If there was ever an advert for the way consumers are changing the way they watch and access video content, the US drama Breaking Bad provides an apt case study.
The show, which tells the story of a cancer-stricken chemistry teacher who dabbles in the dark world of illegal drugs, is now a global phenomenon. Its final episode reached 5.9 million viewers on US cable TV, and its meteoric rise up the US ratings has largely been attributed to consumers being able to access every season of the show on video-on-demand (VOD) platform Netflix.
Talk of the show – first aired in 2008 – has now gained traction across the world. The Netflix effect, and indeed, the benefits of accessing a library of episodes, is there for all to see. The show reached little over a million viewers when it premiered.
And while telcos seek a way to access such rich-media content, cablecos are looking at improving their fibre and wholesale infrastructure to offer similar VOD services. Is there a middle ground in sight?
Up for sale?
The underlying advantage cable companies hold over telecoms operators is in their access to rich-media content like Breaking Bad. At present, the industry is at odds over who will be the controlling players in the battle for market share in both segments.
Speculation was ripe at the end of last year that there would be a takeover bid for perhaps the most iconic cable company in the US, with rival operators Comcast, Charter Communications and Cox all circling Time Warner Cable. Reports suggest Comcast has now taken a lead on a potential acquisition, which could be worth up to $38 billion.
John Malone, the ambitious chairman of aggressive European consolidator Liberty Global, has also shown his intention to consolidate further in 2014. He owns 27% of Charter Communications and is unlikely to let Comcast take Time Warner Cable easily.
As Capacity went to press, Liberty Global had also again reopened talks to acquire Netherlands-based Ziggo, where it already owns cableco UPC. This follows Malone’s interest in acquiring Germany’s Kabel Deutschland last year, which was eventually acquired by Vodafone.
The UK-based behemoth has seemingly targeted investment in the cableco market as its next project following its exit from the US, and is rumoured to be interested in making additional investments in 2014, with Spain’s ONO and Italy’s Fastweb in its sights.
But perhaps the most intriguing activity is yet to come. Charter Communications has shown a long-term interest in Time Warner Cable in the US, which has led to Comcast making a play for the company. With Comcast’s leverage, it is likely that the largest and second-largest pay-TV companies in the market could consolidate in the coming year.
Meeting the MSOs
Cable started to generate large-scale investment during 2013. Many industry insiders claim that the resurgence of the industry and speculation over widespread consolidation is predominately down to increasing demand for video content.
Malone’s M&A strategy for Liberty Global is designed to expand its reach in companies that are widely synergistic to its present operation. Through the acquisition of Virgin Media – which it secured at the start of 2013 – the company expanded its reach to address over 1 million km of fibre across Europe and, in turn, increased its direct presence in wholesale.
“The acquisition definitely helps us in the wholesale market,” says David Jan Aris, the company’s director of wholesale. “People are recognising us because of the large investments we have made in recent years. It also means we are now directly involved in the carrier space.”
For telcos, the threat of cable expanding in such a way is as strong as ever, given the fact that the large cable operators have access to all-important content streams, giving them the ability to offer a range of bundled packages.
Cablecos, too, have seemingly vamped up their telecoms offerings in recent years, in an apparent bid to cash in on their advantageous position in the market.
“Carrier services have been viewed as the leadership of commercial services,” says Thane Storck, group VP, carrier services at Time Warner Cable Business Services. “It has a strong growth engine and one we are really excited about.”
Time Warner Cable has operated a wholesale division since 2007, and offers two lines of business under the carrier flag. It has a vested interest in the cell tower business in particular, and also operates a last-mile service that deals with transport firms, CLECs and international firms coming into and out of the US.
Storck describes the company’s wholesale strategy as “young and aggressive”, and worryingly for the telcos, he sees them as natural competitors in the space.
“We are generally competing for the same business,” he says. “Alternatives in the sector seem popular and that has created additional opportunity for us.”
Storck believes cablecos in general are in a better position to serve multiple areas of the market, given the fact they have access to the all-important content.
He claims that this crucial element means cablecos are better positioned to integrate with MNOs, giving such companies access to Time Warner Cable’s eyeballs.
“Organisations that are close to the eyeballs of the public infrastructure will have the opportunity to leverage their network assets,” says Storck. “This, in effect, enables a more streamlined design and a better offering to MNOs and transit firms, which is an asset for us and becomes an important differentiator in the long term.”
Comcast, one of the companies rumoured to be interested in Time Warner Cable, has followed it in increasing its presence in wholesale and building a network fit to serve and compete with carriers. Barry Tishgart, VP and head of wholesale at Comcast, told Capacity that the increased focus on the sector was part of a drive by the company to meet the evolving needs of its customers.
The company’s move towards becoming an MSO has also been driven by increasing demands for video. According to Tishgart, cablecos are in a better position than telcos to roll out quad-play – and even IP services – given their widespread access to such content on a range of levels.
“When we talk about wholesale capabilities to deliver video services that are IP-based or linear, there is competition coming from telecoms operators in the US,” he says.
“The fact that Comcast has the leverage to combine different businesses helps. We now have more of a focus and resources dedicated in this space where we hadn’t in the past. We have seen the opportunity and are aligned with customer needs.”
The customer is always right
Both Storck and Tishgart attribute the rise in the MSO business model as a direct effect of cablecos having a better grasp of customer requirements, compared to telcos.
“The industry has evolved,” says Storck. “There is a bigger requirement in the industry to have a scalable strategy that also gives customers the necessary outbound to the internet. They are not out of touch, but they are in the midst of an evolution as well. I can’t speak for their boardrooms, but these are some of the key elements we have focussed on.”
