And the winner is… Comcast!!!!

Comcast has emerged as the winner of the drawn-out Sky acquisition battle with 21st Century Fox, offering shareholders £17.28 per share.

After 21 months, much bickering and passive aggressive commentary, the auction was completed on Saturday 22 September, with Comcast valuing the business at £30 billion. The unusual auction process was overseen by The Takeover Panel, an independent body established in 1968, whose main function is to issue and administer the City Code on M&A.

“We consider the Comcast Offer to be an excellent outcome for Sky shareholders, and we are recommending it as it represents materially superior value,” said Martin Gilbert, Chairman of the Independent Committee of Sky. “We are focused on drawing this process to a successful and swift close and therefore urge shareholders to accept the recommended Comcast Offer.”

“Sky is a wonderful company with a great platform, tremendous brand, and accomplished management team,” said Comcast CEO Brian Roberts. “This acquisition will allow us to quickly, efficiently and meaningfully increase our customer base and expand internationally.”

In securing Sky, Comcast not only adds an additional 23 million customer relationships to its current subscriber base of 29 million, it also increases its footprint in international markets. Prior to swallowing the Sky business, Comcast attributed 9% of its revenues to the international markets, though this now increases to 25%. It’s a more diversified business, offering comfort for Comcast shareholders, while also creating a broad and varied content portfolio. Alongside partnerships with HBO and Showtime, Sky also brings with it a heavyweight position in sport content, a presence which has underpinned its success.

Looking more specifically at the auction process, it was a slightly unusual one. Starting on Friday night, both companies made a starting bid, with the lowest offeror at the commencement being afforded the opportunity to make an increased bid in the first round. In the second round, only the offeror that was not eligible to make a bid in the first round could make an increased bid. If there was not an increased bid in the second round, the auction would have been concluded, though it did run to the third (and final) round, where both companies were offered a final opportunity to increase bids.

As a result of this process, Comcast tabled a bid of £17.28 compared to £15.67 per share from 21st Century Fox. The winning bid represents a premium of 125% to the closing price of £7.69 on 6 December 2016, the last business day before 21st Century Fox’s initial approach. Sky has proven to be a very successful bet for investors representing a ten-year total shareholder return (since 1 July 2008) of +402%, compared to +97% as an average of the FTSE 100.

While this might seem to be the end of a prolonged saga, there are a couple of twists yet to be turned. Firstly, Comcast still has to convince shareholders to part with their assets, and secondly, what will the future hold for the Sky telco business?

In terms of the shareholders, for Comcast to officially secure Sky it will have to gain approval of 50% of shareholders. Fox/Disney currently owns 39% of the business and is yet to disclose what its own position will be, meaning Comcast will have to convince 82% of the remaining shareholders to be safe. Due to the Fox/Disney 39% stake, de-listing Sky will be an unlikely outcome (75% threshold is needed), as will squeezing out remaining shareholders (90% ownership is required). 21st Century Fox could remain a thorn in Comcast’s side for some time.

Another question worth considering is what to do with the Sky telco business. Comcast’s intentions in acquiring Sky have been clear; it is Europe’s most powerful content business; though the telco business comes with this prize. Sky certainly has a notable broadband business in the UK (roughly 6 million subscriptions) and has successfully launched its own MVNO, though it is currently unclear whether this is an area Comcast would like to develop or whether it will look for a sale.

According to RBC Capital Markets, an acquirer would have to shell out in the region of £4.5 billion to purchase the Sky telco business, though there do not seem to be many suitors. BT, Virgin Media and TalkTalk are too large for antitrust approval, leaving only O2 and Three in the telco space. Considering the precarious financial position of O2’s parent company Telefonica, and recent comments from CEO Mark Evans dismissing the convergence craze, O2 seems unlikely.

Like O2, Three has a large mobile business but no presence in the broadband space; a converged offer would be of interest to cash-conscious consumers. It is unknown whether Three parent company Hutchison would want to pursue this avenue, though considering it has begrudgingly spent and cash in the past, instead trying to use political influence to better Three’s prospects (it has a reputation as a moany, spoilt child for a reason), we can’t see this as realistic.

The only other option which would be on the table would be a player from the financial market, though RBC Capital Markets feels Comcast will retain the telco business without expanding it to the continent. Sky is demonstrating the convergence business model can work, and it is an important aspect of the offering in customer eyes; why would it want to undermine a healthy position. As the old Bert Lance motto goes, ‘if it ain’t broke, don’t fix it’.

