Content Finally is King

One of the more common memes in our industry is the phrase “content is king.” This was first said by Sumner Redstone of Viacom in 1994 but made more famous by Bill Gates in 1996. The phrase has been used since then to describe how the creators of content have the power in our industry – be that programming or web content.

John Stankey, the CEO of AT&T Entertainment, recently emphasized this same concept in talking about the company’s planned merger with Time Warner. At the recent Mobile World Congress in Barcelona he said, “We just cannot envision a future where AT&T is relevant if we don’t directly participate in some of the water flowing through our pipes.”

All of the big ISPs have decided that content is key to their survival. Comcast already owns a mountain of programming, and after the merger with Time Warner, AT&T will be a content powerhouse as well. Verizon has climbed into the game with the acquisitions of AOL and Yahoo. There are web companies with the same philosophy. Netflix has built a new industry by creating new content. Google is pushing content heavily through YouTube. Amazon has started to create unique content and recently said they are going to make that a priority. Facebook is becoming a content force through Facebook Now.

I remember having this conversation with Derrel Duplechin of CCG back in 2000. We were asked by several clients to speculate about the future of the carrier industry and we foresaw that most carriers were likely on the path to eventually become what we called “dumb pipe” providers. I remember that this was a story that many of our clients did not want to hear.

We lived in a different carrier world in 2000. Most homes still had telephones and voice was the most profitable product for most carriers. The cable TV product that many of our clients sold then also had decent margins. But we predicted that both products would eventually sink in importance and in margins and that eventually most of our clients would earn most of their profits from broadband. We thought this would happen to all carriers, small and large, and we figured that the most profitable future companies would be those that found some other line of business other than just selling data pipes to end users.

We had some clients take this to heart and some of them have made a really good living by providing extra value to customers. For example, we have several clients who thrive by bringing a suite of products to businesses other than just plain connectivity. But for the most part, the majority of the ISP industry sells dumb pipes today. They compete with the speed of those pipes and with price and with good customer service – but the primary products (and the driver of most of the profits) are now data pipes.

The big companies like AT&T, Verizon and Comcast looked at that future and it scared them. It’s pretty obvious that if your only product is dumb pipes that your earnings are not going to continue to grow fast enough to satisfy Wall Street. This is probably what convinced Verizon to stop expanding their FiOS network. Both AT&T and Verizon got huge earnings boosts from expanding their cellular businesses, but that industry also seems to be heading towards the same plateau as landline ISPs – cell service is becoming a commodity.

So these big companies are now pursuing content because it looks to be the last area in our industry with the potential for significant bottom line growth. It’s going to be an interesting race to watch. Content providers have succeeded or failed over the years according to their ability to find smash hits. A huge hit movie or TV series can mean huge returns to the bottom line. But content providers that don’t create what the public wants to watch suffer badly in terms of stock prices and earnings. Being a content provider is not predictable in the same way as telecom.

Interestingly. AT&T, Verizon, and Comcast are now direct competitors of Facebook, Google, Amazon and Netflix. Content certainly is king, but content also brings the risk from competition. The companies that fall behind in this race are likely to be gobbled up by their more successful competitors. I find it extremely unlikely that all of these big companies will still be in existence in 10 years.

There is no real barrier to entry into the world of content creation other than having a pile of money. It’s likely that other big companies will join the content fray. But all of these companies are entering a world that is in big flux. For example, traditional video and web content might well be replaced by virtual and enhanced reality. The companies that succeed in content will have to spend a lot of money staying one step ahead of the competition, and my money is on the more nimble technology companies. Twenty years ago I would have been shocked to know that someday AT&T would have a CEO of Entertainment – and that may turn out to be the most important job in the corporation.

See You in Austin

BBC%20Summit%202014pink_woDATE%20-%20regonline-HDerrel Duplechin of CCG and I will be in Austin this week at the Broadband Communities Summit. We will be putting on a seminar on Wednesday afternoon on the topic of Revenues Beyond the Triple Play. If you happen to be coming to the convention we’d love to see you at the session, or look us up.

I feel lucky to have gotten this topic to discuss. If you have been reading this blog you know that we at CCG feel strongly that every triple play provider should be putting energy into developing new products. The revenues we derive from voice are continuing to decline and cable TV is headed down the same path. The time to react to this eventual train wreck is now, while you still have the margins from those products, and not wait until your cash is squeezed.

Every triple play carrier is going to face a pretty simple choice at some time in the near future – either retract your company and become an ISP and sell nothing more than fast data pipes to your customers, or else start implementing new products to replace the sinking triple play products. If you choose to become a dumb pipe provider your future is really simple. You’ll need to strip out employees and systems and become a pure ISP and do nothing but provide the fastest pipe you can create.

If you elect to remain as a full-service provider you have a much more challenging task. No one or two or even three products is going to replace the revenues and margins you have been getting from voice and cable. Rather than have a few products that most of your customers buy, you are going to need a lot of products that only have a 5% to 10% penetration. There are no more big magic bullets. I offered to help one company look at their future was told that they would pay to have me come see them if I could tell them what the next big product is. That is exactly the wrong question to ask because there isn’t going to be one. The small carrier industry has frankly gotten a bit spoiled in that we had products that were relatively easy to sell. But those days are over and we are going to have to do what many other businesses do and scramble for every customer and every dime we can make

Both choices I have laid out are probably valid ones, and both are very different than what we do today. For instance, if you choose to be nothing more than an ISP you are going to have to dismantle most of your company and staff to stay profitable.  It can be done. and if you want a model of what that looks like look at the many WISPs in the marketplace today.

But if you choose the full service provider route what will you sell? There are a number of potential products you can sell today and many more coming in the future. Today you can consider products like security, energy management, home automation, wireless MVNO, IP Centrex and OTT Video. You can also do what we call crossing the threshold, meaning that you make a product out of having your technicians do whatever businesses need in the telecom and computer space. We know companies doing each of these products and they can all be moderately successful.

There are also a lot of interesting things coming. Home automation is the very first step of getting into the Internet of Things. This is going to quickly grow into areas like medical monitoring, crop monitoring, flock and herd monitoring. And mostly the things that are coming we haven’t thought of yet as carrier products.

The biggest challenge of transitioning to many new products is to figure out a way to be efficient with new product development. You can no longer take a year or two to put together a new product. You have to roll them out quickly and learn how to sell them efficiently. You will have to do this in-house or collaborate with other carriers. If you can figure this out you will probably thrive and survive. But if you don’t do anything and stay blindly on today’s path, at some point you will no longer be viable and will fail. Our industry has never faced such a divergent set of options and this is both a scary time and an exciting time to be in the business.