Comment There is that great promotional line in the first season of Game of Thrones which goes, “In the game of thrones, you either win or you die.” Well, it applies just as much to the Game of the ever-converging, ever-thrilling US telecommunications and network market.
With the news this week leaking out that Softbank has more or less agreed the purchase of T-Mobile, not only will the US mobile market be going through dramatic changes, but the entire shape of the digital communications landscape will change, taking in fixed cable and telcos, ISPs and potentially broadcasters and studios.
The drift is towards the converged operator – a large national player that has a wireless network, a fixed network, a national footprint for both large and small video services (4K and portable) and which has a secondary wireless network in Wi-Fi, as well as one that has sufficient scale to acquire both original TV content and sports rights. The race is on to become the first to achieve all of this.
By looking at what each of the surviving operators have to do to achieve this, we can perhaps glimpse the future shape of the US digital communications map.
If Comcast is really allowed to close its deal with TWC, the buying power of two major pay-TV players will be merged into one, and the same thing will happen with the merger of AT&T and DirecTV, dramatically cutting down the number of options studios have when they look for a home for a TV series or channel. In the US, at least for a while, it will be become a buyers’ market.
This will make for a powerful set of buyers in the sports market too, challenging the traditional pre-eminence of US broadcasters like ESPN, CBS and Fox to gain exclusive access to key sports events. Elsewhere in the world cable and DTH have taken over from broadcasters already, so this is overdue.
Without control over sports rights, broadcast TV channels will lose their edge in content negotiations with pay TV operators, and an inevitable slide could ensue, resulting over time in national broadcasters becoming part of the consolidation picture in the US. Comcast has already acquired NBC, so why would Time Warner, CBS, Disney and Viacom or part of either of them, come into the consolidation picture? Disney owns ESPN and ABC, CBS is a loner cast adrift by Viacom, while Paramount is one of the key assets inside Viacom. There are multiple regional broadcast players too.
Big fish to eat Dish's dinner
At the same time the gap between low-end pay TV operators and their larger counterparts will begin to tell, simply because it is just too large. The larger ones will have the scale to get in first bids for all content and the muscle to dictate pricing, while the smaller, less leveraged players will get fleeced on price and be left with slim pickings.
The first likely “victim” in this scenario is Dish Networks, which has no partner in the US for a return path for telephony and broadband, and too few assets outside the country (Mexico only) to force its growth. It clearly has spectrum assets, but does not appear to be naive enough to go it alone in building out a national wireless network.
It can launch OTT video services, but is prone to being slowed or taxed at the peering level and potentially squeezed at the access delivery point. Without a fixed line network or access to fixed wireless networks – like TD-LTE for instance, such as the Clearwire network that Sprint owns – it can only dream of an LTE Advanced network on its spectrum. The starting price is in the order of $8bn or $9bn just to get it off the ground – and even then there are no guarantees of success.
Dish's proposition is straightforward – it wants to offer the spectrum it holds to a player that already owns a wireless network in the US, and get back privileged rights immediately. Verizon is not offering it a deal and says it does not want to buy it, while AT&T has already chosen its rival DirecTV with which it has made the same deal.
The only remaining games in town have just agreed to merge, so this is now a deal that can only be made at the behest of one man: Masayoshi Son, the CEO of Softbank. Dish chairman Charlie Ergen has already tried and failed with Clearwire and Sprint, as he chanced his arm to acquire them from under Masayoshi Son’s nose.
There is a saying in negotiations, “The first man to speak loses,” and Ergen here has given away how keen he was to partner with Clearwire, and now Masayoshi Son can likely dictate terms. We have no idea of why the Dish share price has remained so buoyant in spite of this obvious position.
AT&T DirecTV, Comcast TWC... and everyone else
The other potential victims of the sudden size advantages of the two merged behemoths are the newly created SpinCo, Charter, Cox, Cablevision and Brighthouse Networks. A content owner will find itself made when it signs up either Comcast TWC or AT&T DirecTV, and so needs these other smaller deals far less. It will thus be able to make the negotiations hell and profitable enough to make up for the negotiating leverage that Comcast and AT&T have. Renew a Comcast content deal for 20 per cent less per home, and you simply ask all the others for 20 per cent more.
One of the worst things is that AT&T now has a national Pay TV footprint in DirecTV, which matches its cellular footprint, and extends way beyond its fixed line reach. So it competes with every single one of these tiddlers in pay TV.
Now where it has broadband, or better still U-Verse, as well, AT&T can bundle four services in a fairly irresistible quad play. Outside of its fixed line footprint, it can only bundle mobile and pay TV, unless it partners for Wi-Fi or broadband reach with these other players, or hooks up with a Wi-Fi aggregator like Boingo, or builds out its 2.3 GHz holdings using TD-LTE, to create a cheaper version of Clearwire with a better brand. That way it could extend a quad play to the entire US footprint, although that would take time and would probably only yield a relatively slow line, perhaps 10 Mbps or so.
It could also do this with a variety of spectrum using carrier aggregation in LTE, but it amounts to much the same thing.
The only service offerings right now that can beat this come from Verizon using FiOS lines or from the incumbent cable player, which has far better DOCSIS 3.0 broadband. But right now in the US Games of Network Thrones, what cable operator really has a proper quad play with a cellular option?
This is like cutting between the scenes in the HBO epic with one woman with dragons on one side of the sea, and a bunch of wildlings North of the Wall on the other side of the Game of Thrones maps. If they knew and trusted one another, they would be irresistible, but they don’t. And this is true of the new combined Sprint-T-Mobile (Or T-Sprint or whatever you’d call it) and the cable companies. They have tried to partner in the past and nothing much has come of it. In fact, Cable has tried to form an exclusive partnership with Clearwire, and another with Sprint, one with both of them together and then tried for an exclusive partnership with Verizon. It’s running out of options.
So cable seems to have settled for Wi-Fi First as its weapon of choice but it still needs an MNO partner to keep the service fully mobile – allowing it to roam outside of a Wi-Fi footprint. To us it looks like cable will collectively and separately have first dibs at a relationship with Sprint-T-Mobile not because it is more likely to reach an agreement this time around, but because in the long run, Sprint-T-Mobile will at some stage find itself challenged to match Wi-Fi held by both AT&T and Verizon.
At some stage, these conservative US telcos will decide to take a rest from heavy capex outlays for cellular, and instead drive prices right down using whatever Wi-Fi they have to hand, off-loading mobile to it instead of building further cellular base stations. At that point they can target Sprint-T-Mobile on its own terms – on price – and go for the jugular.