The auctions bring to close a long-running chapter in the European content game, but this is by no means the end of the story. With its 39% stake in the business, 21st Century Fox can still be a prominent character.

Sky convinces Netflix to do the thinkable: move titles off its platform

Having initially announced a tie-up earlier this year, Sky has somehow managed to convince Netflix to loosen the grip on customer experience, integrating its biggest titles into a very chunky on-demand package.

As part of the partnership, Netflix content will be hosted on the Sky platform, allowing customers to access a huge number of on-demand titles without having to navigate between different streaming apps. Having to navigate through different windows to find the right content can be a frustration for consumers which Sky is certainly addressing, though it does seem to contradict the Netflix ambition to standardise customer experience across all platforms and partnerships.

Across one page users will be able to navigate through Sky’s content such as Patrick Melrose and Tin Star, HBO’s Game of Thrones, Showtime’s Billions and now, Netflix titles such as The Crown, Stranger Things, The Kissing Booth, Making a Murderer and Queer Eye. It’s a lot of quality content for one place, cementing Sky’s position as the UK’s king of content.

“Sky wants to position itself as an aggregator of services as underlined by recent tie-ups, bringing services together is to be offer users a seamless and integrated service experience,” said independent telco and tech analyst Paolo Pescatore. “Therefore, the move further increases Sky’s own value as a one stop shop provider. More importantly it will also get access to Netflix’s catalogue and metadata which will prove more attractive to Disney.”

“Europe lags the US when it comes to cord cutting due to numerous reasons. Among other things the pay TV penetration is a lot lower in Europe and has been dominated by a handful of players. However, both regions are seeing huge growth in binge watching driven by changing user behaviour towards on demand programming.”

The mega on-demand deal will cost £10 a month, alongside a Sky Q subscription, with a 31-day rolling contract available as an option. It might be more expensive than a normal Netflix subscription, but with Sky’s box set content available for £5 a month, professional bingers will be able to save money combining the pair.

Sky Netflix

While this is a massive coup for Sky, it is a strange turn of events for Netflix. Last week at IBC 2018, Maria Ferreras, VP of EMEA Business Development at Netflix, stated that while the business was open to partnerships the experience would remain consistent across all platforms and partnerships. In allowing Sky to host its programming on its own content platform, Netflix has essentially handed over the management of customer experience. It’s an interesting announcement with Ferreras insisting maintaining a high-quality and standardized experience across all platforms was critically important for the business.

That said, another ambition of the business is to make its content as accessible as possible. Improving accessibility is one aspect of the strategy to secure additional subscriptions as the growth rate looks like it is beginning to wobble. Perhaps this is simply a compromise. As growth momentum slows executives have to make difficult decisions, some of which they will not like, and maybe this is one. The drive for new subscriptions seems to outweigh owning the customer experience.

Now before anyone gets too excited about this being a possibility for every content platform, this will probably not be the case. Ferreras highlighted last week that each partnership is weighed on its own individual merit. There are frameworks in place to guide the parameters of each relationship, though the end product will entirely depend on who is sitting on the opposite side of the table.

Taking this an example, Netflix might have been happy to hand over the customer experience management because Sky has an excellent content platform which it has spent years honing; it is a solid experience with content easy to find. Others cannot say the same, take Virgin Media for example. We cannot imagine Netflix would allow a similar integration of content due to the cumbersome nature of the TV offering.

The search for new subscriptions will certainly take Netflix into some interesting partnerships. After the last quarter’s results, were subscription growth looked to stagger, there might be more pressure for executives to loosen the stranglehold on the platform, and be more flexible when it is discussing partnerships. Netflix still has the upper-hand when it comes to negotiations, though if it wants to maintain its lofty market cap ($152 billion!!!) it will have to be more pliable. Offering more access to its valuable customer data and behaviour insight could be one of those areas.

Legere gives up the weird and wonderful for loyalty-focused Uncarrier move

Revamping customer services and launching a loyalty programme might be very intelligent plays by T-Mobile, but it isn’t quite the grandeur of kick-starting an assault onto the TV content market.

Whenever CEO John Legere pulls on the magenta t-shirt, applies the gallons of mousse to the hair and presumably drinks 15 shots of espresso to get the authentic wired look, the industry has come to expect big, disruptive and combative things with Uncarrier announcements. The latest ‘challenge’ is somewhat more traditional than we are now used to as the norm with the eccentric CEO.

