With what seems to be an explosion of content provider acquisitions underway, Verizon remains committed to being a content delivery partner not a content competitor. With streaming video seeming to be everyone’s direction, Verizon still doesn’t have its own streaming offering. What makes Verizon think they can buck these trends when competitor AT&T has gone the acquisition route, and what will they need to do for that to happen?
Let’s start with their current financials. Verizon’s revenues were up 5.4% y/y in their most recent quarterly announcement. They added almost 400,000 postpay smartphone accounts, the kind mobile operators like best. Their postpay churn was less than 0.8% for the fifth consecutive quarter. FiOS revenues grew by 2.3%. Is all this enough, particularly if Verizon stays with the promise it’s repeatedly made, which was not to get into the content acquisition game?
The first point to make in answering that question is the mobile smartphone postpay numbers. Verizon continues to do exceptionally well in that space, and it’s where Wall Street knows they should be focusing. Mobile services are much more profitable than wireline, and operators have known that for a long time. AT&T has been using DirecTV Now to promote its mobile service by creating a bundle deal, but so far at least, Verizon doesn’t seem to need that.
On the wireline side, particularly with home TV viewing, Verizon has more FTTH than AT&T, and it’s recognized the value of the 5G/FTTN hybrid model of broadband delivery to the home as the direction it needs to go in. That model offers lower “pass cost” meaning less initial investment to reach a point where the operator is positioned to serve a customer without custom provisioning. It also offers speeds that are higher than current FiOS customers select.
All this is possible because Verizon has a very high “demand density” meaning that it has a lot of communications dollars per square mile in its service area. High demand densities mean your infrastructure returns more on investment, and Verizon’s is a whopping seven times that of AT&T. That would tend to give Verizon an advantage in deploying the 5G/FTTH hybrid, but Verizon is also planning to use that to compete with AT&T in areas outside Verizon’s home region.
This point about broadband competition versus video competition out of region may be a critical one. AT&T, with both its DirecTV properties, has been poaching out-of-region TV customers by using either satellite or riding OTT on a competitor’s broadband. In part, this strategy has grown out of the need to support its own customer base in areas where FTTH was out of the question and even 5G/FTTN hybrids might not be practical. The combination of FiOS FTTH and 5G/FTTN could give Verizon a practical way of delivering broadband to all its key high-value customers, and at a decent price with decent margins.
The margin implications are then the step to answering the question of whether Verizon’s go-it-alone approach is workable. Once Verizon commits to 5G/FTTN, it commits to streaming video delivery. Once it does that, it not only can rework its FiOS delivery strategy in-region to match (it would almost have to do that), but it can then use that same platform for mobile video and out-of-region, whether the customer has Verizon 5G/FTTN broadband or some competitor’s broadband. That would get Verizon to where AT&T says it wants to be with video, a single platform for all the customers regardless of the delivery model.
The downside of this streaming approach is that everyone who streams to the customer is dependent on the same broadband resources. Unless an operator wants to risk regulatory intervention, they can’t make their own video better, which they can do with linear delivery. But Verizon makes it very clear that they don’t like the linear model, and in particular the incremental cost. If customers are going to stream from Netflix and Amazon and Hulu, even for things other than live TV, then there’s a lot of value in tuning your own TV delivery to match the streaming model and reducing the total equipment you need to support video subscriptions to customers.
A solid margin on video delivery, arising out of strong demand density, would let Verizon off the hook in terms of grabbing additional revenue by owning content. That might then let Verizon accommodate future models of content delivery. Listen to Verizon’s McAdam: “…we’re not going to be owning contents [sic] or we’re not going to be competing with other content providers, we’re going to be their best partner from a distribution perspective and I think that makes great sense for the company going forward.”
What is a “best partner from a distribution perspective?” Verizon might be thinking that a company like AT&T or Comcast, with its own content assets, might not be an ideal delivery partner for competing content. Could content owners not want to carry competitive channels that aren’t so popular their loss would cause a viewer revolt? Could be.
A better distribution partnership could also mean putting less pressure on content providers for pricing or bundling channels. A lot of negotiations go on now, and if you combine this point with the one about competitive content, you could see that Verizon might believe it would be able to get some deals that content providers wouldn’t make with AT&T or Comcast.
Could better broadband delivery margins let Verizon support a future when TV networks go their own way and offer content directly to the user? It seems to me that this is the big question for Verizon, the determinant in whether its promise to stay out of content can be kept in the long term. Linear TV almost cries out for third-party delivery bundling because the cost of getting linear delivery to a customer is too high for each network or studio to go their own way. On the other hand, if a network has a good inventory of content, do they really need to be part of a bundle put together by any delivery company? Could Verizon make enough margin on broadband not to stand in the way of networks independent delivery? Do they even need to be a “TV provider”?
Network operators live on margins, profit per bit, and so forth. You can’t make up for delivery network losses by having your own stuff to deliver, unless it’s truly your own and nobody else can get it. That’s not true in the streaming video space. Verizon obviously realizes this, and so they’re wringing the cost of delivery out of their network, focusing on making the thing that they truly can own as profitable as possible. So is AT&T, but demand density works against them as it works for Verizon.
One thing seems clear, though. Verizon will have to be able to deliver very strong streaming video if it plans to move to that (as it has to if it uses the 5G/FTTN hybrid) and plans to rely on content partners. Partners don’t like problems with their stuff being delivered. AT&T has suffered problems with its own unified platform and streaming service, and they’re still having it. For now, Verizon has made the best choice for itself, but they’ll have to make darn sure they don’t mess it up down the line because all the good content properties will be gone by then.