AT&T has announced that it is planning to promote its new DirecTV service over the previously native U-Verse. This makes a lot of sense from two separate directions.
First and most importantly, it will free up Internet Bandwidth. Video from U-verse takes a lot of bandwidth on the local loop. When you stream over U-verse it takes that bandwidth out of service for Internet Service. So a customer with the current U-verse can get an instant bandwidth upgrade by turning off their U-verse TV and moving to DirecTV. This is a way that AT&T to do what looks like a network upgrade without investing in the network at all. The real question to me is what about AT&Ts Fiber Footprint? In the olden days, it used to be conventional wisdom that Video was a required service to justify the cost of putting in a fiber network.
The second reason is scale. Linear Pay TV is a commodity business. The services are relatively expensive, but are low margin. The use of satellite as a delivery vehicle means that AT&T can address a national base. If they can move people to the single platform, they can reduce their costs to deliver video and increase the scale. Given that the long term future for the service is to be replaced by OTT video, the only question is whether the purchase of DirecTV is worth the price. That is not something I am going to analyze here. But from a business model standpoint, it makes lots of sense.
Also this week, Verizon announced the purchase of XO for $1.8B. The stated reason was that this was a low cost way to expand Verizon’s fiber backbone. $1.8B is a lot for you and me, but it is a really price for the XO network. One of the advantages is that Verizon gets to think about the network not as a depreciated asset but at the replacement value of the assets. Most of these products last a long time and are upgradeable. That means that their is a huge arbitrage opportunity that exists for these kinds companies. By that I mean that investors have a value for the assets at after depreciation but a strategic buyer can evaluate the assets at something near list price. That means I expect more purchases of network assets like this over time.
Finally, let’s get to Net Neutrality. Carol Wilson of Lightreading wrote an article discussing possible impacts of what is called Network Function Virtualization (NFV) and Net Neutrality. The idea of NFV is to allow the dynamic creation of network capbilities on an on demand basis. There has been commentary by European Mobile Operators that Net Neutrality could cause problems with the deployment of NFV. There is a lot of hope that NFV will allow more flexible, lower cost networks. This is what it has done for the IT people in their world. My concern here is that there is this ongoing belief in the ISPs that there are network based services. I think we need to eliminate from thinking today. There are applications and networks. If you are trying to build a specific network service, you are probably making a mistake. The one exemption from this would not be a problem for Net Neutrality anyway. That exemption is the deployment of services within an Enterprise or between Enterprise Partners. An example might be telemedicine. But if you are expecting to bury consumer services inside the network, then you are going to lose every time to OTT players who can address a much broader audience.
Have a great weekend!
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