The future of diversification in the mobile sector

Diversification will take a vital role in the mobile market in 2017, with the realisation that mobile operators can no longer be a ‘dumb pipe’

The adage of “evolve or die” is not a concept lost on the telecoms sector. Diversification has become a key concept for both fixed and mobile operators, which have been deploying various strategies for some time, and includes acquisitions, partnerships and, to some extent, in-house developments.

Operators are anxious to avoid becoming commoditised channels over which younger and nimbler tech companies can offer services, and are moving into areas beyond their core competencies. These include mobile payments by mobile network operators (MNOs), cloud-based services and, notably, content services.

As the outcomes of the 2016 European Union referendum and US presidential election have shown, predicting possible outcomes is fraught with risk. However, the announcement of AT&T’s acquisition of Time Warner has prompted commentators to consider the wisdom and merits of diversification, and it is from this position we consider what 2017 could have in store for the sector.

In a world of fixed and mobile convergence, consumers are indifferent to the method of delivery of content, provided it is available everywhere and all the time. Whereas the quest for diversified revenue streams is aimed at bolstering dwindling margins at the carriage level, the real differentiation for the new generation of consumers appears to be the availability of content. Traditionally, the accepted rationale for this model is that the content drives traffic to the distributor.

In a recent interview, Liberty Media chairman John Malone praised AT&T’s acquisition of Time Warner as a sensible investment that he would have made had he been at the helm of AT&T. Interestingly, however, he didn’t view the synergy between content and distribution (carriage) as a means of driving traffic to the connectivity services. Rather, he viewed it as an enhancement of the profitability of the content services.

And this is the key point. Traditional content owners have struggled in the digital age, thrashing about to find the right model to maximise the monetisation of their content. Consumers are increasingly engaging in “cord-cutting” and opting for specialised viewing, relying on cable replacement services such as Sling TV, PlayStation Vue and Now TV, or streaming subscriptions such as Netflix, Hulu and Amazon.

All of this has left traditional models of vertical integration in disarray. Many have argued that, ultimately, the model of subsidising traffic through content acquisition offered for free is unsustainable. As argued by Malone, if the crux of the content and carriage synergy is not the driving of traffic to the carriage services, but rather an enhancement of the profitability of content, then perhaps one can postulate a new world order.

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Historically, the corporate cultures of the communications industry and the creative sector have not gelled well. Therefore, one long-range strategy for the future diversification of communications companies may be the integration of the creative industries into their core competencies. We’ve constantly been told “content is king”, but it doesn’t seem to have been reflected in the relative power balance between owners of the pipes and content owners.

If large content owners can continue to produce relevant and captivating material, the balance of power in a convergent ecosystem may change. If connectivity becomes a given, those able to provide tailored bundles in all their varied manifestations – be they the ability to harness the internet of things, mobile payment of services and tailored content viewing – may prove to be the winners.

And, if content is the key differentiator, it may finally truly be king. This recalibration of power could mean that in the future, the Time Warners of this world will end up being the senior partners in the quest for diversification.

Askandar Samad is a partner and telecoms expert at international law firm Reed Smith LLP.

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