Back in January, when T-Mobile US completed the acquisition of Layer3 TV, it paved the way for the magenta army to tackle the convergence market. T-Mobile has been promising a disruptive TV service and is yet to deliver. When Legere decided to stoke the fire of excitement by telling us the next Uncarrier move was coming this week, assuming it would be the TV embrace would have been a fair bet. The reality is functionally a great route for the business, but it isn’t anywhere near as stimulating as what we imagined, even if Legere does his relatively-shallow excitable-puppy routine.

The banner for the new initiatives is ‘Rock Star Treatment’, which does seem to be a rip-off of the Virgin Atlantic adverts of yesteryear. The first prong will be to revamp the customer services operations, creating a proposition where the customer feels valued. Despite Legere claiming this is disruptive, it is something which should have been done anyway. The song-and-dance surrounding the upgrade just illustrates how little telcos think of their customers in the first place. Secondly, the loyalty programme is very similar to the proposition which O2 has built in Priority. It’s a very effective loyalty programme for O2, so we have no issue with Legere ripping off the UK market leader.

“Our customers get treated like rock stars with Team of Experts, and we believe they ought to be treated like that everywhere they go,” said Mike Sievert, COO at T-Mobile US. “Music connects us, so we’re connecting our rock star customers with exclusive magenta extras at Live Nation events and with Pandora. Now, when they turn on their tunes or head to a show, they’ll get an elevated experience, just for being with T-Mobile.”

On the customer services side of things, the T-Mobile Team of Experts has been launched nationwide which promises no robots or automated phone menus, and a dedicated customer services representative who will be assigned to a customer. As part of the initiative, Legere has promised you will talk to an actual person, no bouncing from department to department, 24/7 call centres, call-back features will be introduced and integration with Alexa or Google who will be able to assist negotiating the beige maze.

Some of these features are welcome additions to the customer services mix, while other are something the telco should have been doing anyway. Although this is hardly the most exciting aspect of the communications world, it is a critical one. Telcos who take customer services seriously are the ones who have the lowest churn and highest Net Promoter Score (NPS). Many business experts will tell you it is more profitable to keep current customers happy that constantly chasing acquisitions to replace the churn. It seems like an obvious thing to say, but with the attitudes of the telcos, you wonder whether it has hit home. T-Mobile is seemingly making efforts to improve here, and the second aspect of the Uncarrier launch will also add to momentum.

The second aspect is a loyalty programme. Here, a partnership with Pandora will offer Uncarrier customers a year-long Pandora Plus subscription, and through a tie-up with Live Nation, will have exclusive and early access to gigs, as well as discounted tickets. This is an approach to retention and rewarding customers which we really like and smells very similar to O2’s strategy.

When looking at free value-adds for customers, some telcos look at big ticket items like sports. While this might attract certain customers, the risk is there is little interest from others. A focus on music offers breadth and accessibility. With Pandora, customers can choose their genre, or tap into alternative content such as podcasts and radio stations. It offers something for everyone. With the Live Nation tie up, this is relatively risk free as it gives the consumer the choice of what to purchase. T-Mobile is offering value to the customer through discounts and early access, though it is placing the financial commitments on the consumer. They choose what they want, but are receiving value through being a T-Mobile customer.

Overall, this is an alternative approach to convergence. The ventures into content are not to generate revenue directly through increasing ARPU, but focused on retention of customers. Offering value-adds for free makes the customer feel rewarded and an indirect boost for the bottom line. Securing customers for the long-term is an excellent way to improve profitability, and a better relationship with customers will only create more brand ambassadors.

While this is not the devilish and enticing Uncarrier move which we have become accustomed to with Legere and his wild eyes, it is a pragmatic business strategy to secure the user base and improve the foundations. If T-Mobile US can take it retention capabilities up to the same level as its subscriber acquisition, the duopoly might not be that far on the horizon after all.

Apple, a perfect example of what can be achieved through customer loyalty

The telco world is filled with companies who are constantly chasing new customers, but considering the success of Apple focuses on sweating the brand, should executives be looking inwards more often.

The term ‘sweating the brand’ is an interesting one, and relates to the much hyped convergence strategy. A company develops a relationship with a customer, and then uses the power of that brand, alongside the connection with the customer to sell additional products and services. The two important aspects of this concept are developing a strong, independent brand and a trusted relationship with loyal customers.

Through years of creative advertising and carefully protecting the fruity image, the Apple brand is one of the most recognisable and respected in the world. On the customer service side of things, the teams dedication to servicing customers and creating a welcoming environment in its stores, has creating a cult-like following of iLifers who would possibly sacrifice a finger for their iPhone. It took years, some mistakes and a few obnoxious statements, but Apple has created an incredibly enviable position. And what is the result, buckets of cash.

