Telecoms companies bet on content but at a cost

BT’s bold foray into Premier League football is emblematic of how telecoms groups have spent billions on original content © Reuters

Over the past five years, some of the biggest European and US telecoms companies have moved into the media world by scooping up exclusive sports rights and content businesses.

Those efforts have largely been applauded as bold and disruptive, with companies such as BT, Altice, Verizon and Telefónica making big bets. They have spent billions of dollars in the belief that broadcasting high-end content could be the tonic needed to avoid their businesses becoming utilities offering no more than “dumb pipes” for other media and technology companies to use.

The push has culminated in AT&T’s blockbuster $85bn tilt at Time Warner which, if concluded, would mean that popular television shows such as Game of Thrones and Curb Your Enthusiasm are produced by a telecoms company.

Yet the expensive push into content has come at a cost for those that have placed the biggest bets. European companies with telecoms-media strategies lost 40 per cent of their stock market valuation on average over the course of 2017, according to Stephane Beyazian, an analyst with Raymond James. Meanwhile, AT&T’s deal for Time Warner is in danger of being blocked after the Department of Justice sued to stop the takeover.

By contrast, those that have taken a back seat in looking for exclusive rights have started to outperform those that have. Both Vodafone and Orange have upgraded profit forecasts as their focus on network investments has started to pay off.

Telecoms charts

Orange was one of the early movers in content when it bought exclusive rights to French football matches in 2008 and launched a pay-TV cinema service backed by deals with Warner Bros, MGM and Lionsgate, the film studios. Within two years, however, the French company had retreated from exclusive content.

The user does not want to be in jail with content. The user wants the best possible range of content at the best possible price

Stéphane Richard, chief executive, now stresses the benefits of the aggregator model, whereby the company offers TV services to 2.7m consumers by partnering with media companies such as HBO, the US cable network, to stream their programming.

“The user does not want to be in jail with content. The user wants the best possible range of content at the best possible price,” he told investors in London in December.

Ramon Fernandez, deputy chief executive of Orange, adds that it is “convergence” in mobile and fixed telecoms networks, not media, that will drive growth. “It’s not this pseudo telecoms-content convergence that makes the difference,” he says.

A similar tone has been adopted by Deutsche Telekom. Tim Hoettges, chief executive, boasted at the Morgan Stanley telecoms investor conference in November that rather than investing in expensive rights or “buying Time Warner”, his company was “building fibre like hell”.

The German group has a lower-risk TV strategy in which it signs deals with other companies such as Netflix, the streaming service. “In some areas, we could buy exclusive content if it is a good deal but it is not my primary intention,” he said.

The contrast with BT and Altice, the French telecoms and cable group, is stark. Mr Beyazian calls the two companies “flagships for the telecoms-media convergence” but both have had a turbulent 12 months: Altice lost more than half of its value while BT has dropped by a quarter.

Vodafone, which dropped plans to launch a UK pay-TV service earlier this year to focus on customer services and network strength, has conversely risen 17 per cent.

BT is under pressure to prove that its model works given that subscriber growth has stalled since it started charging customers for BT Sports, especially with a new auction for English Premier League rights set for February.

Mr Beyazian says the company is spending £900m a year on sports, including production costs, but only generating direct sales of £450m. BT struck a cross-licensing deal with Sky in December that also signalled the company has ended its ambitions to challenge its pay-TV rival outside the sports market.

The problem is even more acute for Altice. It has spent €1bn on content rights including the French football league rights that Orange abandoned earlier this decade.

Founder Patrick Drahi has said that SFR, its French telecoms unit, made a “double mistake” with its sports strategy by raising prices for all customers rather than charging a premium for users who were particularly interested in sports content.

Mr Drahi has ruled out more content acquisitions in the near term and this week carved out its pay-TV operations into a separate division. Altice said it was also moving away from exclusive content to partnerships and would look to offer its content on other platforms.

Despite these struggles, not everyone thinks content is dead.

Telecoms charts

Telefónica has invested in fibre but also spent €2.4bn for exclusive rights to Spanish football matches in 2016.

Verizon, the US telecoms group, recently signed a new five-year deal to stream live NFL games and is reported to have paid more than $2bn.

Telecom Italia is trying a slightly different tack. It has formed a joint venture with France’s Canal+, the pay-TV arm of its largest shareholder Vivendi, to create content. That tie-up could soon include Mediaset whose chief executive Pier Silvio Berlusconi said it was “very interested in an agreement” with Telecom Italia.

Dhananjay Mirchandani, an analyst with Bernstein, says that the push into content has helped reduce churn for telecoms companies but the risk is that having established a foothold in media, the pressure to keep buying the rights at higher prices kicks in. The operators “get hooked . . . and any weaning-off is plainly painful”.

Content push continues but at a smaller price

While many telecoms groups pull back on content, others are launching production plans with smaller budgets than they did in the past.

Orange, for example, has committed to spending a modest €100m over the course of five years on TV content. That is about the same amount that US network HBO spent on the first season of Vinyl, its 2016 rock drama which it cancelled.

This month will also feature the debut of Telefonica’s La Peste, a thriller set during the bubonic plague that is estimated to have cost €10m. The Spanish company has wider plans to develop original content and has budgeted €70m this year to kickstart pay-TV growth in its home market and sell it internationally.

The company’s latest foray into content is a much more modest effort than it pursued at the turn of the century when it spent €5.5bn to acquire Endemol, the maker of the reality TV show Big Brother. The deal was part of a major international push to drive into the media and internet realms under Juan Villalonga, its former chairman.

However, the strategy backfired and Endemol was sold off in 2007 for €2.6bn by Mr Villalonga’s successor César Alierta. He deemed Telefonica’s TV arm to be non-core and invested instead in telecoms assets, including acquiring O2.

This post originally appeared on Financial Times

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