PDS Blog

Tuesday, 12 August 2008

Eye- to- Eye With Unions: Verizon Blinks to Avert Strike

CWA & IBEW: “We Did It!”

In the tentative agreement with the CWA and IBEW announced August 10^th, Verizon conceded on points that were headlined as key to both sides.

First, Verizon will continue to pay 100% of health care premiums for current employees and retirees. Second, some jobs that have been in the non-union Business (ex-MCI) group, and some formerly non-union temp workers, have been re-classified as permanent union jobs. Third, Verizon agreed to wage and pension band increases (10.87% compounded over three years), plus an additional cost of living bump in wages.

The agreement is complex and the specific starting positions of each side have not been disclosed, so it is unclear how far Verizon and the unions each fell short of their original objectives. For example, while the unions celebrate that formerly non-union SMB tech jobs will obtain union recognition, VZ management indicates that this is achieved by transferring positions to the unionized Telecom group rather than by admitting the unions into the Business group. Also, there is a long-standing theatrical convention, involving parts played by both management and union negotiators, that agreements must be presented by union leaders as representing hard-fought gains won on behalf of dues-paying union members. However, one of the agreement terms reveals that Verizon management believes that it did not achieve the cost savings that it sought. Unlike the earlier five-year contracts, this new agreement will run only three years which Verizon explains will provide “additional flexibility to closely align future agreements to marketplace changes.”

Each side had reasons to fight and reasons to settle. In the end, it looks like Verizon’s big reason to settle – no interruption to marketing and installation of FiOS in New York City and elsewhere – outweighed the unions’ concerns about what they refer to as “a very tough economic and political environment.”

For cable operators, this outcome of Verizon’s latest confrontation with its unions means no time off from FiOS competition, continuation of Verizon’s current labor costs, and a new benchmark for the MSOs’ own labor relations.

Verizon’s top executives may now be hunting for other ways to off-set ongoing high labor costs. It’s unlikely that their first choice will be to sacrifice their own bonuses. Perhaps, as occurred after the last Verizon labor agreement in 2003, they will find cost savings by laying off lower level managers. And then, three years from now, they’ll have an opportunity to arm-wrestle again with the CWA and IBEW.

Comments?

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Friday, 1 August 2008

Strike Clouds At Verizon: Update at The Brink

Union contracts at Verizon East (former NYNEX and Bell Atlantic) will expire tomorrow, August 2^nd, at midnight. There has been no public indication of progress on key sticking points between Verizon and the CWA and IBEW. Union members have authorized a strike which could start on August 3^rd if a new contract is not agreed.

The Unions are providing a running update on the negotiations, from their perspective, at http://www.cwa-union.org/verizon/. Excerpts follow:

Verizon Northeast (former NYNEX), 25 July.

CWA/IBEW 2213 and IBEW New England resumed negotiations with Verizon this morning in Rye, New York . …The focus of today’s meeting was on the marketing department side of Verizon. The Unions has raised the issue of the jobs of the future during numerous bargaining sessions since the beginning of these talks. No progress has been made on this important matter.

Our contracts expire on Saturday (sic), August 3rd. Strike preparation continues on both the National and Local Union levels. Members should be contacting their Locals about picketing and strike duty assignments if they have not already done so.

Verizon Mid-Atlantic (former Bell Atlantic ), 28 July

The Unions and the Company met today and the Company provided counter-proposals to the Unions' health care proposal made in earlier meetings. The meeting adjourned and the Union will assess the counter-proposals and prepare a response.

Only a few more days remain until the contract expiration and we are still far apart on all critical issues and without any agreement on any issue. While it is still possible an agreement can be reached, it is most important that we are ready in the event this contract has to be negotiated in the street.

This contract is about the future. It will do us no good to win wages and benefits and then lose our jobs. Our members have made it clear that they understand and support our bargaining agenda. Special notice: Alpha Units and Moonlight Units are to stay on stand-by. Absolutely no jumping the gun. These units must act at the same time when the signal is given.

