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Cable-telco mergers -- a new Mission Impossible sequel

As featured in DisruptiveViews

John Legere, President and Chief Executive Officer of Un-carrier, T-Mobile in the USA (or should I say Un-CEO), has deduced that cable companies may one day merge with carriers, so as to provide phone service along with internet and cable. Brilliant deduction Sherlock, but in case you haven’t noticed, it’s happening already – but not for the reasons Legere believes.

During T-Mobile’s recent earnings call, Legere even hinted at a future collaboration with a cable company. “As content and entertainment and social are moving to the internet, and the internet is moving mobile, these industries, the adjacent industries, are in the same game that we’re in,” Legere said.

“So whether it’s what you see Google doing, what you see the social media companies doing, or as you start to see cable players trying to move content — Wi-Fi integration with mobile networks, etc. — these are individual customers that are looking at both offer sets. I think you need to think about the cable industry and players like us as not competitors, but potential partners and alternatives for each other in the future.”

Of course, that all makes sense, especially in light of current M&A activities in other markets and the recent rumors that Vodafone may be targeting Liberty Global, but what are the drivers and would such mergers actually happen or even be productive?

The ever-present fears held by telcos, both fixed and mobile, is that voice and messaging revenues are declining faster than data revenues are rising. So what? Their constant efforts to reduce costs, transform their operations and optimize their investments in network infrastructure have generally kept margins and profits healthy. This, in turn, is leading to a resurgence in investor confidence in the sector.

Maybe savvy investors see telcos as good targets with recent news that Google is dabbling in the mobile space as an MVNO after rolling out fibre in some selected US cities. But it begs the question why it would ever want to become a CSP in its own right when it has so many network operators delivering traffic at virtually no cost to Google.

OK, so Google has its own massive backbone network to connect all its data centres, but the revenue stream is still firmly set in the search and ad space and that sees no sign of decline in the short term. That also constitutes the ‘content’ that Legere and so many others keep declaring will be the ‘special sauce’ for future survival, now that the battle for apps and value added services seems all but lost by telcos.

Cable companies have become the specialists in acquiring and producing content. It not only pulls viewers to the networks it also provides a lucrative revenue stream in sales to non-competitive operators worldwide. It’s hard to find any fixed or mobile operators that have come close, except maybe BT in the UK that cornered the UK Premier League football for an incredible sum of money. But as far as telcos producing original content goes you’d have more luck finding hen’s teeth.

The other key sticking point is that most cable operators are already providing fixed line voice service, often as a loss leader to bump out the PTT incumbent wherever they can. They too, can become MVNOs if they see the need to get more control, but would they really want to buy a mobile network to achieve this goal? Could they afford to offer mobile connectivity as a loss leader just to get their content and subsequent advertising viewed?

Apart from there being no love lost between the cable and telcos sectors, there will almost certainly be regulatory issues to overcome. Even M&A between likes can be fraught with issues as the recent Comcast/Time Warner debacle proved. Can you imagine the scrutiny that would come down on say, a T-Mobile/Comcast merger? How would the regulations for both sectors be managed and what would the FCC have to say about one combined company controlling a complete, ‘unbiased’ value stream from content production to delivery in terms of net neutrality? The mind boggles.

Whilst Legere and many others may see mobile/cable mergers as a certainty in the future you can bet it will be business as usual while revenues and profits keep flowing. It’s only when both feel really threatened by a yet to be determined force, or shareholders get nervous about growth, will we see these mergers come to fruition, and even then, getting both sides to agree on conditions, let alone a common operations and IT core, will be tantamount to ‘mission impossible.’