Does a mobile network – cable TV network marriage make sense?
Vodafone has being buying cable TV assets in several European countries and in France the cable TV group Altice (owner of Numericable) has bought the French mobile operator SFR. Delivering TV programmes to a TV set appears to have nothing in common with delivering a telephone call to a mobile. So what is the commercial or strategic logic of a mobile network operator getting together with a cable TV network operator?
There was a theory in the 90’s that the triple plays of bundling together fixed telephone, mobile telephone and TV services would lead to lower customer churn. That does not explain why a company has to own both networks. Liberty Global, for example, is content to be an MVNO in order to add mobile to its bundled offers. The explanation is more likely to be linked to convergence of the fixed and cellular mobile industries and the battle for customers in the overlap areas where customers have a choice of either a mobile or fixed network connection. Vodafone understood 15 years ago the limits of growth of the European mobile market. Their strategy was to look for future European growth by expanding into the adjacent fixed telephone market. The mobile telephone was the perfect conduit to suck out the fixed telephone revenues from the fixed network operators. This strategy proved highly successful for a while. By 2003 over 40% of all telephone calls to and from the home were taking place over a mobile phone…even though the home had a fixed wireline telephone and calls over the telephone line were a lot cheaper. It was the battle for the home the mobile network companies were on track to win. As mobile prices fell it would only be a matter of time before customers cut their home wire-connections and spending all of their communications money with the mobile industry.
Then it all came to a juddering halt. The broadband Internet access came along. Consumers could get much faster data access speeds over ADSL fixed wire connections than they could over the GSM mobile network…in fact over 10 times faster. When 3G arrived around 2003 Vodafone had to decide whether this provided the technology to continue its fight to win new revenues from the fixed telecoms market. It came down to whether a 3G mobile network could provide Internet access that would be as fast as a copper wire could deliver? If one looked over the next 5 years the case was arguable. Plans were already afoot for faster 3G in the form of new HSPA technology. If one looked over the next 15 years and believed that more and more of the copper would be replaced by fibre optic cables…there seemed no way the mobile networks could keep up with the fixed broadband access network in providing ever faster Internet access. That I believe fundamentally changed the way Vodafone viewed the local infrastructure market. Vodafone had intended to sell the Arcor fixed line business in Germany it had acquired when it took over Mannesmann. It quietly dropped the planned sale. Maybe being just a pure mobile network operator was not the right long term answer.
A measure of this foresight is that, if mobile networks were profitably sucking out 40% of telephone traffic in the home from the fixed telephone network in 2003, the mobile networks were off-loading 40% of their data traffic via WiFi onto the fixed broadband networks by 2013. The battle for the home was now being won by the fixed broadband networks in the new smartphone Internet access world.
This shift of fortunes between the two adjacent industries brought about by the rise of the broadband Internet looks set to continue into the future. Mobile network operators will continue to have a unique competitive advantage in providing wide area mobility but for nomadic untethered wireless connections at very high speeds the value moves substantially to the fixed broadband networks. Even if a mobile operator owns the radio tail it will be the fixed back-haul that will gate the price and performance. As these untethered short range very high speed access points become more numerous, particularly in cities, it will be the fixed broadband network operators taking more and more value from the mobile market and not the other way around.
This brings us back to Vodafone’s interest in cable TV network assets. It is a lot easier for a fixed network operator to add mobile network coverage, at least over urban areas, than for a mobile network operator to build up a high density of buried fibre optic cables. Amongst the probable winners in this very high-speed and very low-latency untethered wireless world will be the entities having low cost access to lots of local fibre optic cables.
But why cable TV? By 2002 cable TV companies were already using their cable TV wires to run broadband Internet access using cable modems. It is the broadband Internet access that is the commonality between today’s mobile networks and cable TV networks. However the most valuable component of the cable TV asset is the ducts through which the cables run. Through these ducts the local access network can be enriched with a huge amount of local fibre optic cable relatively cheaply. A marriage of mobile and cable TV networks does seem to make a lot of strategic sense in a converging fixed-mobile market.