From Our Briefings Newsletter

Published on17 SEP 2018

The article below is from our BRIEFINGS newsletter of 17 September 2018:

Briefly . . . on Cord Cutting, Convergence and Competition in Media and Telecom 

Nearly 100 telecommunications and media executives, including AT&T CEO Randall Stephenson, Verizon CEO Hans Vestberg and Viacom CEO Bob Bakish, presented at Goldman Sachs’ 27th Annual Communacopia Conference in New York last week to discuss improving business trends amid structural long-term challenges and consolidation. We sat down with Brett Feldman and Drew Borst of Goldman Sachs Research who brought us up to speed on everything from cord cutting to 5G. 

Can you describe the sentiment and tone among participants?

Brett Feldman: I would say it’s a positive near-term and cloudy long-term story. After years of deceleration, broadband subscriber growth has increased while subscriptions' premium ‘postpaid’ plans in the wireless sector have also re-accelerated. The strong economy has probably driven these improvements, but investors are still struggling with the long-term growth profile of these businesses as the sector goes through structural changes. For example, one of the themes we’ve been highlighting for investors is the emerging turf war between cable and wireless companies. Historically these companies, with their distinct infrastructure and services, have operated in their own silos. Cable companies provide consumers with video and broadband services, while wireless firms provide mobile connectivity. Today, however, we’re seeing these two groups enter each other’s businesses. We’ve seen the largest cable companies launch wireless services which they now include in their bundled offerings, while Verizon is getting ready to launch a 5G residential service that will serve as a cable broadband alternative.

Drew Borst: Everybody is basically competing with everyone. Cable companies are competing with telcos in mobile phone services. Telcos are launching 5G wireless. Media companies are aiming to go directly to consumers with content offerings. And traditional internet companies are offering live TV services. All this competition is good for the consumer but creates a challenging environment for investors who are trying to  assess the winners and losers.

How is consolidation and M&A affecting these companies’ business models?

BF: For one, the recent M&A activity in our sectors is changing the way video content is delivered to customers. With AT&T’s acquisition of Time Warner, for example, AT&T can tap its wealth of data on its wireless customers to determine how to tailor and position advertising against Time Warmer content. Broadband networks, which include mobile networks, have become a new form of video distribution. That’s great news for content providers which have more ways to reach consumers, but it’s disruptive for traditional video distributors, such as cable or satellite companies.

DB: Investors, for their part, have been generally lukewarm about the recent wave of mergers between traditional cable companies and content providers. For context, the last two decades of consolidation in the telecom sector have been characterized by similar businesses combining to find cost efficiencies and create better products. But the latest wave of M&A combines businesses in different sectors. That introduces more strategic and financial risks into the combined companies. 

Let’s pivot to the consumer. Anything surprising to report on the cord-cutting front?

DB: The fact that people aren’t watching as much live TV as they used to continues to pressure TV advertising. But despite a challenging backdrop, there’s healthy demand from big corporations for TV advertising due, in part, to the healthy US economy as well as a backlash against digital advertising in light of recent privacy concerns on social media and online platforms. TV ads are a known quantity. So while the consumption side is still a headwind, the advertising – which is still a big revenue driver for media companies – has strengthened.

At the same time, the market for people who are willing to pay for a live TV subscription is growing for the first time in five years. For media companies that’s very encouraging. The improvement is being driven by a new class of internet-based, live streaming  services – including Sling, DirecTV Now, YouTube TV, Hulu Live, and  Sony Playstation Vue. These services offer many of the same channels that are offered through traditional cable and satellite TV services but the bundles have fewer channels and lower prices. Meanwhile, subscriptions for traditional cable and satellite services are still declining but that decline rate has bottomed out for the last three quarters. In other words, consumers are still continuing to cut the cord on cable and satellite payTV but the rate of decline has stabilized. 

The wireless carriers are also focusing on greater accessibility and more content in their unlimited data plans. How have consumers responded? 

BF: A year ago, investors had expected a race to the bottom in the wireless space as companies rushed to offer their unlimited plans. Instead, we’ve seen a segment of the US population that had previously opted for the cheaper, prepaid plans upgrade to the premium plans since they saw more value in the offerings. That migration – combined with a stronger economy and rising wages – has helped to reinvigorate the wireless market.