Over the past couple of weeks, we've witnessed two deals in the ever-consolidating communications and media industries: Verizon-AOL, and Charter acquiring TWC and Bright House Networks. The broadband business now looks like the wireless business, with Comcast and Charter owning some 60 percent of the market and four (rather than two) players splitting most of the remaining 40 percent.
Despite the AOL deal, many financial analysts are negative on Verizon, citing increased competition, falling prices, Verizon's comparatively weak capacity position, and its over-reliance on wireless (compared to broadband).
I think this is a good opportunity to take a closer look at Verizon, and what might be next for the company.
First, it's important to understand the context of the AOL deal. Verizon needs a "what's next." Although Verizon is still the market share leader in the wireless business, with 110 million subscribers, the company sees the writing on the wall. The U.S. wireless business, which represents 70 percent of Verizon's revenues, is maturing, with 90+ percent penetration and 70 percent smartphone penetration. The market is intensely competitive, and Verizon has neither the network capacity nor the desire to engage in a major price war. The IoT market, with its projected billions of connected things, is an opportunity for all the operators, but it is disaggregated – a series of "base hits" that might not deliver the growth that a company the size of Verizon needs. It's also not clear than Verizon will dominate in IoT.
Verizon has been pretty conservative, focused on maintaining its margins, and undertaking numerous small deals that could add up to a bigger story if it plays its cards right. Meanwhile, AT&T has been more aggressive and flamboyant in seeking avenues for growth, making big bets on DirecTV, Digital Life (connected home), connected car, and Latin America.
But one senses a restlessness in Basking Ridge, N.J. (and on Wall Street). Rather than a huge or disruptive deal that would take a long time to close or get into regulatory crosshairs, I think Verizon believes video could catalyze its business in some new and exciting ways.
First, let's look at 'skinny bundles,' which Verizon has been [aggressively] advertising as "Custom TV." Verizon has 5 million TV households and 6 million FiOS broadband subscribers. But with TV representing less than 10 percent of its business, Verizon can take the risk of firing some warning shots at the traditional pay-TV model. As much as anything, Custom TV is an interesting experiment. How many existing Verizon TV subscribers will change their TV package? Will Verizon take meaningful incremental share in their markets? What sorts of packages will subscribers choose? And what types of subscribers will choose them? This is something that Comcast won't do with its core business in the same way Verizon won't do anything to overly disrupt its core wireless business.
The Custom TV initiative will feed other pieces of Verizon's video vision. I believe there are two pieces of this. The first part is consumer-facing. With OnCue and other video assets Verizon has acquired, I believe Verizon wants to put together an OTT package that appeals to both its Internet/TV and wireless subscribers. Some aspect of this will be a customized package of traditional linear TV that its FiOS subscribers will buy. But Verizon is looking at the changing video landscape, the consumption patterns of those under the age of 30, and the spread of connected 'screens.' Think of where so much of the action is now – players such as Netflix, HBO, YouTube, Vessel, Vice, AwesomenessTV, and so on. Verizon could build a platform to offer a broader menu of video content and formats, across the pay TV, on-demand, OTT, and Internet video landscapes. The content package might be linear and longer form for its FiOS/Broadband subscribers, and more on-demand/a la carte, and shorter form for wireless, where there are network capacity limitations, price sensitivities, and whose subscribers are more interested in snacking on and sharing content, rather than watching long-form programming. Add to this the growing portfolio and expertise in ad serving/distribution, some unique content partnerships such as Verizon has with the NFL, and evolving platforms such as LTE Broadcast, and one can see that Verizon has slowly assembled many pieces of the puzzle. More effective ad-serving technology acquired from AOL is an asset Verizon can use in trying to negotiate deals with content providers and programmers to deliver its vision of offering content across multiple screens, including live television.
On the B2B side, Verizon's video distribution could be used to offer brands a richer, more targeted ad serving capability. This is an important asset, as we see content consumed over a growing number and variety of outlets, publishers, screens, pricing structures, and contexts. One way of looking at Verizon's video distribution business is how MLB Advanced has become the go-to platform for video streaming, counting HBO, WWF, and ESPN as clients. This is potentially very exciting, and could be a $10+ billion business over time.
The question, though, is whether this is enough. Verizon is a $130 billion company. The AOL acquisition, although strategic, barely shows up on the revenue line. Is the video sum-of-the-parts sufficient to help drive growth, given that the wireless business is becoming more challenging?
Although Verizon has many of the ingredients, there are questions and challenges. First, and foremost, is whether Verizon has a broader vision of how this all fits together, across its businesses. Second, is whether Verizon has, or can build, the IT platform required to manage the complexity of content, platforms, endpoints, price offers, billing, and so on. Third, is whether a company where some 90 percent of its revenues still come from a monthly package of TV channels/broadband service/wireless data can have the vision and agility to offer a broader and more flexible package of content and services….profitably.
More broadly, there's the consideration that Verizon has 10x the number of wireless than fixed broadband customers. And in wireless, no matter what one says about the growth of video usage on smartphones, wireless networks are still very much capacity constrained, which is why prevailing pricing, at $10/GB on average, still discourages video consumption rather than encourages it.
One key variable is whether Verizon can meaningfully add to its wireless network capacity by deploying small cells, purchasing more spectrum through auctions, and using a grab bag of other technologies, such as LTE Broadcast, LTE-Unlicensed, and other Wi-Fi capacity techniques.
Another question is whether there are any deals that could meaningfully add to Verizon's network position. On the wireline side, there are few opportunities left to add major new markets for broadband. The biggest wildcard out there, capacity wise, is DISH, who seems to be talking to everybody except AT&T (because of DTV). Verizon has interest in DISH's spectrum, but not its business.
Verizon has done a great job over the years of fully leveraging its assets, achieving greater operational efficiency, and building a strong brand based on network quality. But given the toughening competitive landscape, maturation of the core wireless market, and fast-changing media/content consumption/distribution/monetization landscape, is a "what's next" needed? There's no obvious big move.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein