BRB Bottomline: You might’ve noticed that when you go into an AT&T or T-Mobile store to purchase a phone plan, you no longer get just the standard bundle of calls, texts, and data. Instead, you get a “free Netflix subscription” or “Hulu subscription for a reduced price” on top of your standard unlimited calls and data. Why are telecom companies doing this? And, what does it mean for the future of content creation?
The telecommunications industry started out as an oligopoly, a market with high barriers to entry and a low number of providers. And, because of the high level of demand for cable, phone, and internet services, telecom companies, such as Verizon Wireless and AT&T Inc., enjoyed years of easy profits without much competition.
Fast-forwards to today, and those companies have matured, growth has slowed, and little differentiation between the services they offer mean price cutting. While the number of players has consolidated significantly—and will continue to consolidate if T-Mobile and Sprint successfully merge—telecommunication companies today provide a product-service that has become a commodity, which has translated into business economics similar to a monopolistically competitive market. With price-sensitive consumers and little product differentiation, the elasticity of substitution is high between competitors. Because of this, telecom giants have had to go beyond the simple “build it and they will come” business models of the past.
So how are these companies responding? In an attempt to retain customers and differentiate themselves from the competition, telecoms are finding opportunities in content.
Netflix and Hulu aren’t complaining.
What Does This Mean for Telecom Companies and Their Customers?
Telecom companies recognize the power of video streaming. The Big Four telecommunications companies—Verizon, AT&T, T-Mobile, and Sprint—are partnering with content-producers to bring their customers streaming services in addition to the classic phone plan.
In order to make their services more appealing, telecom companies are bundling streaming with the data, calls, and texts packages. In the case of T-Mobile, the company is offering free Netflix services to any of their T-Mobile ONE family plan users. In the case of Sprint, they are offering Hulu streaming at a reduced price as part of their Sprint Unlimited plan. Verizon Wireless is partnering with Netflix to offering one year’s worth of free streaming to their FiOS customers.
Perhaps “partnership” isn’t the right word. In essence, telecom companies are paying your Hulu, Netflix, and HBO subscriptions for you. And in the eyes of the consumer, we are the clear winner.
So you might ask yourself: what could they possibly gain from this? How is spending more money to get the same amount of money good economic sense!
Because the telecommunications industry has evolved to become an essentially monopolistically competitive market, customers are very sensitive to price changes. If your contract is up, switching providers is easy and makes little difference to the overall experience. This results in high churn rates, which is very costly for telecom companies. By paying for content and streaming, these providers hope to not only attract new customers but also make it harder for you to switch away.
If you want to watch Orange is the New Black or Daredevil on Netflix and don’t want to pay for Netflix, you’ll think twice about switching from T-Mobile.
T-Mobile’s customer churn rate is already trending down from 1.1% from the second quarter last year to 0.95% this year.
AT&T Doubles Down
You might’ve notice that I haven’t yet mentioned AT&T—the largest telecom company second only to state-owned China Mobile. Unlike the other telecoms, AT&T is diving head-first into content creation.
While the other Big Four companies have essentially outsourced their content differentiation, AT&T is creating its content in-house after recently acquiring Time Warner—which owns HBO and CNN—and DirecTV, allowing it to offer direct streaming on AT&T devices.
After AT&T completed its acquisition of entertainment giant Time Warner Inc earlier this year, the company released this statement showing its optimism:
“We believe that the acquisition will give us the scale, resources and ability to deploy video content more efficiently to more customers.”
“The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world’s largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.”
After the company’s $48.5 billion bid to acquire DirecTV back in 2014, AT&T wrote in its financial statements that:
“DIRECTV NOW connections continue to grow as we add eligible devices and increase content choices. Our strategy to bundle services has positively impacted subscriber trends and churn, with customers who bundle our wireless and video services having nearly half the rate of churn as satellite customers with a single service.”
These acquisitions indicate that AT&T recognizes the telecommunications industry trending towards more content production, and they are doubling-down. AT&T is just one of the many telecom companies that realizes there are huge money-making opportunities in the content-creating business.
Who Is the Real Winner?
In short, content creators make out like gangbusters compared to telecom providers and their customers. Just like Time Warner Inc.—whose shareholders were bought out at an $80 billion valuation—other content creating companies like Netflix, HBO, and Hulu are set to benefit as well.
On October 17, 2018, Netflix released their quarterly reports. On that day, their share price rocketed as much as 15%, as the company outperformed their earnings estimates for the third quarter due to increased number of subscribers.
It’s no coincidence that subscriber growth is growing at the same time T-Mobile, Verizon Wireless, KDDI in Japan, and Sky UK are all signing partnerships with Netflix to offer streaming packages.
Other content producers are also benefiting. With telecommunications companies desperately trying to differentiate themselves and stay relevant with consumers, content creators are seeing increasing interests.
Take Home Points
When industries mature, the products and services that those firms provided homogenize and consumers become price-sensitive. This realization reroutes capital flows from stale industries to new industries that can help the mature firms rebrand themselves and their products. The state of the telecommunications industry is just like that. Many of these companies are under pressure to create or attract content onto their platforms to differentiate themselves from the competition. By bundling streaming packages with their other products, telecom companies are hoping to retain their customers and reduce customer churn.
Content creators are the major benefactor of this market shift. You and I also have a lot to gain from this as telecom companies essentially pay for our Netflix or Hulu subscriptions in the efforts to win our business. How long that lasts, only time will tell.
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