In the late 1990s, rapid penetration of cell phones and development of mobile technology triggered expectations of a convergence of telecom, media and technology (TMT). AOL, valued at about $200 billion, was then a dial-up internet-service provider for much of the USA. Times Warner, a staid media producer and cable owner, had attempted and failed to establish an online presence. A path-breaking merger was announced, forming a company with $350 billion in market value. Soon, the dot-com bubble burst. Two years post the merger, AOL Times Warner had to take a $99 billion write-off - no chump change even by today's liberal valuation standards. In 2015, the demerged AOL was taken over by Verizon for around $4 billion. The residual Times Warner trades at less than $60 billion.
Many of the assumptions around the merger were based on forecast of how consumers would consume media in the new, internet connected world. Several of these assumptions have actually panned out - though perhaps in ways that were unimaginable 15 years ago.
Reliance Jio: The world's largest startup
Reliance has reportedly made investments totalling ₹15 billion for its re-entry into the telecommunication space. Unlike its previous avatar which rapidly penetrated the market through its low-priced offering, this time the market is far more competitive. Penetration levels are extremely high, and pricing remains amongst the lowest in the world. Just aggressive pricing is not likely to help in gaining consumers. Reliance is reportedly working on a 'convergence platform' - a bundled service of telecom, internet, video-on-demand, its proprietary content and data storage.
The actual service is yet to be unveiled. Media reports suggest a soft launch next quarter, with a real roll-out later in the year. Such a bundled service, if launched at an appropriate price point, has the capability to 'disrupt' not only the business models of other telecom providers but of cable TV, direct-to-home providers, TV channel bouquets and internet-service providers. Will convergence work now when it didn't earlier?
This time is different
There are three fundamental differences in the eco-system which makes the new combined offering more powerful:
- Deep and improving penetration of mobile devices (cell phones and tablets) that are internet connected at broadband speed allows users to consume content based on individual interests rather than collective interest, as in the case of a family gathered around a single television screen. Except for blockbuster live events like marquee sports games, each individual can watch content that is relevant to him or her. This challenges the output of large media producers, who have to create stuff relevant to each individual. It also empowers small producers of content to develop programs and market them at a much lower price point or for niche audiences.
- Media is no longer consumed in a 'linear program' mode as in television. The availability of streaming media from varied sources allows viewing on a time-shifted, on-demand basis. This challenges the business models of not only channels but also infrastructure providers like cable TV and direct-to-home providers. With users no longer dependent on watching programming coming onto the TV set from the cable or satellite dish, the bargaining power of 'pipe providers' reduces in comparison to that of content developers. Consumers now have an incentive to drive down the cost of pay TV or perhaps to drop it altogether.
- Availability of advertising models that can move advertising dollars on a real-time basis based on instant feedback on program viewership and preferences of the viewer. Advertising remains the primary source of income for media ecosystem and an inter-segment shift in advertising revenues can upset business models quickly.
And the winner is...
In the emerging ecosystem, a key winner will be a business that is able to help viewers quickly find relevant content. Content is now available across internet aggregators, TV and social media. No one has yet created a mechanism to allow users to use a single point of navigation to access these diverse streams. Surprisingly, cable TV providers (a part of the chain that seemed headed to extinction) with internet offering may be best positioned to create the linkages with internet aggregators, TV channels and other media services to provide the go-to mechanism for search. DTH providers or internet providers without TV content are unlikely to find it as easy.
Proprietary content - either self-created or through transmission rights - can provide significant barriers. This is now a costly proposition as marquee programs, high on the 'watchability' index, will necessarily be bid for aggressively. On the other end of the spectrum, niche content for special-interest groups will always find an audience. General run-of-the-mill content is less likely to attract eyeballs and will consequently go down in value. Despite this, it is clear that content is king and more than anyone else, the content provider gains irrespective of how access is provided.
Online content aggregators will continue to have to protect their positions by aggressive addition to high-value content.
Telecom providers are already feeling the heat of these changes as OTT (over the top) programs like WhatsApp and Facebook Messenger eat into first the messaging business and now into voice.
The movie-theatre business is at an interesting juncture. Much of urban India watches movies in multiplexes due to the experience of new releases, large screen and comfortable surroundings. However, once original content is released either first on the net or simultaneously with a theatre release, demand may change rapidly. Content producers are less likely to agree to share approximately half their revenues with theatres, especially if viewers decide that a home theatre is not nearly as bad when it comes at a fraction of the cost of a theatre viewing.
In all this flux, investors would be well advised to watch how the space unravels without making big bets in existing business models. Investing, especially for the long term in this field, may be fraught with unmeasurable risks as businesses strive to retain their relevance. While technology drives changes in business models, perhaps the only segment that seems to win in almost all scenarios is the content owner. 'Pipe' owners seem particularly vulnerable. Choose carefully.
Anand Tandon is an independent analyst.
This column appeared in the May 2016 Issue of Mutual Fund Insight.
This article was originally published on May 27, 2016.
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