Verizon and ATT had long marched to different strategic drummers, and nowhere is that as obvious as in their streaming video strategy. AT&T launched its DirecTV Now as a mobile and wireline live TV service, supplementing its DirecTV satellite acquisition, and Verizon stayed with linear FiOS TV. Now, Verizon has done a deal with (gasp!) Google’s YouTube TV for streaming services, not only to mobile customers but also to FiOS customers.
Both companies have also reported earnings this week, and while Verizon delivered a modest beat, AT&T missed slightly on revenue, which the Street attributes to their need to absorb and strategize around their Time Warner deal. It’s interesting to note that the Street values both companies primarily on wireless business, interesting because Verizon and AT&T seem to have different strategies to address the challenge of sustaining wireless growth.
I think one of the most relevant numbers hidden in the quarterly reports are the subscriber losses in TV. AT&T and Verizon both lost wireline TV viewers in the quarter, and it seems virtually certain that this loss is due to a gradual shift away from linear TV consumption toward streaming. That shift applies not only to an increase in mobile viewing, but also to a “cord-cutting” trend seen across the whole cable TV industry. The message there is that live TV, once seen as the enduring profit source for wireline services, isn’t going to be able to deliver.
In past blogs, I’ve noted that one big difference between AT&T and Verizon is the economic value of their base regions. I’ve used the metric “demand density”, which is an adjusted measure of revenue opportunity for telecom services per square mile, as an indicator of whether ordinary communications services can pay off. Verizon’s demand density is about seven times that of AT&T, which means that Verizon’s strategic planners can look forward to at least the possibility of profits in baseline mobile and wireline broadband. AT&T has a much harder row to hoe, as they said in my youth, because they have to deploy more infrastructure (at higher capex and opex) to reap the same revenue opportunity.
For AT&T, this means two things. First, you have to look somewhere other than return on infrastructure for profits. That’s why the TW deal was so important to them. In a sense, they’re mimicking rival Comcast, who acquired NBCU to get content revenue to supplement their own limited return on infrastructure. Second, you have to pull down your cost per bit sharply, because you can’t compete in the content production space if your content has to subsidize a loss in broadband.
Verizon has demonstrated with the YouTube TV deal that it’s not going to try (at least for now, and probably never) to get into the streaming business itself. The big question is whether that decision is a reckless bet on the enduring value of their demand density advantage. Can Verizon, without draconian steps to cut capex and opex, stabilize their cost per bit at a level that at least guarantees a break-even with revenue per bit? If they cannot, then they may regret not being more aggressive in their own capex/opex measures, and they may find content company opportunities either gone or priced too high by the time they decide they need one.
That’s not their biggest risk, though. A smart strategy for streaming live TV is more than a new revenue opportunity, it’s the strongest early driver for carrier cloud. Verizon, by adopting YouTube TV as its streaming strategy, is essentially walking away from the opportunity to build an early carrier cloud platform that could then be expanded to serve the broader drivers coming down the line.
They may be heartened by AT&T’s missteps with DirecTV Now. This service, which was at launch one of the better one, had many reported problems with service quality and seemed unable to introduce basic new features (like cloud DVR) in a smart and timely way. As a result, a service that for at least a quarter or two led the streaming market in growth, has now fallen behind. Verizon’s YouTube TV choice is far better than DirecTV Now, particularly out of AT&T’s home region.
That reopens the question of whether telcos can even build their own cloud infrastructure. Google’s YouTube TV is good because of the software and the consumer-friendly design. It’s built on a solid cloud-native platform, right at the leading edge of the space. I don’t think that AT&T or any other telco could draw the talent needed to duplicate it, which begs the question of whether AT&T is in the lead by doing something that probably won’t work before rival Verizon does, or behind.
Verizon may in the end have to follow AT&T into a strong push for carrier cloud, but might their hedge against this future risk be simply doing a deeper cloud deal with Google? Could Google host an entire network operator’s carrier cloud, or even multiple operators? Maybe.
If we look at the six drivers of carrier cloud (NFV, video/advertising streaming, mobile infrastructure and 5G, carrier-provided third-party cloud computing, contextual/personalization services, and IoT), two of the six are difficult to outsource, but all the rest could be. NFV today is all about vCPE, which means that it’s probably mostly an opportunity for hosting agile features on uCPE. Other NFV stuff is largely business-targeted and thus could be handled with modest edge computing. 5G and mobile infrastructure is, at least in my view, similarly divisible into a white-box and edge computing deployment. Thus, neither of these is necessarily a barrier to third-party hosting of carrier cloud.
Google has its eye on the telco space, as a number of recent announcements have shown. So does Amazon and IBM and even Microsoft. What may be interesting here is that YouTube TV might give Google an inside track. If a streaming service is essential for operators, and if deploying their own service on their own cloud isn’t viable, then Google has an alternative for them.
Into this brew we must also stir the issue of the 5G/FTTN hybrid. If millimeter wave proves out as an alternative to fiber to the home, it introduces a wireline future where linear TV delivery isn’t possible. Every operator then has to ask whether they’ll bundle a third-party service like YouTube TV, roll their own streaming service, or simply be a fat pipe provider. The millimeter-wave model for home broadband isn’t universal, though. In fact, it’s most useful where demand density is high, and that means both that Verizon is likely to deploy it and that competitors like T-Mobile are likely to concentrate more on Verizon’s territory.
This means that demand density both enables Verizon and threatens it, and that streaming for Verizon is likely a given. AT&T, with lower demand density, will find that many of its TV customers have to stay with DirecTV satellite because rural and thin suburban locations won’t benefit as much from the hybrid. But AT&T can credibly look anywhere in the US for customers for TV (and does) while Verizon is almost surely going to offer YouTube TV integration only to its own customers, leaving Google to market to the rest. This puts more pressure on AT&T to get DirecTV Now to work for it.
A final question all this raises is whether even streaming services can be viable in the long run. Apple and Amazon think that being effectively a TV aggregator and delivering stuff directly from the networks or content owners is the best approach. Some networks think they can go it alone, and it’s probable over time that content owners’ desire for profit growth will put the squeeze on all forms of content delivery services. If CBS All Access can work for CBS, will more providers start to offer their streaming directly, and will this a la carte offering set finally break the mold of channelized, what’s-on-now TV forever? It might happen.