Posted by Matt Walker on September 20, 2017
For several years, the telecom industry has faced a slow-growth climate. Telcos have adapted, cutting short-term costs as they position for longer-term cost reduction with efforts virtualization & software-defined networks. Most telco execs seem relatively confident that network costs will get in line, eventually. They seem more ambivalent about content.
Content costs keep on rising
Content is important to most big telcos’ growth prospects, and a central reason why cloud providers keep growing. But content is also expensive – both to buy and support in the network.
The biggest telcos have content budgets in the billions. While not many telcos report content costs, BT reports spending over $900M on content (“programme rights charges”) in 2016, for its base of 1.7 million subscribers. Established cable providers, even those who own production studios, have it just as bad. Comcast spent $11.6B in 2016 to purchase programming for its 22.5M video subscribers. That works out to over $500 per subscriber, in the same costly range as BT.
The related network investment to support this content is also hefty. Getting ARPU high and keeping churn low is essential for video platforms to pay off, and you don’t do that with choppy service.
Content also has some “soft” challenges. Most technology deployed by telcos and cloud providers is global, with little variation in basic design and function across country. Content varies dramatically by culture & language, and the R&D/production process is entirely different than a manufactured hardware product or software package.
Cloud providers serious about the content game
Many cloud providers have invested in their own original programming. Netflix gets most of the attention, but Google, Amazon and others have their own studios. Many also invest in early stage content development, in exchange for ownership rights, favorable licensing terms, and/or revenue sharing. Alibaba, for instance, plans to spend $7B developing content over the 2017-19 period. Another Chinese cloud player, Tencent, has its own “Tencent Pictures” arm, which spent ~$150M financing film projects last year.
M&A is an unproven solution
Telcos seem to be leaning towards acquiring their way out of the problem. At least for AT&T. Its purchase of Time Warner is coming along, and won’t be the last big telco-content merger we see – probably not even the last one in 2017. There are downsides to locking in content, though, when you also want to sell it on the open market. And Comcast, which owns both NBCUniversal and DreamWorks, hasn’t exactly solved the content cost puzzle; programming costs amounted to over 40% of its first half opex.