Meanwhile, Verizon is starting this week to install FiOS in New York City in the midst of an intensive marketing campaign. A strike that disrupts growth of FiOS in this market, and elsewhere, will be inconvenient for Verizon’s wireline business which increasingly relies on FiOS to compensate for decreases in local phone lines and DSL connections

Comments?

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Friday, 1 August 2008

DISH Network Nail-Biter As AT&T Decides Next DBS Deal

In April, AT&T said it would no longer offer DirecTV in its former BellSouth territory, leaving DISH Network “for the near term” as its sole satellite TV provider across the 22-state AT&T footprint. Then, in June, AT&T notified DISH Network that its distribution contract will terminate at the end of 2008.

This does not mean AT&T will stop offering satellite TV. AT&T now forecasts that U-verse will be built-out by end-of-year 2010 to reach 30 million households, up from 11 million today. Even if this is achieved, it would still leave 40%-50% of the households in AT&T’s footprint with no “advanced TV” option unless AT&T has a satellite TV partner.

Although still needed, satellite TV seems to have lost its magic for AT&T as a draw for new subscribers, which may help to explain why AT&T would want to change its DBS distribution deal. AT&T’s growth in satellite TV connections, net of churn, declined precipitously during the last four quarters, from 140,000 (3Q07), to 130,000 (4Q07), to 116,000 (1Q08), down to just 3,000 ( DISH -only 2Q08). AT&T attributes this in part to the greater appeal of U-verse, which gained 318,000 subscribers during 1H08, almost three times AT&T’s net new satellite TV subscribers during this period.

DISH Network has the most to lose if AT&T doesn’t renew. In the DISH Network quarterly SEC report for 1Q08, AT&T is credited with producing a “significant percentage” of DISH ’s gross new subscribers. Of 730,000 gross ads during 1Q08, DISH gained only 35,000 net new subs. Lacking AT&T distribution, DISH may start to suffer net losses of subscribers.

In DISH ’s favor, AT&T’s innovative Homezone product integrates DISH satellite TV and DSL Internet access, in order to provide VOD -like online movie downloads and remote DVR management, among other features. However, Homezone may not swing a big enough tail to wag the DISH dog. Its subscriber count is unreported by AT&T, but is probably nothing to brag about given that it is a subset of newly-added DISH Network subscribers. An AT&T deal with DirecTV would not necessarily mean the end of Homezone, although the Homezone DVR receiver would need to be adapted to work with DirecTV.

DirecTV is probably less desperate than DISH , but nevertheless would benefit from a distribution agreement that covers AT&T’s entire footprint. DirecTV’s earlier arrangement with BellSouth produced 818,000 subscribers by 4Q06, when AT&T’s purchase of BellSouth was consummated and DirecTV subscribers were last reported by AT&T separately from DISH subscribers.

DISH Network or DirecTV? “In terms of AT&T Homezone, it is premature to speculate. AT&T continues to discuss options with DISH , in addition to evaluating other short- and long-term options,” an AT&T spokesperson says.

Comments?

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Wednesday, 11 June 2008

Strike Clouds at Verizon Bringing Spring to Cable MSOs' Steps

Battle lines are forming for a strike at Verizon beginning in early August that could end up as an industry-changing confrontation.

On 2 August 2008 , existing contracts expire between Verizon East, the combined wireline operations of the former NYNEX and Bell Atlantic, and the CWA (Communications Workers of America) and IBEW (International Brotherhood of Electrical Workers). The parties are now negotiating such difficult issues as how to allocate cost of health care and prescription drugs and which jobs are covered, or not, by labor contracts.

Much has changed since August 2003 when Verizon and CWA/IBEW last approached a strike, which in that instance was averted at the last moment. Some of these changes are exerting new pressures on each side to reach agreement before the picket lines go up:

On Verizon

· In 1Q08, Verizon reported a net loss of 576,000 residential phone lines primarily to cable and to wireless substitution. Service disruptions caused by a strike will accelerate this erosion.

