Wireless Weapon in Big Telco v. Cable

The big telcos are taking their first baby steps to exploit their mobile wireless assets in the all-fronts competition with cable operators.

As of the end of 2Q07, Verizon Wireless served 62.1M customers while ATT Mobility served 63.7M. To the extent that the big telcos can bind wireless with their other products, it's likely that they can stanch churn in otherwise vulnerable categories... especially residential and small business fixed phone lines... and boost growth in other areas such as Internet access and multi-channel TV.

In this regard, there have been highly significant institutional changes at both of the telcos. Obviously, as ATT pointed out, its merger with BellSouth enabled ATT to acquire complete control over their formerly jointly-owned wireless operator, thus allowing more flexibility to exploit opportunities for marketing and technical convergence between wireless and fixed products.

Changes at Verizon are more subtle but are also significant, despite VZ's inability to date to buy out Vodafone's share in VZW. During the last year, c-level executive transfers from Verizon Wireless have infused the leadership ranks at the Verizon Communications mother ship. These include Dennis Strigle, president and COO, formerly president and CEO at VZW; John Stratton, EVP and CMO, formerly VP and CMO at VZW; and Richard Lynch, EVP and CTO, formerly EVP and CTO at VZW. Such transfers import a hyper-competitive attitude from the wireless side. They also encourage greater appreciation for potential synergies between wireless and other VZ products. Ironically, while these c-levels were at VZW, they most likely vociferously resisted efforts to associate their own fast-growing wireless with mature and boring fixed products. Given their new responsibilities, they probably now see the cost/benefit ratios of convergence somewhat differently.

Examples to date of converged wireless + fixed products from Verizon:

• Calling plans that include unlimited home-to-mobile phone calling. Single wireless + wireline services bill.
• Bundling for price discounts of various wireless plans with one or more of home phone, Internet access, and TV

Examples from ATT:

• Bundle of fixed local and LD phone, AT&T Yahoo! DSL, and AT&T Mobility wireless. Sold online only.
• "Unity" calling plans with unlimited calls to/from ATT's "calling community" of 100M wireless and wireline phone numbers, available to both residential and small business customers in AT&T's 22-state service footprint.
• ATT Mobility handsets with capability to access ATT Yahoo! portal can select and schedule TV content downloads to an ATT Homezone DVR receiver.

Such examples are not especially novel conceptually. Similar features have been discussed in connection with the Pivot mobile wireless service being introduced by cable MSOs and Sprint. However, they are significant because they are finally beginning to appear in the market and because of the big telcos' massive presence in wireless, still totally unmatched by anything on the cable side. For their part, the MSOs' Pivot venture has had a run of bad news. Time Warner announced recently that subscriptions to Pivot have been underwhelming and Sprint stated that it would not offer Pivot in any additional Sprint stores. The MSOs also possess spectrum that they purchased in last year's AWS auction but they have not yet announced how they plan to use this resource.

Every time cable stocks lose value in the market, pundits point out that one of the reasons is that investors fear operators will make big investments in wireless. Strategically, however, such investments may be unavoidable as well as highly beneficial to the MSOs, both defensively and offensively. Mobile wireless is one of the most vibrant and lucrative segments in the complex of info-telecoms-entertainment businesses; cable MSOs have assets they can bring to the party and they should be going after their share.

AT&T plus Echostar: Dumb Money

There are rumors afoot that AT&T might buy Echostar, or maybe DirecTV, as a shortcut to obtain a meaningful subscriber base in multichannel video services. Why would AT&T do this? One reason might be that AT&T's ongoing buildout of its hybrid-fiber-wirepair network for U-verse is seen as progressing too slowly to make a difference in its strategic competition with cable. U-verse's 126,000 subscribers as of September 2007 are a long way down from the millions served by the larger cable MSOs and by the DBS operators, which translates into much higher per-sub programming costs. Perhaps more significantly, AT&T is accustomed to carrying the biggest guns in each of its markets. Being the little, tiny guy in video is uncomfortable culturally for the biggest kahuna in fixed and wireless telecoms.

It is true that by offering Echostar's DISH (in the former SBC territories) and DirecTV (in former BellSouth territories), AT&T can claim to have a video play that serves a respectable ~1.9M video subs. But these are, after all, DBS subscribers. AT&T is only one of several DBS distribution channels.

By acquiring Echostar and its 13M subs, AT&T would gain immediate entry in its own right into the club of big multichannel video service providers, with all that that entails. Buying DirecTV and its 16M subs would make it the second largest video provider, after Comcast.

Either way, Echostar or DirecTV, this would be a big blunder for AT&T. While each of the DBS operators is a highly credible competitor in linear multichannel video, the game is changing to include interactive, on-demand and bundled products. In these areas, DBS is crippled. The DBS operators have no effective response to VOD; downloading video content to DVRs for replay later does not compare in terms of connvenience or choice. They have no broadband Internet access solution that can compete in the data rate arms race with cable and Verizon FiOS. While the DBS national footprints are an advantage for Echostar and DirecTV as national providers, AT&T could only exploit the DBS coverage within its own regional area for purposes of bundling with its telecoms and Internet access products. Elsewhere, AT&T would simply offer DBS service, probably less effectively than current DirecTV or Echostar managements.

Echostar's market cap is currently north of $20B. Charlie Ergen can be expected to demand a healthy premium such that AT&T's total acquisition cost for 100% of the company would likely approach or exceed $30B. What else could AT&T do with this money? Well, with this kind of investment, AT&T could upgrade its network build-out to provide truly competitive broadband connections to subscribers, like Verizon FiOS does with its fiber-to-the-premises. AT&T has put forward its hybrid-fiber-wirepair network architecture as a much lower cost (and therefore smarter) approach than Verizon's FiOS, so adopting Verizon's approach after all might be embarrassing for some AT&T execs, at least for awhile. And it would take 3-5 years before AT&T could show results from this investment. By comparison, it might seem easier to buy Echostar (or DirecTV), avoid the embarrassment, and obtain a quick hit of millions of video subs now; but, to paraphrase Richard Nixon, for AT&T's long-term strategic interests, this would be the wrong choice.