launched last year, has shown that media excites passion in a way that telecoms, a mere utility, cannot. Others have got in on the act. TalkTalk debuted its TV service in 2012 and EE unveiled a TV set-top box in October.
This is not just about telecom providers wanting to be media companies. The convergence of different technologies means it is now easy for these operators to offer a “quad play” of all four services – home phone, broadband, mobile and pay-TV – and increase their revenues.
As we look into the future, all these services will be offered through a single platform, the internet, and if a company owns the “pipes”, then some say it is logical that it should take an interest in what travels along the pipes too.
It is this trend that is driving the industry trend for quad play and a frenzy of merger talks.
Until recently, there were four main fixed-line broadband and pay-TV providers – BT, Sky, Virgin Media and TalkTalk – which operated in a different market from the four mobile carriers – EE, O2, Vodafone and Three. Now that all these companies can theoretically compete against each other in quad play, the market is over-supplied with eight players and consolidation looks certain.
The biggest players – BT, Vodafone, Sky and Virgin owner, Liberty – have the strongest negotiating position. Companies with a strong fixed-line broadband and TV base have an advantage because their revenues have been growing steadily – unlike the mobile operators, which have seen year after year of declining sales as regulation has pushed down on price. That is why the foreign owners of debt-laden O2 and EE are each eager to sell and why Vodafone and Liberty could reportedly merge.
However, offering a bundle of services – triple play or quad play – is not new for the telecoms industry and it has had mixed results in the past. Consulting firm Enders Analysis points out in a research note: “In the UK since 2001, there have been eight attempts at cross-selling between fixed and mobile, with five outright failures (three of which were from BT).”
Then there is the long list of companies that failed in their efforts to take on Sky in TV. ITV Digital and Setanta collapsed and Disney’s ESPN stepped back. BT’s recent TV success has been the exception, and it has required a huge £1.6bn bet on football rights, with the long-term result still unproven.
Virgin and TalkTalk both already offer quad play and have made some progress in winning customers. The challenge for BT and Vodafone, with their much larger subscriber bases, is can quad play become a mass phenomenon? Enders cites industry figures that show Britons do not have a history of taking all four services from one provider – unlike in, say, Germany and Spain. Choosing broadband and TV tend to be household decisions but mobile is personal, which is why, a shrewd operator like Sky, for example, has resisted going into mobile so far.
There are three reasons why quad play might take off with consumers now: price, superior service, and exclusive content.
Price could be decisive since BT and Vodafone are expected to force change in the market by launching a price war. Economies of scale ought to drive down costs and consumers will switch if they can save a lot of money – even in an industry where there is a lot of customer inertia. Think of BT’s “free TV football with broadband” offer.
Superior service could also be important as we increasingly want seamless communications inside and outside the home. One provider and one bill make sense – if they are combined with fast speeds. When it comes to fixed-line broadband, BT, Virgin and, to a lesser extent, Vodafone have an advantage as they own fibre networks. In contrast, Sky and TalkTalk have to rent broadband access on a wholesale basis from BT.
Content is the other differentiator. Sky has built its platform on exclusive football, which is why BT copied its rival. Other carriers lack original content. All the mobile operators offer some content – Vodafone has a choice of Netflix movies, Spotify music or Sky Sports video; O2 has goal clips from The Sun; and EE has music from Deezer and films – yet it all comes from third parties, so it is not exclusive. Similarly, TalkTalk has almost nothing to call its own and Virgin sold its own TV channels in 2011.
Interestingly, Liberty, has begun to invest again in content, buying a 50 per cent stake in Gogglebox TV production firm All3Media and taking a 6 per cent stake in ITV.
Predicting the outcome of the quad play wars is difficult, but the winners will be those who have scale and a high-quality network. BT and Vodafone are betting they need exclusive media content too.Reuse content