The pipes are fighting back. For years, making television shows has garnered more attention rather than providing the internet and satellite connections that allow consumers to watch them.
But Vodafone’s announcement that it will offer TV to British customers – and potentially acquire programmes – is the latest sign of how distributors are trying share the limelight.
Content has become a way for telecoms and media companies to outflank each other and new competitors such as Netflix and YouTube. “It’s a three-legged stool. You need content, you need distribution and you need a device,” says Michael Goodman, digital media analyst at Strategy Analytics. When internet providers buy content, “they are controlling two out of the three legs”.
That trend is already advanced in the US. Comcast, the largest cable internet provider by subscribers, bought NBCUniversal in 2009, bringing content creation and distribution together in one company.
In May, AT&T agreed to pay $48.5bn to acquire satellite television network DirecTV, pending regulatory approval, partly because the latter has the rights to broadcast some Sunday NFL games on TV and mobile devices. Verizon has some exclusive rights to NFL games on mobile devices, which it credits for a jump in video consumption that pushed more customers than ever before to upgrade their data plans.
In the UK, Vodafone would be catching up with other telecoms group. BT has been the most aggressive, spending about £2bn on sports rights. Liberty Global, owner of rival internet provider Virgin Media, acquired half of TV production company All3media this year for £275m. It also tried to buy Formula One and Channel 5, the UK broadcaster.
The backdrop for these moves is a shift towards “quadplay”, bundled offerings which include landline and mobile contracts as well as broadband and TV. If one company can offer all the aspects of communications and TV, it can produce a domino effect. Vittorio Colao, Vodafone’s chief executive, has said that if “BT comes more into mobile then we will go more into consumer broadband”.
Speaking this month, at a Morgan Stanley conference in Barcelona, he added that “if someone starts bidding for content then you [might] have to yourself.”
In Spain, Telefónica’s highly successful Fusion bundles have reshaped the market – in turn prodding competitors such as Vodafone and Orange to move more deeply into broadband and TV by acquiring Ono and Jazztel respectively.
More than a third of the Spanish market had moved on to discounted fixed-mobile bundles within the space of just six quarters by the end of 2013. Telefónica is going to start offering pay-TV as standard, putting further pressure on rivals.
In the US, Verizon and AT&T are pushing their pay-TV services as a way of making a better return on their new fibre networks. AT&T has about 6m video customers while Verizon has signed up about 5.5m, meaning that roughly 85 per cent of people who buy its fast-fibre internet product also decide to take a TV package.
So far, though, Verizon has preferred to act as a “pipe” for existing programming rather than make its own forays into the glitzy world of programming.
BT uses its sports rights to help sell its premium-priced superfast broadband. Since it started offering sports channels free with its internet service in 2013, it has won more new customers than its rival Sky every quarter, bucking the previous trend.
Eelco Bloc, chief executive of KPN in the Netherlands, told the Financial Times that offering additional services meant that its call centres had one more thing to sell when talking to customers.
Vodafone offers Netflix, Spotify, the music streaming service, and Sky Sports partly so its mobile subscribers use more data.
Such strategies are likely to be easier for companies that own the programming rights. But Dido Harding, chief executive of TalkTalk, which has become the UK’s fastest growing TV company on the back of cheap bundled packages, says telecoms groups may find it difficult to become successful content owners.
The market will quickly evolve, so companies will be talking less about content and more about “what are the fifth, sixth or seventh service you are offering your customers down the pipe”, she says.
Rogers, the Canadian telecoms group, is now looking at “quint-play” by bundling in smart home services with its TV and telecoms, says Alexander Brock, its chief technology architect. A customer could adjust the temperature of their house, or watch real-time video of the rooms, via their mobile phones. Similar products are being developed in Europe by companies such as Deutsche Telekom and Telefónica.
But TV, Mr Brock admits, had been important to win customers in bundled deals. Rogers is a leading provider of sports TV in Canada, offering popular ice hockey and baseball games.
Whoever owns it, video content plays to telecoms operators’ core strengths. Ronan Dunne, chief executive of Telefónica UK, says that when Facebook allowed videos to screen automatically on users’ homepages, data use shot up by 10 per cent overnight.
Telecoms operators also want to avoid losing out in the battle for consumers’ wallets. In the UK, BT had complained that Sky, which until recently had exclusive live broadcast rights to Premier League football, would not wholesale its channels at an acceptable price. Having its own exclusive content strengthens its hand in future negotiations. The same is true in relation to Netflix, Amazon, Apple and YouTube, all of which are increasingly important content providers, especially to younger viewers.
“They take more of our mind-time than our traditional competitors,” Jeremy Darroch, chief executive of Sky, said this month of video-streaming rivals. “The big opportunity is growing the pipe: getting people to pay for TV at some level.”
Sky, has a programming budget of £4.6bn, and a partnership with HBO, the US cable channel. It has also acquired Love Productions, maker of The Great British Bake-Off .
However, many industry figures are still unconvinced of the synergies between distribution and content production. Television remains a business dominated by big hits. “A large percentage of what is actually produced fails. And it’s not cheap to fail,” says Mr Goodman of Strategy Analytics.
Bigger businesses will, by sheer probability, generate more hits, but not all internet providers will be able to achieve scale in TV production. The field is also increasingly crowded: Xiaomi, the fast-growing Chinese phonemaker, has said that it would spend more than $1bn on original content for its internet TV platform, while Sony recently announced plans for a new video-streaming service called PlayStation Vue that will includes programming from 75 channels.
Will Vodafone invest in content? “Maybe but the UK is too soon,” says Mr Colao. He later detailed the risks: “For a platform, you have to ask if exclusive ownership over many years is going to lead to higher cost or a real increase in value.”
That point is not lost on consumers, many of whom cannot get both BT and Sky channels on a single subscription. If telecoms companies opt for exclusivity, viewers may soon find it more difficult to access all the content they want.
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Sports rights boom is partly case of déjà vu
Sports federations around Europe are likely to be rubbing their hands at the prospect of Vodafone investing in content, writes Henry Mance.
Already telecoms companies have helped push up the price of rights – BT has committed about £2bn to show football and rugby in the UK, Deutsche Telekom has bought the rights to Germany’s domestic basketball league, and Telefónica now controls Sunday night football in Spain through its acquisition of Canal Plus Spain.
“Sports rights are quite simple content: you just buy the rights, and you’re quite sure the content will have some traction,” said Tom Evens, a researcher at Ghent University. “We seen a spectacular increase [in the rights’ value], and that will go on for at least a couple of years.”
This is partly a case of déjà vu. About 20 years ago, pay-television companies such as Rupert Murdoch’s BSkyB outbid free-to-air broadcasters for the rights to top events. Now telecoms companies, whose balance sheets are even larger, are now threatening another shake-up.
Live sports coverage is particularly attractive because it cannot be substituted by content available elsewhere, such as Netflix or YouTube.
Can anything stop the boom in sports rights?
First, many households – at least 50 per cent in the UK, according to a survey by EY, the professional services firm – say they are not willing to pay for sports coverage.
Second, regulators may intervene if spiralling costs are passed on to consumers. Ofcom, the UK regulator, is already examining a
complaint by Virgin Media that English consumers pay more than anyone else in Europe to watch domestic football. One solution, favoured by Mr Evens, is to insist on non-exclusive rights, whereby the same matches are available on different broadcasters.
A third possibility is that companies act to avoid mutually assured destruction. Sky will have to pay 60 per cent more in the next Premier League auction to continue its current coverage, analysts at Berenberg forecast. A wholesale deal with its rival BT would take the air out of the balloon.