Apple recently reported its numbers for the last three months and the spreadsheets were bunging. Total revenues stood at $53.3 billion, a year-on-year increase of 17%. For the first nine months of the 2018 financial year, $202.695 billion has been bled out of the iFollowers.

Looking at how the business makes money, 41,300 iPhones were sold for $29.906 billion. This is the core aspect of the Apple business today, but the immensely popular devices was developed through diversification. Personal computers were the bedrock Apple built its business on, and the team sold 3,720 Macs across the last three months. Perhaps the most successful venture over the last couple of years has been the services business unit, which contains AppleMusic and AppleCare as two examples, bringing in $9.548 billion over the quarter. These are all the headline products, but when you factor in Apple TVs, smart watches, smart speakers and other subscription services, the message is quite clear; Apple can make money out of pretty much anything.

Of course, there have been some disasters. Original content has not been great to date, Shark Tank was truly awful, though using the power of the Apple brand, no-one seems to remember it. The next couple of months will see releases of various original content, including a multi-year content partnership with Oprah Winfrey.

All of the products are successful because of the Apple brand. A brand which has been created through creativity and dedication to current customers.

The convergence business model should be built on the same principles but it is not. Customer service has never seemingly been an interest of the telcos, who are constantly fighting to steal customers from each other. The strategy of these companies is simple; acquire more customers as quickly as possible, though there are numerous studies which suggest caring for and maintaining your current customer base is a much more success route.

For divergence to work, the core business needs to be sound. For the core business to be sound, customers need to be loyal. For customers to be loyal, the business needs to care for them. This is the fundamental oversight from the telecommunications industry; the customer never feels like anything more than a statistic. Telcos might be searching for the right formula to make convergence work, but they are failing at the first hurdle.

Unfortunately, the ‘sweating the brand’ strategy which Apple has moulded so effectively takes time. It also takes the right culture, foresight and innovation. Demanding investors, many of whom only focus on the next three months, remove such blue-sky ideas from the realms of possibility, while you also have to question whether the telcos are set up to achieve even the smaller fraction of what Apple has done.

Everyone wants to achieve the level of profitability which Apple makes look so simple, but few are willing to build the same foundations the iLeader has. Apple has only dominated the world over the last decade, but the culture of creating loyal customers goes back to 1976 when Apple was founded.

Telia continues on the TV acquisition trail

Only a matter of days after Telia announced the purchase of GET and TDC Norway to bolster its convergence play, the Swedish telco has confirmed the acquisition of Bonnier Broadcasting.

Telia has been gearing towards the convergence business model for years, with content as a notable prong, though the acquisition work this week brings the promise closer to reality. The new business will be a separate entity within Telia, with a comprehensive ethics and compliance framework already in place to maintain editorial independence.

“The debate which has been taking place ahead of today’s announcement shows that Telia Company has several important roles to play in the Swedish society,” Telia said in a statement. “It is a role that the company takes most seriously and one that, as we move forward, will continue to be handled responsibly. Telia Company therefore welcomes shareholders and other affected parties within politics and society to take part in constructive dialogue around these issues.”

While the convergence business model is a logical one, there are some concerns in Sweden about the takeover, mainly surrounding government influence in broadcasting. The acquisition will have to be handled carefully, somewhat explaining Telia’s compulsion to explicitly state there will be no changes within the organization once it is brought into the telcos family.

The Swedish government is currently the largest shareholder in the Telia business, controlling a 37% stake, and already controls the largest traditional broadcaster in the country, SVT. Should the government have direct/in-direct influence over two of the major broadcasters in the country, some might question whether this is a sensible decision. With a general election scheduled for Sunday 9 September 2018 in the country, the timing of the deal could make this a much more politically sensitive position.

Although some might suggest this is a paranoid distraction, you only have to look across to other countries with far more ‘proactive’ governments, to understand why some critics are sensitive to the idea.

BT CEO in last chance saloon as investors voice concern

New criticism of BT CEO has emerged, with some investors questioning his position at the helm as share price drops to the lowest point for six years.

According to the FT, five investors have requested a meeting with no-nonsense Chairperson Jan du Plessis to discuss whether Patterson is the right person to lead the transformation of the BT machine after numerous scandals and poor performances littering the record books in recent years. This is not the first time Patterson’s role has come into question, but calls for a change are starting to become louder.