· Verizon has cleared almost all regulatory hurdles to offer FiOS TV in New York City and expects to start doing so by late 2008. A strike would put on hold this much-awaited expansion of FiOS TV as well as stopping new installations of FiOS (and other Verizon services) elsewhere.

On CWA/IBEW

· If a strike causes Verizon’s wireline business to shrink, or puts FiOS at risk, Verizon’s need for union workers will be reduced. Other major telecoms employers in Verizon’s territory, including cable MSOs and Verizon Wireless, have minimal union representation. A strike that undermines VZ’s business would shrink the pie that feeds the major telecom unions and their members.

Despite pressures to settle, Verizon may decide to take a strike. A potentially key factor in this decision is that Verizon’s senior management has been taken over by C-level imports from Verizon Wireless starting with Denny Strigle, president and COO , formerly president and CEO at VZW. Unlike its parent, Verizon Wireless is non-union. Might this be Strigle’s moment to take a stand against the CWA/IBEW, as in Ronald Reagan Smites the Professional Air Traffic Controllers Association? According to a CWA online newsletter in April 2007, a Verizon executive who was urging workers to rethink their support for a union was quoted by witnesses as saying “we are under wireless now,” which the CWA observed was “a reference to Strigle’s harsh anti-union stance when he headed Verizon Wireless.”

Although the MSOs are on the sidelines, they have a stake in the outcome. They will benefit if the unions “win” and Verizon is forced to carry higher labor costs and has less flexibility in managing its operations. Even if Verizon “wins,” the MSOs may still see their glass as half-full if this weakens the CWA and IBEW which are also knocking on the MSOs’ doors. Either way, the MSOs’ interest in these proceedings has at least a tinge of schadenfreude.

Comments?

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Monday, 21 April 2008

Verizon FiOS Magic Words for Digital Transition: ‘Free’ and ‘Easy’

Verizon is now telling its FiOS TV subscribers that beginning in May their analog TV channels will be transitioned to a digital format. This will affect all subscribers who have directly connected any of their TV sets to receive FiOS’ analog TV package of local broadcast and access channels. The magic words that Verizon is using to break this news—improved, more, free and easy — may be of interest to cable operators who are fretting about how to deliver the same message to their own subscribers.

Cable operators are worried that their analog subscribers will resent having digital set-tops foisted on them versus no set-tops or low-cost analog STBs. The broader context of broadcast TV’s digital transition should alleviate some of this potential resentment. A positive spin on the digital changeover, as is now being modeled by Verizon, could further help to make the medicine go down more smoothly although admittedly Verizon has less to fear since there are relatively few analog-only subscribers to its low-profile local TV package, as compared to the still numerous legacy analog cable subscribers.

In a letter to FiOS TV subscribers, Verizon headlines “an exciting change” that will “…continue to improve the Verizon FiOS TV experience….extending quality of digital to all TVs in your home…to bring you even more of the great HD and special interest content.”

Then, the catch: “Each TV in your home will need one of the following devices to receive the new digital signal: a Verizon-issued digital adapter, or a Verizon-issued set-top box or CableCARD.”

But then, the good news: Verizon offers to provide this equipment for free, as in FREE , all caps, repeated twice. “To avoid disruptions to your service,” subscribers are told to contact Verizon “to order your FREE equipment.”

The letter concludes: “…an all-digital signal will give us the chance to provide improved picture and sound quality, including more HD channels and programming…We will make going 100% digital 100% easy!”

Verizon is fulfilling its commitment to the FCC to complete FiOS TV’s transition to all-digital by February 2009. The FCC requires cable operators to continue to deliver local broadcast TV stations in analog form until 2012 or until a cable system has transitioned to 100% digital, whichever happens sooner. Whenever cable’s digital transition occurs, perhaps cable’s legacy analog subscribers will be mollified if they are persuaded that it will be easy, will improve their service, provide more content, and require only that they accept FREE equipment.

