US Media M&A Will Turn Old, Big Telecom Losers Into Future Winners

March 2017

In America, telecom companies are moving from yesterday’s losers to tomorrow’s winners thanks to their extremely deep pockets and willingness to buy up companies.

“We are seeing giant telecoms like Verizon and AT&T make large-scale M&A plays that are clearly aimed outside of their traditional industry boundaries,” Tom Mannion, Managing Director in BDO Consulting’s Valuation & Business Analytics practice, says.

“This is in some ways a case of ‘the best defence is a good offense’ against the technology industry, which has been taking market shares from telecoms thanks to technologies like online streaming, in the shape of Netflix and Voice over IP (VoIP) with services like Skype and WhatsApp.”

At the heart of this M&A strategy lies a marriage between telecoms and media, and 2016 has seen companies like AT&T and Verizon make big plays aimed at establishing themselves as central players to the US media industry.

Technology drives transition
The major driving force behind these developments is technology. Over the last 10-15 years, new services and solutions have torn down the long-established silo walls between industries.

At the same time, many major technology companies have been quick to exploit innovation and foresight to corner emerging new markets and outcompete established companies in the media and telecoms space.

“A company like Apple is a prime example – it is not only a producer of technological hardware, including the very popular iPhone, but also one of the biggest music media vendors in the entire world,” Tom Mannion says.
Google is another good example. I imagine that many senior executives at big telecoms have been kicking themselves repeatedly, wishing that they had been able to work better together when smartphones first appeared. Instead, Google’s Android operating system became nigh-on ubiquitous – with most of the remaining market going to Apple’s iOS. And don’t get me started on how they must feel about an application like Skype

Telecoms on the losing end
The examples mentioned above exemplify telecoms’ general struggle to keep up. Over the last 10 years, they have been steadily out-innovated and outcompeted. Their focus seems to have been the ongoing consolidation of the telecoms industry.

“There have been four long established trends in telecoms M&A. The first is fixed mobile convergence; the second is global mobile consolidation – if there have been more than three players in a given market, the big players acquired the smaller ones. A third trend is local cable consolidation with the fourth being cross-border mobile and cable M&A,” Mannion says.

At the same time, many new services, products and sub-industries have been growing exponentially, putting even more pressure on telecoms and their infrastructure. 2007 saw Steve Jobs introduce the iPhone, the launch of Twitter, Facebook signing up its first users and the release of Kindle. Since then, mobile networks have seen a 1000% increase in traffic.

While the need for extra capacity is good news for telecoms, it also relegates them to the role of ‘pipe providers.’ Broadly speaking, they have been supplying network infrastructure instead of providing the new services.

Today media, tomorrow the Internet of Things
Telecoms aren’t stupid. Not by a long shot. They have seen what is happening, and even if they were initially caught napping, things like text messages being supplanted by WhatsApp, Snapchat, etc. will have served as a slap in the face. Today, SMS texts are telecoms’ equivalent to media’s VHS and CD formats.

In recent years, some of the biggest US telecoms have increasingly turned to M&A as a weapon to improve their competitiveness. They are buying companies outside their traditional market sphere – and they are not afraid of buying big, something clearly illustrated by several 2016 megadeals (deals worth more than $1 billion).
The biggest deal of all is perhaps also the best example of what is happening – AT&T’s acquisition of Time Warner for $85.4 billion. It comes two years after AT&T bought DIRECT TV for $49 billion. The deals cloud be described as the first ‘pure media’ plays by AT&T since it acquired a stake in Vizible Corporation back in 2008.

Verizon is also going beyond the traditional borders of telecoms. Since buying AOL for $4.4 billion in the middle of 2015, the company has made no less than 12 acquisitions. They include a string of media-related companies, most notably, the $4.3 billion acquisition of Yahoo.

On a side note, I find a couple of Verizon’s other acquisitions very interesting – those of Telogis, Fleetmatics and Sensity Systems.  All three relate to the Internet of Things (IoT). Other telecoms are also flexing M&A muscle in relation to IoT. Japanese SoftBank’s (if we can still call it a telecom at this stage) big acquisition of ARM this summer was widely seen as an attempt to establish the company as a main player in the emerging IoT market.

I’ll admit that I have a thing about IoT. I think it is still somewhat unclear what exactly it is and what it will become, not to mention how we will use it. It still lacks that ‘killer app’ that will make it ubiquitous. What is clear is that it will be huge – and that it’s still an open space where different players from different industries – including telecoms – have the opportunity to establish themselves as central platform providers. Much in the same way that companies like Google and Apple did with smartphones.

Why media and what is next on the menu?
Returning to media and telecoms, diversification is partially driven by a trend previously covered on this blog. Telecoms are looking for quad-play. That means being able to offer landline, mobile phone and internet subscription, as well as – you guessed it – media in some form. The most common thing to offer has been TV. With good reason.

“What we are seeing is that the level of cord-cutting is much lower than many analysts expected just a few years ago. Here in the US, it’s stabilized around 1% per year,” Mannion says.  

Bundling the four services in one deal makes great sense for both telecoms and consumers. Telecoms get to sell four products together, streamline back-office services and encourage customers to stay with the company. Consumers on the other hand get a good price and less hassle.

However, TV is not the only reason for the large M&A plays. Else the Yahoodeal, for one, doesn’t make sense.
The key is – as Netflix recently showed – to have access to a combination of data and unique content. That is what companies like Time Warner and Yahoo can give telecoms, and why we are nowherenear finished seeing telecoms spend big on media companies.

When looking at the next possible plays, Manion sees a number of possible directions.

“You have to look at a company like Sprint and ask what they will do. Are they going to try and compete by making their own M&A plays, or will they be bought by one of the other companies? While we’re talking about US telecoms, there are plenty of other countries where they might see interesting opportunities. Mexico and the UK are two places where we have already seen them make a bit of M&A noise,” he says. 

This post was originally published on the BDO Global Tech & Media Watch Blog.