“I don’t have much faith in Gavin,” one shareholder said. “Since he took over, it has not been a happy time for shareholders. I am not sure he is the right man for the job.”

“Shareholders are worn out,” another said.

Patterson seemed to have the ambition to take BT back to the promised lands of profitability, but delivery on the grand plan was somewhat lacking. When he took over, five years ago, BT was already struggling, and a vision to wrestle control of the content world out of the hands of the dominant Sky was the plan to turn fortunes around. Hindsight is a wonderful thing, as the BT content mission doesn’t look to be anything more than an expensive mistake now with subscription numbers heading in the wrong direction.

This might be the downfall of Patterson, as while other attempts at diversification might have been forgiven, the billions and billions spent on sub-par delivery cannot be over-looked. In truth, Sport promised and delivered, but the BT approach was fundamentally flawed. Subscribers were tempted in on the promise of football, but for the rest of the week the BT platform was mediocre at best.

Sky spent years developing a platform which was rich in content, for all demographics and moods of the individuals. It has something for every person in the family, and an intuitive interface, two aspects which complete the experience. Football is the poster-boy of the Sky content promise, but it is by no-means the only factor. Patterson and the BT content team didn’t take this into account, and now the CEO is seemingly being punished for it.

Of course this is not the only failing of Patterson over the years. The accounting scandal in Italy cannot be forgotten, neither can a quickly disintegrating relationship with regulators which should not be viewed as anything but negative. There have been some positives to take out of the last five-years, but it seems for investors, nowhere near enough.

Where are the telcos hiding at IBC 2017?

Content is a game that every telco wants to get involved in, but there doesn’t seem to be much evidence of it at IBC this year.

Multi-play is a majestic buzzword which has peppered the telecommunications world for the last couple of years, as operators look to recoup lost profits. Convergence is another which is on the lips of every PR-greedy CEO. Content is, of course, an important factor of this strategy. Arguably king.

But watching the keynotes this morning at IBC 2017, and flicking through the agenda, the telco presence is pretty limited.

While it is your correspondent’s first time at the conference, a few industry friendlies also highlighted the absence to us. This wasn’t just a passing comment either, we’re looking for some sort of reason. A couple of years ago, BT hogged the stage with loud and bold ambitions of dominating the content space; quite a contrast from this year’s event.

Maybe we shouldn’t be surprised. The telcos are treading the steady slope to utilitization, and there doesn’t seem to be much friction. Spin-laden announcements declare the interest in adding value through content services, but perhaps that is all there is to these announcements – PR rhetoric to keep feisty investors at bay.

The truth is content is a difficult game to play in. You have to walk a fine line between sensible investments and lavish spending. Look at Netflix. It might be the poster child of the video evolution, but the costs of securing attractive content have spiralled upwards. Some might look at these costs and become a bit less bullish in the content arena.

Sports is another area where the balance is tricky. Yes, it is a strong emotional connection to the audience, but how much money do you want to spend for such a limited product lifecycle. If you are only leasing the rights you are playing a dangerous game of cost escalation.

Orange has taken a different route, going down the perhaps less attractive cultural content route, but then again this is also no guarantee of success. It is certainly more cost effective, but if you don’t get a return even a small amount of wasted cash could be seen as sacrilege.

And you don’t have to be a content producer. Just look at what Facebook is doing. It has cultivated an audience, and now charges access to it. It has even been very clever when it comes to original content. It hasn’t paid for it, but encouraged the narcissist in its users to the surface which has resulted in an absurd amount of user generated content.

The telcos might not have the same scale and footprint as Facebook (few people do), but they do have subscriber bases. How many customers does BT have in the UK? Or how about Vodafone across Europe? This is a trusted connection to an audience which the telcos are not making use of.

If telcos are too scared to be content producers, why not consider the less attractive and showy route of being a content distributor? It’s not as glamourous, but there is cash there; Facebook wouldn’t be considering it if there wasn’t.

This is essentially a golden ticket. The millennials, an audience which many want to reach, are notoriously difficult to nail down. But you can guarantee they won’t go anywhere without their smartphone. This is an audience which the telcos have an unreal connection to because on this dependence on devices. How are they not making better use of it!?!

All that remains is connectivity. This the telcos seem comfortable and happy doing, but this is not going to recover the eroding mountains of cash. This is simply going to make them a dumb pipe. The content revolution is happening right now and it just seems to be passing the telcos by.

So the absence this year has been noted. And the next time a telco complains to you about the relegation to the role of utility, perhaps you should quiz them as to whether they are just standing back and letting it happen.