While FREE may work for subscribers, it does have financial implications for MSOs facing substantial capex for the digital set-tops. The financial equation is made more complex by the fact that subscribers who currently have digital STBs now pay a monthly fee for this equipment. Offering digital-transition STBs for free could put this existing revenue stream at risk. FiOS subscribers also currently pay for digital STBs, generating revenues that presumably Verizon also wishes to retain. Here, again, Verizon’s approach may be suggestive for MSOs. Verizon will limit the free devices to reception of linear TV channels with no VOD access, thereby reducing their value for subscribers relative to revenue-generating STBs.

Comments?

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Wednesday, 27 March 2008

Playing Nicely With P2P

Verizon’s recently-reported willingness to play nicely with P2P (peer-to-peer file-sharing) providers has implications for cable operators. Verizon participated in a trial of a “P4P” system designed to deliver faster P2P file-sharing downloads for users. Although Verizon’s primary motivation is economic – P4P would reduce the P2P burden on Verizon’s Internet backbone by preferentially selecting nearby versus more distant file-sharing peers – this initiative also has regulatory/political and marketing implications.

In the hubbub over “net neutrality,” it will be remarked that Verizon is prepared to assist file-sharers while cable operators are on the griddle for throttling some users’ P2P traffic. Cable’s valid technical reason -- to ensure quality of service for most network users by managing excessive P2P uploads of a small minority of broadband abusers – may be shadowed by the perception that Verizon is collaborative while cable is adversarial.

In the marketing arena, I expect that Verizon will exploit its P2P-friendly activities as a basis of differentiation for FiOS versus cable. Verizon’s marketing message almost writes itself: “For Internet users who love online video, who live for multiplayer games, or who rely on large file transfers, Verizon and P2P providers are working together to ensure a level of performance over FiOS that cable can’t deliver.”

This message will be amplified if it is taken up and repeated by P2P providers and multimedia content publishers who look to P2P to save on networking costs.

Cable operators have a legitimate issue with P2P traffic that jams scarce capacity in the shared upstream channel. Verizon also has some concerns about file-sharing traffic on the local network and P4P will not deal with this issue. This remains an unresolved challenge for all local broadband network providers.

Even so, it will be to MSOs’ advantage to find a way to work with P2P providers. Apart from opportunities that might emerge for cable through more collaborative involvement with P2P, Verizon’s reported progress on this front raises the stakes for cable to find common ground with an increasingly important segment of Internet multimedia distribution. The fact that MSOs including Comcast, TWC, Cox, and Cablevision have joined as Observers in the P4P Working Group is a step in the right direction.

Similarly, an agreement announced today between Comcast and BitTorrent provides a framework to collaborate on traffic management issues and to work on these issues with the broader ISP and Internet community. Apart from this very worthwhile and timely substantive objective, the most significant outcome from the agreement is political, as stated in the press release: "Both BitTorrent and Comcast expressed the view that these technical issues can be worked out through private business discussions without the need for government intervention." BitTorrent, at least, has now recused itself as a potential cable adversary in the net neutrality proceedings.

Note: P4P, which stands for Proactive network Provider Participation for P2P, is being developed by a working group of the Distributed Computing Industry Association.

Comments?

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Monday, 10 March 2008

Playing the HD Numbers Game: Cable Versus DirecTV & FiOS

Who’s got the biggest and best high definition (HD) TV line-up? The answer is, it depends how you count HD TV choices.

DirecTV’s website lists over 90 HDTV channels, well more than on any cable system. These are carried via DirecTV 10, a recently-launched satellite that transmits over Ka-band spectrum and thereby adds substantial capacity to that of DirecTV’s legacy Ku-band satellites. DirecTV 11, a second Ka-band satellite, is scheduled for launch shortly and will provide even more capacity for HDTV channels. There is a catch: To receive the HD channels, subscribers need new terminals that can receive Ka-band as well as Ku-band.

