Stormy Weather

Capsule: Will Google, Amazon, Microsoft/Yahoo! and Apple compete with Comcast, Time Warner Cable, Verizon and AT&T on media distribution?  As the new content/distribution hybrids get serious about cloud computing, will they rain on cable and telecom's parade? 

Google.com

Google's Cloud Looms Large


Despite its dominance, Google is a master of understatement.  It doesn't talk much about its next innovation--like leveraging cloud computing--until it's already under our noses.  It stands out from its competitors who announce their plans before launching their products.  On the far end of the spectrum, cable MSO's and telecom providers announce their innovations weeks, months or years before they're brought to market.

The issues separating ready-to-launch new cable and telecom businesses from their early publicity may be less about appearance than the reluctance of mature money-making industries to develop new products for little or no reward.  The equity markets and its analysts play a big hand in this preference for press over forward-looking product investment.  Cable and telco stock prices halt or falter based on capital spending despite its essential role in paving new growth roads and shoring up existing growth engines.

Verizon, a standout exception at the head of the capital spending honor roll with its Fios products, has spent years selling its cable overbuilds to the investment community, finally justifying the necessity of Fios in terms of competitive game theory and fill-in revenue for its declining wired service businesses.  Even with its substantial size, Verizon stands on the foundation of its exceptional partly-owned CDMA/EV-DO wireless business to reach the higher shelves of Wall Street sanctioned capital investment. 

AT&T, a skillful combination of many wired voice businesses and a crowd-pleasing GSM/HSPA-protocol wireless product, has been cable-careful on capital.  Setting the course after being discounted for years of low or no profits, the cable MSO's have fallen off the other side of the horse.  Cable's conversion to free cash flow reverence has been absolute, even though the rewards have been limited because cable came to profitable maturity when everybody else was looking elsewhere.

Ironically, all investment eyes have been trained on an imaginary distribution train wreck that might be stopped with more diverse growth-related capital investment.  For the last five years, fears of slowing growth in the telecom and cable businesses have punished the translation of exceptional results into equity value.  Rumors of the inevitable decline of wired TV, broadband and voice have been greatly exaggerated. 

True--after reaching market share for digital TV, broadband and voice products of anywhere from 15% to 75%--cable and telecom are starting to hit a revenue peak for their existing product lines.  Likely, the intelligence of the cable and Fios platforms will allow for new products and revenue streams on the way to the next Mother Lode.  But for these new products to be built, advance work on product definition, market strategy and operating execution would have to be far along--which would compromise free cash flow growth and dividend confidence.

At the same time, alternative distribution forms that include a new version of content as well as massive distribution capabilities are viewed from the southern tip of New York with a softer eye.  Google is profitable--an event the equity markets were comfortable waiting for since the late 1990's even though the capital and operating requirements of Google's businesses are inherently lighter when it comes to adding customers than traditional distribution.  In fact, most of Google's recent capital spending has been capital investment in highly distributed server capacity that will enable a new range of businesses with new customers inside "the cloud."

Cloud computing is not new.  The idea of reducing cost and increasing distributed reliability by processing information through the Internet and its protocols powered the third revenue rush for cable and telecom in the form of VoIP and voice-over-cable services.  Cable created a hybrid structure for its voice products that used its own platform to supplement or replace the cloud, ensuring call quality within regional service areas before competing with the traditional five-nines service reputation of circuit switched telephony.

Cable has also announced plans to use its platform as a cloud in network DVR applications, moving the emphasis inside cable viewing from the set-top box to servers that can be located and backed up virtually anywhere.  Similarly, the cable Project Canoe would benefit from a reconsolidated broadband platform and server links that could enable national content players to sell, book and execute targeted interactive advertising to any TV set in the US.  But both of these post-voice-over-cable concepts are lingering in the post-announcement pre-execution phase for need of a product and market strategy as well as a business plan.

A new influence on these plans is the tangible convergence of video and broadband into a single merged product with a potentially robust business model or two behind it.  Cable is used to these mash ups, having converged voice and broadband into a single cable broadband product with a voice extension to great acclaim and real success. 

The telecom businesses, including Verizon, AT&T and other wired businesses of size like Qwest, have viewed convergence with great suspicion gained from running both wired and wireless businesses that cannot easily converge profitably.  Similarly, the convergence of TV and broadband challenges Verizon and Qwest with potentially huge content-related costs and the need for a new business model; while AT&T continues to plug away at its home-made converged broadband service about which it's still too early to tell.

These great ships of the media generate revenue and profits in the billions and are appropriately loathe to invite the next set of challenges that might reset their multi-faceted clocks.  The fact that their product and revenue futures will likely depend on a broadband core is understood. But the unique approach to the market that will be required to make new broadband products and services profitable has not yet been announced, which means it may be years away from launch.  Big ships take a while to turn. 

Also, the tendency for both cable and telecom distribution to favor products bordered by some restrictive friction to deter competition may make the types of competitive collaboration required in these new sometimes stormy seas seem less than navigable.  Regardless of how unsettled they appear, cable and telecom will have to stake a position and prepare the equity and credit markets for the investment required to make it work.  Otherwise, Google, Microsoft/Yahoo!, Apple and Amazon will introduce a new set of content and distribution relationships that are guaranteed game changers for the traditionalist.

Could cloud computing lead major internet based competitors to new distribution platforms capable of storing both TV and data content, as well as the personalized navigation and advertising to bring it all home?  In some ways, we're already there.  But, of seminal importance, internet content/distribution hybrids lack physical service and billing relationships with their customers.  Their ability to monetize a collection of personalized services without an earth-based way of placing customers in their real homes and businesses to establish service and billing care is a serious future challenge not to be minimized. 

Also huge are the content relationships and costs that make TV distribution a business.  Unlike a major book publishing aggregated rights deal--or maybe just like it--the complexity of the content business cannot be wished away.

Will it be easier for internet media hybrids to create the tangible basis for profitable customer relationships or for media distribution to become product development prodigies sailing through the broadband-linked clouds?  Most likely, a hybrid-hybrid that combines TV, internet and wireless products to the best advantage of their broadband-served customers will set tomorrow's media models.  Which means that everyone will have to learn to swim with the competition without crashing into the rocks or floating away.