We all know that in a market that’s commoditizing as networking seems to be, it’s common to see “horizontal aggregation” of players, where competitors bulk up to improve efficiency as market profit margins decline. We now seem to be entering an era of “vertical aggregation”, where companies buy not competitors but rather symbiotic players in an attempt to gain competitive advantage. The publicized media acquisitions of Comcast and AT&T are examples of this, and Amazon is now rumored to be looking at buying Boost from Sprint/T-Mobile. Is this just a maturation of the old M&A trend, or something new? Two factors may be the determinants.
In a small pond, you might well expect one big fish to survive simply by eating the others. This is a pretty good picture of the horizontal M&A model, and if it were left to market dynamics to control events, we’d probably end up with little or no competition. The first complicating factor is regulation. Almost all industrial countries have anti-trust regulations, and most generally follow established economic theory that says that you should have three or four viable competitors in a market. Policy may thus prevent those natural market forces from taking hold.
The other factor is the economic benefit of horizontal aggregation. You can reduce waste if you can lower the amount of stuff like competitive overbuild of network infrastructure and redundancy in staffing that results when you divide a market into a bunch of competitive enclaves, but suppose that’s not enough? Ultimately the costs of supporting services will plateau to a certain level; you need some infrastructure and staff. If willingness to pay for services isn’t rising, and if new market opportunities aren’t developing, then profits will also plateau, which makes the stock market very antsy. They want growth in earnings, and that’s that.
Buying a non-competitive business is a possible answer. A number of operators, including Telefonica, have gone to emerging markets to deploy services, having exhausted the potential for growth in their home market and facing a lot of competition there as well. The problem with this approach is that you’re essentially buying revenue, and the strategy will hit the same wall as your new market area reaches cost optimization and addressable-market limits. Every emerging market isn’t a good one, and the good ones get snapped up fast.
The symbiotic approach is what’s now emerging as a complete and credible strategy. In the old days of networks, they were focused on connection as a service. Today, they’re focused on experience delivery. Internet traffic and profits come far more often from delivering video than on making calls or sending emails. Thus, it’s logical to assume that network operators would look to climb the value chain and obtain the experiences themselves.
An operator who owns the experience now has the profit margin from the experience plus the profit margin from the connectivity. Some of the organizations’ staffs can be consolidated, but the big value is that there’s less disintermediation of operator interests when you have both what’s wanted and how it’s delivered. The OTT isn’t stealing your profits because you are the OTT, or at least part of the OTT. You’re climbing the value chain toward what the buyer really wants. All very logical.
What’s not as clearly logical is the trend in the opposite direction, which is instead of climbing the value chain, you descend it. Google fiber is an example of this, and Amazon’s acquisition of a mobile operator would be another. Generally, the experience-level stuff has a better return than the connection-and-delivery stuff, so why would an experience player decide to dive into the mud?
One possible reason is that you’re afraid that your own business success will be impacted by the increased profit pressure on those lower on the value chain. Google’s business wouldn’t be possible without network operators to provide mobile and wireline services. Google, Amazon, Facebook, Netflix, and all the rest, would love operators to just suck it up and invest no matter how lousy their return on infrastructure is. But what if they won’t?
Google demonstrated the “what-if” when they fielded the notion they might bid on wireless spectrum. They did another demonstration with Google Fiber, which was a big media hit but was deployed only in situations so rare that there could have been no hope of it changing the market. Amazon might be doing that today, or it might not.
Mobile services, mobile broadband, have been for years the growth and profit engine of network operators. In general, wireless capex has continued to grow at least modestly while wireline has generally been in a slow decline. So one reason why an OTT might be willing to dive into the mobile service space is that it’s still green-like-money grass and not quite mud. One reason, but not a convincing one.
The problem with mobile services is that it’s more competitive. How many times have we heard about a big telco running out to deploy wireline infrastructure in another telco’s territory? We do have poaching of high-value business customers, but not of mass-market consumers. But mobile services are easily offered out of region, and so they’re quickly being eroded by the extra competition. The grass is greener than wireline’s grass, but it’s showing signs of mucking up.
There’s a better reason, though. From the perspective of “new” services, it’s hard to find much happening except in the mobile space. Mobile broadband is really the driver of social media. It’s really the driver of streaming video. If there’s a future to augmented reality, it’s probably a future that will come about because of a mobile offering. Same with IoT. You can’t immerse yourself in, or change your life with, something that you can only access between dinner and bedtime. Mobile is where you are, everywhere you are, at any time.
Which may be what Amazon is thinking. Nobody believes that Amazon can eat all of retail. Nobody believes it can eat all of video and audio either, and yet the Street agonizes over how Amazon can continue to deliver great quarterly growth when their core markets aren’t growing. So perhaps Amazon is thinking that they’ll find new markets, and that might well mean finding new mobile-centric services.
Amazon failed in its phone attempt. Might they see 5G as an opportunity to launch a new run at that market? If so, might they also see that if a 5G-centric service happened to be something that Amazon could sell as an experience to users, as a cloud feature to partners, they’d be able to double- or triple-dip?
There’s even a chance that this kind of move would help relax the regulatory problems facing the big OTTs. For all the coverage we have of unfair practices from these guys, the fact is that they’re fighting for an ad market that has little upside. The global ad market is always going to be a lot smaller than the actual market for goods and services that the ad budgets are shooting to influence. Amazon is already in a good place because they sell stuff, not ads. They could be in a better place if they were driving a networking revolution. Imagine people liking Amazon again!
If Amazon thinks it would be able to create a 5G revolution and profit from it, then acquiring Boost would make a lot of sense. However, there would have to be some understanding that 5G would be part of the deal, and perhaps that would mean even an MVNO piece of a possible 5G millimeter-wave deal of the kind T-Mobile was promising. There’d also have to be some specific brass-ring application for Amazon to exploit.
We have never had an MVNO relationship built with the goal of exploiting a new service rather than a legacy service. Does Amazon hope to do just that, and if they do, might that actually give life to the network slicing aspect of 5G? Remember that network slicing creates a more complete asset segregation than a normal MVNO relationship would, and that could be something Amazon would be interested in. Could Amazon hope to create a 5G network-slice MVNO over both wireless and wireline? Even more interesting, and we’ll have to see what actually develops.
And how would this play for Google, with Fi? Google already has an MVNO relationship with both Sprint and T-Mobile. If Amazon could exploit a new MVNO deal (via Boost) surely Google could do the same. And if that were to come about, we’d have a real business case for network slicing, for 5G core, and for a more revolutionary 5G deployment model. It’s worth thinking about.