Verizon has raised the HD bar even higher, claiming that by the end of 2008 FiOS TV will deliver 150 HD linear channels plus 1000 HD choices over VOD . Getting from FiOS’ current ~26 HD linear channels to 150 will be a big jump but the FiOS network is likely to be able to deliver the required capacity. Like many up-to-date cable systems, FiOS employs 860MHz for its TV service. However, unlike cable, FiOS will be able to allocate its entire 860MHz bandwidth for downstream SD and HD TV channels. Compared to cable systems, FiOS already allocates a much smaller portion of its video bandwidth for analog channels and by February 2009, FiOS will re-allocate even this segment of its bandwidth entirely for digital TV. Also, unlike cable, all of FiOS’ 860MHz is available for downstream linear TV since upstream and downstream traffic for VOD and Internet access is carried on different wavelengths over the fiber plant.

For cable operators to beat DirecTV and FiOS in the HD numbers game will be a challenge if MSOs play by the same rules. Each of the multiple techniques to expand effective capacity of cable’s HFC (hybrid fiber coax) networks, including switched digital video (SDV), migrating some channels from analog to digital, and so on, will take time to deploy broadly across cable’s footprint. Although cable engineers are past masters at expanding effective capacity of the cable networks, even they will not be able to tweak the cable networks enough to match DBS or FiOS in delivering 100-150 linear HD channels by the end of 2008.

Hence, HD over VOD! Comcast announced in January that it will offer far more HD than anyone else, “more than 1000 HD movies and TV shows every month” on Comcast’s VOD platform.

HD-over- VOD tosses marketing fairy dust on consumers who ask, “where can I get the most HD programming for my new flat panel HD TV set?” Notably, DBS cannot provide real VOD and Verizon lacks the MSOs’ scale and history as video distributors and is therefore likely to lag several steps behind in lining up HD VOD content.

Eventually consumers will clarify whether they prefer an MSO ’s 1000+ HD VOD choices along with 50-60 linear HD channels, versus DBS’ or FiOS’ 100-150 linear HD channels (plus FiOS' own HD over VOD), or can even tell the difference. Meanwhile cable engineers will have breathing room to derive more usable capacity on cable networks for linear HD channels, in case HD-over- VOD turns out not to be enough. Comments?

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Tuesday, December 4, 2007

Cable Needs a Wireless Play

One of the longstanding raps against cable MSOs is that just when they finally start to generate positive earnings, they’ll make new capex-intensive investments. This purportedly upsets investors because it tends to divert cash that might otherwise end up in their pockets. According to Wall Street analysts, MSO share prices have been depressed lately in part because investors fear that the cable operators may spend heavily to build and/or buy their way into mobile wireless.

Thus, when Comcast and Time Warner Cable said on 3 December 2007 they would not bid in the FCC’s upcoming auction of 700MHz spectrum, there was a bump in their shares that analysts attributed to relief that the MSOs were not about to jump into the wireless market.

"I think a lot of people had discounted it, but this is the final indication that they're not going to go out and start a wireless company," said Todd Mitchell, analyst at Kaufman Bros. "I think it's going to be an expensive auction and it's rigged towards the incumbent phone companies, so it's nice to see Comcast remove itself."

"(It) should remove some overhang on the stock as investors were previously concerned about the potential for significant spending, not only in the auction but also on a network build-out," said Thomas Eagan, analyst at Oppenheimer Co, in a research note.

In fact, it made good sense for the MSOs to forego the 700MHz auction because of the FCC’s convoluted rules on how this spectrum will be used. But this does not mean the MSOs will necessarily give up on competing in wireless, nor should they. Here’s why:

Strategic defense. Cable needs an effective competitive response to progress by the big telcos in integrating their market-dominating mobile wireless businesses with their fixed phone, TV, and Internet access services that compete directly with cable.

