Wednesday, January 8, 2020

Without a merger, T-Mobile, Sprint, and Dish will fare very differently

On January 15, closing arguments will be heard in the lawsuit brought by Attorney Generals from 15 states and the District of Columbia to block the T-Mobile-Sprint merger.  In early February, we can expect to learn Judge Victor Marrero’s decision in the case.  While it seems like everyone these days is giving new odds on the likelihood the merger will go through, with and without additional conditions attached, are the three firms with the most to gain from the merger, T-Mobile, Sprint, and Dish, likely to feel the loss equally if the merger does not go through?  I don’t think so. 

While T-Mobile has spent a tremendous amount of money and manpower to get the $26 billion deal approved by all regulators, its business is thriving as it reported a gain of 1 million post-paid subscribers in each of the last two quarters.  And, although John Legere will be out as CEO effective April 30th, the firm’s “uncarrier” approach to the market and its multiple content and wholesale distribution partnership deals will continue to serve it well as it acquires the additional spectrum it needs to accelerate 5G deployment.

The same cannot be said for Sprint and Dish.  These companies need this deal or another to be financially viable in the years ahead.  Both firms reported subscriber losses in the third quarter of 2019 (4Q2019 #s are not available yet) in their most profitable business segments.  According to the Leichtman Research Group, Dish lost 66K subscribers.  During the same period, Sprint shed 26,000 post-paid subscribers, while its competitors all added subscribers.  (Sprint also just announced plans to discontinue its Virgin Mobile service; rolling customers over to its Boost Mobile service.)  If the merger does not go through, look for these two firms to quickly seek out other media firms to merge with or sell assets to.  First on the list for both may very well be the payTV providers, Comcast and Charter.

Monday, December 30, 2019

Netflix: The Best of the Decade

On November 24th, Taylor Swift was recognized as the Artist of the Decade by the American Music Awards.  If a similar award was given to a firm in the video streaming industry it would have to go to its pioneer, Netflix.  At the start of the last decade, Netflix had 12 million subscribers, all in the U.S., and most of them consuming video content on DVDs received in the mail.  Just one year into the decade, Netflix had expanded into Canada, grew its subscriber base to 20 million, and began delivering a majority of its licensed content over the internet instead of through the postal system. 
With the floodgates opened, Netflix would spend the rest of the decade adding award-winning content to its platform and scaling across the globe.  It will end the decade with nearly 160 million subscribers in over 190 countries.  It will end the decade with more of its content being created exclusively for Netflix viewers.  It will end the decade being ten-times more profitable than what it was at the start.  It will end the decade, however, with having to face new competitive threats from former business partners. 
While sticking to its core competency proved to be the right strategic move for Netflix over the past ten years, will it continue to be going forward?  Afterall, the market entrants are no small fries.  They are legends that spent most of the last decade a bit complacent and unwilling to adapt to changing consumer taste preferences   But, that is now a thing of the past.  The disruption to Netflix and the broader industry is coming from content providers going direct to consumer with their own offerings, bypassing content aggregators like cable and satellite providers.  Leading the charge is a re-energized, re-focused Disney.
Since the inception of cable TV, the success of broadcasters (e.g. ABC, CBS, NBC) and cable networks (e.g. ESPN, HBO, Discovery) was tethered to the rise in popularity among households to pay for a bundle of channels delivered to their television set via a cable box or satellite transmission. At its peak in 2009, 100 million households subscribed.  However, fed-up with rising prices for these fat channel bundles, households began cutting the cord early in the decade.  As broadband technology improved and more streaming services (e.g. Hulu, Amazon Prime) became available, cord-cutting accelerated.  The decade will end with less than 88 million U.S. households subscribing to payTV.
For Disney and the other content owners, the challenge is and will continue to be how to hold onto their lucrative relationships with payTV operators (for now) while building out their own competing platforms.  While it is uncertain how consumers will respond to unbundled, somewhat customizable choices for how they allocate their screen time, Disney is primed to be a favorite among consumers and the “one to beat” among its competitors in the decade ahead.  Its success will derive from its extensive content library and theatrical dominance combined with recent acquisitions (e.g. BAMTech and Fox) and product launches (ESPN+ and Disney+).  Its success, however, won’t come easy and cheap.  Disney will have to fiercely compete with the likes of Comcast, ViacomCBS, AT&T (Time Warner), and, yes, Netflix to attract and maintain subscribers.  It will have to spend a lot of money on content creation.  It will have to/want to acquire content by scooping up smaller, fringe firms that have found it difficult to sustain profitability on their own with insufficient scale and consumer loyalty.  In ten years, expect that the video streaming market is much bigger and dominated by the same handful of giant firms (including Netflix) that control the big screen.  Stay tuned!

