Award Winning Blog

Saturday, July 23, 2016

Make Versus Buy in Telecommunications—Verizon/Yahoo

        In a matter of days, Verizon will likely add to its inventory of content by acquiring much of Yahoo.  This deal and the earlier acquisition of America Online confirms the trend that deep-pocketed incumbents see the benefit in acquiring content, rather than growing their own.

            Many years ago, soon after divestiture from the Bell System several Regional Bello Operating Companies threw millions of dollars at becoming content creators, with little to show for it (pun intended).  Now incumbent telephone and cable television companies see the benefit in overnight vertical integration.  You can call it defensive, in light of declining margins and revenues for core, “legacy” business lines.  Alternatively, you can call it prudent recognition that in-house talent might not have necessary mindset and creative skills to flourish in Hollywood.

            The billions of dollars recently invested by companies such as Comcast, Verizon and AT&T confirm that regulatory uncertainty and the “scourge” of network neutrality have not and will not stop investment and capital expenditures.  No company will invest in content if its managers conclude that they should not also make the necessary, concomitant investment in the physical plant needed to deliver content to consumers.  The new, or upgraded infrastructure will exploit technological innovations, such as the fifth generation cellular radio.  Some desirable technologies will not become ubiquitous simply because a profitable business case cannot be made for rural market penetration.

            Let us put to rest the red herring that today’s regulatory wingspan stymies investment in telecommunications.  Ask any senior executive—off the record—and she or he will acknowledge that the regulatory climate falls well below key financial and marketplace variables.  When regulation enters the calculus, too often incumbents use it as a vehicle to stymie innovation and competition. 

            I still do not understand how choice in set top box interfaces with broadband networks somehow hurts consumers and competition.  It does not, but incumbents can cast themselves as victims of bullies like Google and throw sand in the works.  Meanwhile managers at these very same companies proceed with multi-billion dollar acquisitions.  They seem quite optimistic about their staying power and ability to identify and capture new revenue streams.