Growth. Mobile wireless represents an outstanding growth opportunity for cable. There is a lot of money there, at ~$135B in annual US cellular revenues or ~$46/subscriber/month, up 22% from 2005. For cable operators, the subscriber units are households rather than individual people as in wireless. Thus to translate wireless revs into cable-speak, given that there are on average 2+ cellular subscribers per household, the wireless revenues per household probably exceed (again, on average) ~$100 per month. Clearly, such incremental wireless revs per household would substantially increase cable’s current triple-play average of ~$95/sub/month.

Aligned evolution. The evolution of mobile voice into mobile multimedia is well aligned with cable’s own mix of Internet access, TV, and phone products. Mobile operators’ revenues from “data” applications are increasing rapidly, now at ~$19B per year, up 126% from 2005.

Financial returns. Although it does require substantial investment, mobile wireless can produce attractive financial returns. Note, for example, that during the 9 months ending 30Sept07, Verizon Wireless (VZW) produced disproportionately more net cash relative to VZW revenues than the net cash produced by the parent company's wireline business. In other words, VZW is not only profitable, it is subsidizing other segments of Verizon's business.

Verizon Financials 9 months ending 30Sept07 ($million)

Wireless

Wireline

Revenues

$32,439

$37,776

Operating Cash Flow

$12,640

$10,287

Capex

$4,903

$7,873

Net Cash

$7,737

2,414

Source: Verizon SEC 10Q. Operating Cash Flow is defined as Operating Income before depreciation & amortization.

But, you ask, how can cable MSOs compete with the incumbent wireless operators? The answer is, it depends on what they do, but cable does have significant assets that can help:

	an existing subscriber base of 65M+ households
	proven capability to bundle new services with existing services, most recently fixed VoIP phone service with TV and Internet access
	opportunity to create & promote wireless multimedia extensions of their existing TV, phone, and Internet access services
	existing network facilities that can be used to support mobile networks, e.g., for backhaul from base stations
	potential use of aerial cable plant to mount microcells which could substantially increase usable mobile network capacity
	unique capability to provide quality-of-service (QoS) management for in-home traffic that is carried via home WiFi links and cable modems for users with dual-mode cellular/WiFi handsets.

Like most publicly-traded companies, the MSOs would prefer that their share values go up, rather than down. But, bottom line, the MSOs need to have a credible wireless play despite initial investor unhappiness. If the MSOs' story is properly told to investors and other stakeholders, and if they proceed intelligently into mobile wireless so that incremental successes can be demonstrated, the short-term hit they may take on share prices will be compensated by higher share values later.

Comments?

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Monday, 12 November 2007

Wireless Weapon in Big Telcos 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, stodgy, 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.

Comments?

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Friday, November 2, 2007

AT&T + 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.

Comments?

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Sunday, June 24, 2007

Who's Going To Buy Yahoo?

There was speculation a few weeks ago that Microsoft had Yahoo in its sights. There were denials all around and maybe it wasn't so. But, this terrific online asset (full disclosure: I own Yahoo shares) is likely to attract other media players that currently lack a large scale web presence.

My bet for Yahoo's most likely and most logical buyer is on GE. You heard it here first! Consider that GE's NBC Universal is beginning to exploit its broadcast network/studio assets on the web, most recently through the announced venture with News Corp, but otherwise GE has yet to establish a significant online presence. A media company that has ambitions to become and remain a major force in the information/entertainment/communications field has to be on the web, where much of the action is and where Yahoo is still the world's largest destination. GE’s strategy is to be the biggest in each of its markets and I expect GE will decide that being a heavy hitter on the web is key to its future role as a major media company. Buying Yahoo would instantly establish GE as a big web player and, moreso than most potential acquirers, GE can afford it.

Unless it changes course and unloads NBC Universal, I think a huge online acquisition like Yahoo is in the cards for GE, and it’s hard to think of a web business more like Yahoo than Yahoo itself.

PDS blog on cable, telecoms, web

Wireless Weapon in Big Telcos v. Cable

Friday, November 2, 2007

AT&T + Echostar = Dumb Money

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Sunday, June 24, 2007