[BRIEFING.COM - Robert V. Green] Time-Warner (TWX) today announced a deal with Sprint (FON), whereby the Time-Warner cable division would be able to resell Sprint cellular phone service to the Time-Warner cable customer base. The deal is being viewed positively because it now gives Time-Warner cable the ability to be a "single source" telecom vendor and sell telephone, internet, TV, and, now, cellular phone service as an integrated product. The "single source" product is probably the weapon with which telecom companies will compete, but the real battleground, we think, will be in the enterprise market, not the consumer market. In that marketplace, the RBOCs (Regional Bell Operating Companies) have the most competitive advantage. Here is more on the "single source" idea. The digital revolution has turned the "telephone" network into the "telecom" network. The principle difference is that the once all-analog telephone network is now a digital network.
This transformation began before the advent of the internet, but today the "telecom" network supports all types of digital data. Analog source material, such as a phone call, travels in digitized format to its destination and shares the same physical transmission equipment as any other type of digital data, including internet pages and digital video.
Now that the "telecom" network can carry all types of digital information and now that all types of "information" are being transmitted in digital format, it is technologically possible to send every type of digital information on the same network.
It is only natural, therefore, that people might conclude that all types of digital services could be provided by a single vendor. This concept is loosely referred to as the "single source" telecom product.
There are five basic components of a "single source" telecom product. These are:
All of these services can now be delivered using the exact same "telecom" network.
It is tempting to view the "single-source" product concept as a consumer product, because the most obvious digital video service is ordinary consumer television services. Enterprises (large businesses) have basically no presence as a buying force in the traditional television market.
However, for all of the other services, the role of the enterprise buyer is extremely significant. In the data services segment, for example, the enterprise has been the primary driver of the market since its inception.
It is important to keep this perspective in mind when pondering the future of the "single source" telecom product.
The concept of the "single source" telecom product is not new.
At the very height of the internet bubble era, in mid-to-late 1999, the dream of "Internet II" was a strong driver that kept all internet related stocks at extreme valuations. The "Internet II" term was widely used, but sometimes with different meanings, but the common idea was that the "Internet II" era was one where everything would be in digital format and delivered over the internet infrastructure.
However, part of the fever behind the Internet II idea was that the arrival of this new era was "right around the corner" and that investors had little time left to purchase stock in companies that would be the primary beneficiaries. That impatience cost many investors a great deal of money.
Now, however, more than five years later, the "everything in digital format" vision is slowly coming true.
The question still remains, however: what industry and companies are the beneficiaries of this new market - and are there investment opportunities?
Satellite TV and cable companies with digital TV are the dominant providers of digital television to consumers.
However, the network used to deliver digital cable TV to consumers is not fully integrated with the "telecom" network. Most of the local distribution of cable TV occurs over cable distribution networks that each cable company has built on their own, over the past 20 years. Those networks do interface with the telecom network built over the past 100 years, by telephone companies, but the actual connection to a home is made using cables installed by the cable companies.
The cable TV networks, Comcast in particular, have made tremendous strides in gaining market share for data services at the consumer level. Recently, they have also begun offering voice telephone services, based on Voice-Over-IP (VOIP) technology, to their digital cable customers.
However, the cable companies have no cellular telephone infrastructure and must partner with existing cellular companies if they want to be "single-source" providers. Hence Time-Warner's deal with Sprint today.
The cable TV companies primary advantage as single-source vendors is that they already own the consumer TV market.
However, their weakness is that their network, for the most part, has been granted to them on a "town-by-town" basis. Since cable TV contracts are awarded on a monopoly basis in each town, a cable TV company cannot "win" a customer who lives in a town that they do not currently have a TV delivery contract in place, no matter how competitive the offering may be.
While this "licensed monopoly" model was instrumental in building the profitability of cable companies over the past 20 years, it may become an extreme disadvantage in the single-source telecom market.
Satellite TV, on the other hand, is a completely wireless entry into the home. At the moment, that delivery system provides video television and little else.
Although the satellite TV companies have tried to enter the internet data service market many times, they have never had a competitive product and today have little consumer market share and almost zero business market share. The satellite TV networks do not even offer voice telephone services currently.
The RBOCs, as the heirs to the great telecom network first built by AT&T, own much of the telecom network outright.
In addition, the telecom network owned by the RBOCs extends directly into every household in America and into most businesses. Even when a consumer has a competitive long distance or local phone provider, the data actually travels over a network owned by the RBOCs, in most cases.
The RBOCs telecom system already is fully integrated, technologically, to carry phone calls of all kinds (local, long distance, and wireless), data services (both with DSL, T-1, and higher levels) and video content.
However, the RBOCs offer no actual video content to their customers and are therefore partnering with satellite TV companies to try to add this to their product offerings. However, most of these partnerships are neither effective nor really meaningful. Verizon's deal to resell DirecTV, for example, leverages creates almost no synergy as a "single-source" product.
The RBOCs disadvantage in the single-source market is that they cannot provide any content of their own over the network that extends so widely into the potential US customer market, both consumer and business.
One of the provisions of the AT&T breakup in 1981 was that RBOCs would be prohibited from selling any type of actual content themselves. The breakup decree forces RBOCs to be only a distribution system upon which other companies can provide actual content and services.
If this provision of the AT&T breakup were ever legally repealed, it would give an extremely strong competitive advantage to the RBOCs over cable companies and any other competitive provider of "single-source" packages. The RBOC's could simply buy a cable TV company and begin distributing digital cable using DSL.
Under the Telecommunications Act of 1996, the RBOCs cannot deny access to any firm that wishes to resell access to their networks, but most of the competitive telecom companies that were created to take advantage of this law have either folded, are in bankruptcy, or are extremely weak. Nothing prevents one of the cable companies from actually using the Telcom Act to gain access to the RBOCs networks, however.
Owning the actual telecom network is a strong competitive advantage that the RBOCs enjoy. Although fettered by regulations, in the long run, we think the benefits of this advantage will accrue incrementally and slowly, but eventually be decisive.
Cable and satellite TV companies have a clear advantage in the consumer video marketplace, since they own it entirely.
The RBOCs have a clear advantage in the enterprise telecom marketplace, as the cable TV companies have only minimal presence.
The real battlefield where the single-source product war will be fought will be in the enterprise market (large corporate customers). It is there where the "single-source" product will be most fully developed and refined.
Discussion of this idea, however, requires more time and space than a single column provides - and we will explore it at a later date in more detail.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
Verizon (VZ) $40.66 mid-day December 29, 2004
Time-Warner () $19.47 mid-day December 29, 2004
Sprint (FON) $24.81 mid-day December 29, 2004
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