When it comes to delivering video to their customers, have telephone companies learned from their mistakes?
If the partnerships that SBC Communications and Qwest Communications International forged with DirecTV and EchoStar Communications last week are an indication, then maybe they have, analysts said. Instead of trying to reinvent the wheel, the telcos are opting to stick to their knitting of delivering voice and data services while relying on the satellite companies’ expertise to handle the video part.
Analysts are hailing the moves. After several high-profile-and high-dollar-attempts, most observers think it’s smart of SBC and Qwest to use technology that’s already out there instead of developing their own video technology. “It is still too expensive to provide video over wiring right now,” said Joseph Laszlo, an analyst at Jupiter Research. “It makes more sense to forge a partnership with the satellite guys.”
What’s more, by teaming with the satellite companies, “The differentiators [between cable and the phone companies] have been reduced,” said Charles Golvin, an analyst at Forrester Research. Indeed, SBC and Qwest can now boast of delivering to consumers a so-called “triple-play” of voice, data and video, just as the many of the big cable operators do.
These deals come at a time when the entire telecommunications industry is trying anything it can to generate higher margins as their core businesses mature. Cable operators, for example, like phone and data services because they expect that the higher margins in those businesses can offset rising programming costs on the video side. Telcos, meanwhile, have seen their core local and long-distance businesses contract due to the proliferation of cellphones and now cable-based telephony. They figure that by offering a video service, they can retain a customer relationship they might otherwise lose.
The state of flux in the industry is even creating some bizarre business launches: Cable operator Cablevision Systems earlier this month sent a satellite into space and plans to offer an alternative to DirecTV and EchoStar this fall, complete with more than 100 channels.
Qwest’s deal is fairly straightforward: a marketing alliance with both EchoStar and DirecTV to offer Qwest customers satellite TV service in the markets where Qwest offers local phone service.
SBC, meanwhile, is making a $500 million investment in EchoStar at the same time the two companies are forming a joint venture called SBC DISH Network, in which SBC will market EchoStar’s DISH Network service to customers in the telco’s 13-state market. In addition, SBC will handle the customer service and billing associated with the alliance.
For EchoStar, the deal provides the Littleton, Colo.-based satellite company access to SBC’s huge customer base, which uses 57 million phone lines and includes households in high-population states, including California, Illinois and Texas. That could be quite a boon for EchoStar, which has been largely shut out of selling satellite dishes through electronics retailers because of rival DirecTV’s exclusive distribution agreements with Circuit City and Best Buy.
SBC benefits by boasting it can offer customers a full range of products-local service, long-distance, wireless (through its 60 percent stake in No. 2 cellular company Cingular), broadband and now video-and distill them into a single monthly bill, which SBC bets will have huge appeal for consumers.
“This rounds out our ability to offer a full portfolio of products and services,” said Gordon Brown, SBC’s executive director of alliance management. Plus, as Mr. Brown noted, the deal positions the phone giant to take on cable operators.
For their part, cable operators dismiss this attempt by the phone company to beat back the inroads cable has made. “We’ve seen this type of arrangement before and we remain convinced that Comcast is offering the best value in home entertainment in a highly competitive marketplace,” said Comcast spokesman Tim Fitzpatrick.
Wall Street, while hailing the telcos’ strategy, isn’t convinced that it will succeed long-term. Richard Greenfield, an analyst at Fulcrum Global Partners, said that while the partnership between the telcos and the satellite companies makes sense on some levels, he believes SBC’s arrangement with EchoStar benefits EchoStar more than the phone company because the satellite company now has access to tens of millions of customers at no cost.
That said, most analysts applaud SBC’s and Qwest’s decision not to sink billions into building networks capable of delivering video to consumers. However, questions remain as to whether it makes sense for the phone company to be in the video business at all, and whether the concept of the triple play has broad consumer appeal.
Mr. Laszlo said a recent Jupiter study showed that while 40 percent of those surveyed liked the idea of bundling high-speed data with their voice service, just 12 percent said they’d be interested in a plan that partnered their pay-TV service with their phone company.
Nevertheless, the threat from cable operators is looming large over the telco sector. After a series of fits and starts, it seems now that multiple-system operators such as Cox Communications have worked out early bugs in their phone services and are starting to achieve critical mass in several markets. For example, Cox, which has been especially aggressive in pushing its telephone service, reported a 52 percent jump in the number of phone subscribers in its first quarter to nearly 783,000.
By comparison, telephone companies have been trying for years to crack the code of video delivery, only to stumble badly. One of the more notable attempts came in the mid-1990s, when the local phone companies rallied behind Tele-TV and Americast, with the hope that they could offer video content using phone lines.
When both efforts failed, AT&T in 1998 thought it might have found the answer: Instead of trying to build network that could deliver video, spend $100 billion for cable systems that were already delivering video and upgrade them to offer telephone service. That strategy also came up short, and AT&T wound up selling its cable properties four years later to Comcast.