Monday, November 18, 2019

Update: Legere staying on at T-Mobile until end of April

Thank goodness for T-Mobile employees, customers, and shareholders, Legere is staying put until his contract expires at the end of April.  Although I think more time at the helm would have been better, Mike Sievert, current President, COO, and Board Member at T-Mobile is the natural succession choice.

Sunday, November 17, 2019

Legere Needs to Stay at T-Mobile

In other news this week, WeWorks, controlled by SoftBank, was rumored to be courting T-Mobile’s CEO, John Legere, to be its new CEO.  SoftBank currently is the majority shareholder in Sprint, the company merging with T-Mobile in early 2020, if a settlement with 15 states trying to block the merger is reached.  In the twists and turns of the T-Mobile-Sprint merger, Marcelo Claure, who is the executive chairman of Sprint, is also the COO of SoftBank.
The attractiveness of Legere to be the savior of WeWorks makes sense.  His success in elevating T-Mobile to the 3rd largest wireless carrier in the U.S. with his eccentric and “make it happen approach” is undisputable.  But, if T-Mobile is going to get through the court case with the states AND live up to all its promises to the federal and state agencies, it needs Legere at the helm.  No ands, ifs, or buts.

What a Week It Was For Disney

Last week, Disney introduced Disney+, its new streaming service.  The price is $6.99/month as a standalone product or $12.99/month when bundled with Hulu and ESPN+.  The bundle price is the same as what Netflix charges for its most popular offering.  Within the first day, 10 million households had subscribed. 

With full operational control of Hulu since the spring, Disney also announced that effective December 18, the price of its Hulu+Live service will go from $45/month to $55/month, a 22% increase.  The price increase comes 6-months after a 12.5% increase in January (from $40 to $45). 
If you had any doubt, the two announcements “define” what market power looks like!  While Netflix had the first mover advantage and has grown to over 150 million global subscribers in a dozen years of streaming , Disney’s huge brand identity and intellectual property assets (which it no longer licenses to Netflix), makes its “late” entry into the market a huge concern for Netflix.  

For now, Disney can enjoy the fanfare and the excitement around the launch.  But, in 2020, the market is going to get more crowded with other media giants (e.g. NBC Peacock and AT&T’s HBO Max) entering with their own direct-to-consumer entertainment choices that will be priced to attract and retain subscribers.  While it is not a zero-sum game or an "everyone will be a winner” situation, expect that, when all is said and done, Disney will be one of the major players in this space. 

Wednesday, October 30, 2019

HBO Max - A Potential Winner?

Yesterday, AT&T (WarnerMedia) announced its new streaming service HBO Max.  The service will launch in May of 2020 and will be offered for free or discounted to subscribers of AT&T’s premium unlimited wireless plans or one of its MVPD services (U-verse, DirecTV).  Entering a market using well-established platforms (wireless, MVPD), with millions of subscribers on each, and then adding the cherry-on-top of price incentives, gives AT&T a huge competitive advantage in the increasingly crowded market for streaming services.  It is not a winner-take-all market as households will subscribe to multiple services.  However, you certainly would expect that AT&T will be one of the winners.  Much like you would expect that Google, Amazon, and Facebook (BIG TECH) will succeed when they introduce applications and new services on their online platforms.

So, it begs the questions.  Does the vertical integration of platform and content, created with the 2018 merger of AT&T and Time Warner, give the media-telecom firm an unfair market advantage?  The DOJ was concerned about that and it is why it filed an antitrust suit to block the merger.  (The courts did not have the same concern and approved the merger.)  This summer, the DOJ opened a broad antitrust review into the BIG TECH firms’ business practices.  If harmful conduct is discovered, what action might regulators take?  Would it be right to extend review (and action) to other firms with similar vertical structures, like AT&T?

The review could start with the year-long carriage dispute between AT&T and its satellite competitor, Dish.  Since last November, Dish has not carried HBO, including during the spring release of the final season of Game of Thrones.  Dish believes that AT&T’s behavior in contract negotiations has been anticompetitive, using its leverage to foreclose access to the premium content favored by many. 

Monday, October 28, 2019

"No Sacred Cow"

On Monday, AT&T released its third quarter earnings and announced a settlement of sorts with activist investor, Elliott Management, that commits, over the near term, to reducing debt and avoiding major acquisitions among other things. 

Probably the most concerning part of the financial results was the continued hemorrhaging of TV subscribers.  In the quarter, AT&T’s Entertainment Group experienced declines of greater than a 5% (1.163 million) in premium TV subscribers and 17% (.195 million) in AT&T Now subscribers.  For “now” though, DirecTV is staying put as part of the firm’s assets and strategy “to meet growing demand for content and connectivity.” With Elliott and other participants on the earnings call, AT&T’s CEO, Randall Stephenson, said that “[DirectTV] will be an important part of our strategy over the next three years. But no portion of our business is exempt.”