Wholesale provider Colt – which signed a deal with UK pay-TV giant BSkyB at the end of last year to terminate the broadcaster’s international traffic – agrees that there needs to be a change in strategy. The company believes there is potential for partnership opportunities between the two segments, particularly if telcos decide not to compete in the video space.
“Cable companies have access to content, which is where the money is,” says Peter Hutchings, VP for voice trading at Colt. “Network operators such as us are also moving towards helping the cable companies utilise video, with the view of becoming an enabler of content. There are now a lot of people which have network-hungry requirements and video is becoming the ultimate. Providing high-value content is really where network operators such as us are going.”
On the consumer side, cable companies are seemingly able to offer their customers a package that trumps both their telco competitors and the ageing satellite segment.
In the US, cable providers are able to offer both broadband and video content in one bundled package, giving them a larger addressable market.
“The residential side of our business is still the core backbone of our company – and the commercial side is the growth darling of Time Warner Cable,” says Storck.
Despite the company’s growth in wholesale across cable, he believes this can be applicable to much of the cable industry. Insiders, too, claim that cable operators are winning the battle for market share in the highly competitive US broadband-to-the- home segment hands down.
Tishgart believes this is where the opportunity lies, not only for cable but also for telecoms. He envisages future convergence between cable and telecoms will be driven by the quad-play model, which could lead to additional synergies between segments in the future.
Comcast is renowned for building an infrastructure that is based on delivering pay-TV, video and internet services. The company has amassed approximately 21.6 million subscribers, with over 86% of Americans subscribing to a pay-TV platform.
Telcos fight back
The larger US operators – namely AT&T and Verizon – have taken note, and have developed smaller but similar bundled packages to cablecos.
“Quad-play has a prominent role,” says Tishgart. “It will be the key for telecoms operators going forward. Internet is forever evolving as a video-based platform, so the confluence of internet, video and data is important.”
However, according to reports, telcos could have a reason to be bullish. Recent data suggests that Verizon and AT&T are now the fifth and sixth-biggest pay-TV companies in the US, with the figure likely to grow if they invest more in the platform.
Telecoms only makes up 10% of pay-TV market share at present, compared to the 55% share of the cable companies, but there are signs that telecoms can pounce on the tenuous position cablecos find themselves in, given the right investment.
Comcast in particular has seen a small but alarming decline in its subscriber base. Recent statistics show that pay-TV revenues have seen a small but sharp decline since 2008, with research from independent firm MoffettNathanson suggesting the industry lost 687,000 subscribers last year alone.
The influence that companies such as Netflix and Amazon have in the market is continuing to grow, and consumer dependence on television is falling, as people begin to watch programmes on a range of devices over fibre networks.
This could ultimately be of advantage to the telecoms operators, and companies like Comcast have had to place a bigger focus on their broadband offering.
The company is also expected to have more subscribers on its broadband service than its pay-TV platform by next year, with analysts suggesting the future of Comcast could be centred on its internet offering, and indeed the development of video-on-demand. Tishgart, however, continues to highlight the advantages of quad-play.
“We are continually looking to draw on our strengths, which include voice, video, data and fixed, primarily in the US,” he says. “Drawing from these capabilities provides a unique set of services.”
The pending battle between cable and telecoms is an intriguing one, particularly if telecoms operators can develop their offerings beyond traditional services. In a relatively short space of time, the cableco offering has developed and Storck still believes the infrastructure that they have built puts cable companies in a better position to provide a bundled package.
“Consumers are finding that cable operators are logically closer to them with the density of our plans,” he says. “Particularly on the metro side, we have the ability to deliver services to on-net buildings and near-net buildings, in addition to expanding our cell tower space. Accessibility to fibre is what people want.”
Cable consolidation
With Vodafone and Liberty Global targeting further consolidation in 2014, there are sure signs that the cable segment will indeed be central to the major deals next year.
Content delivered across telecoms networks is now a key element to the development of the sector, with cable assets continuing to rise in value as operators look to converge offerings and tap into bundled packages.
Market watchers suggest the European cable market is likely to have more rounds of consolidation before it truly matures. It is highly likely that cable companies, too, will look to reinvest in their networks to compete with telco fibre broadband offerings, as access to TV evolves to the internet, which again makes the market ripe for M&A activity across the segments.
Malone’s Liberty Global is a big advocate of reinvestment, and Aris says the company reinvests “over 20% of its revenues back into its network every year, as the amount of data required continues to grow”.
Investment in fibre will also be a key element for MSOs, and is something that the three major players – Liberty Global, Time Warner Cable and Comcast – are aware of.
“We already have a compelling offer for carriers in the fibre space,” says Aris. “We believe that this is our USP to some extent. We have used our strength in local networks and local expertise to deliver the last mile to carrier networks.”
Tishgart, too, agrees with the idea that the two segments can work together on different sides of the business.
“There’s definitely some dependence on telecoms services to help deliver end-to-end cable services, and as telecoms becomes more focussed on video, there is potentially more that cable wholesale offerings can provide for the carriers,” he says.
Both Comcast and TWC failed to deny speculation to Capacity that the companies could merge next year, and whether it is Comcast or a Malone-influenced takeover, TWC seems set for new owners.
In Europe, the aggressive and capital-rich Vodafone has taken on a similar investment strategy to Liberty Global, and there is now talk of a mammoth merger between the two companies. That could bring about telco-cable convergence on a much larger scale.
