Core Capital Partners
Re-ordering the Universe
January 1, 2012
2011 certainly went out with a bang! The discovery of the “God Particle” and a challenge to Einstein’s Theory could re-order quantum physics. But, if you want to talk about really re-organizing the universe, consider the December announcement of an unprecedented consortium between Verizon and the major cable operators.
The heretofore unidentified “God Particle” (formally the Higgs boson) turned from theory to reality in December at the Large Hadron Collider. By smashing protons together the collider simulated the universe a hairsbreadth before the Big Bang. Lo and behold, the test appears to have identified the force that gives shape and substance to everything we know.
Einstein’s Theory fell apart twice (or at least appeared to). Once in September and again in November: extremely low mass particles called neutrinos appear to have broken the cosmic speed limit by moving in excess of the speed of light between the European Organization for Nuclear Research (CERN) in Switzerland and a receptor 730 km away in Italy. What if E doesn’t equal MC²?
But those developments only hold the potential to re-order quantum physics (!). At the same time, the basic assumptions of science were being challenged, Verizon and the cable MSOs began to transform the physics of program content and delivery.
Verizon and four major cable television operators (Comcast, Time Warner, Cox and Bright House) entered into an agreement whereby Verizon would buy the cable companies’ AWS spectrum licenses covering 259 million pops for $3.6 billion. Other than being the definitive conclusion of cable’s flirtation with building their own mobile networks, this part of the announcement is a simple license transfer, not unlike AT&T’s $1.9 billion purchase of Qualcomm’s licenses which closed in December.
The change in the business physics came in the other part of the agreement. The cable companies and Verizon are forming a joint venture to sell each other’s services. Comcast reps selling Verizon Wireless and Verizon stores selling Comcast is one thing . . . but what about a new “wireless cable” service to take on the broadcasters and, once again, re-define video delivery?
The business physics of the 21st century is all about screens and how to get to them.
The pioneers of cable television broke the broadcast oligopoly in the late 1970s and early 1980s by offering via a contained conduit what that era’s spectrum technology could not: consumer choice. The increased access to consumers’ screens spawned an explosion in programming. We now take for granted multiple news and sports channels and programming for every niche from science and history buffs to foodies.
The pioneers of wireless broke a monopoly, too. When mobile took off there was only The Phone Company. The subsequent introduction of digital capabilities transformed the mobile phone business into a screen business as well. According to Cisco’s annual Networking Index, mobile video was projected to exceed half of all mobile data last year and grow to two-thirds of all mobile data by 2015.
Now, the nation’s dominant screen service providers and the emerging next-generation screen service are going to play together. It had to happen for multiple reasons. Telephone companies see the public switched telephone network (PSTN) going away. The programming diversity of cable operators has already become diversity of delivery to multiple wireless devices. And, the Mongols (yes, that is “Mongols,” not “moguls”) of Silicon Valley are massing on the horizon.
The PSTN is a casualty of the digital world. The life blood of telephone companies, like Verizon, and the new blood of cable companies, circuit switched telephony, is headed for history. Internet Protocol (IP)-based voice service is just another app on an IP wireless or wired network, no different from Angry Birds or YouTube. For a traditional telco, it’s time to look to the future of how to be more than an IP “pipe” for someone else’s apps.
Cable television service is changing dramatically, as well. The major operators’ “TV Everywhere” initiative to deliver their content to multiple wireless devices is all the evidence required. The shocking statistic of 2011 was that the number of television sets in America actually declined! It is no longer necessary to have a television to watch TV.
As for the Mongols, both Google and Apple have made clear their desire to be in the video business. Eric Schmidt, Google’s Executive Chairman, has indicated, “By the summer of 2012, the majority of the televisions you see in stores will have Google TV embedded.” And, the rumor mill is rife with rumblings of Apple’s efforts to do to video what it has already done to music. It appears to be a “when,” not an “if” that Apple will offer consumers a subscription service that allows them to build their own customized program lineup, maybe as soon as the second or third quarter of this year.
A TV subscription service like the one Apple is proposing is the heart of what cable is all about. And, whatever Google is doing, they aren’t in every TV just for the heck of it. The Mongols of Silicon Valley have been behaving just like their 13th and 14th century predecessors. Using new technology to their advantage, the Mongols of the Middle Ages sent invasions in every direction. Soon they had the largest contiguous empire the world has ever seen. Sound familiar?
It may be a case of “my enemy’s enemy is my friend”, but a cable-wireless alliance is an exceedingly logical response to the impending attack. Cable operators have program distribution rights (or leveraged access to them) and Verizon has the high-speed wireless network to deliver to the growing number of mobile devices. Both of these players can help each other confront the coming onslaught.
An interesting sidelight to this may be the effect it could have on movie theaters. Box office revenues for 2011 were down from 2010. One of the reasons, according to film critic Roger Ebert, is “ticket prices are too high [and] . . competition from other forms of delivery.” Ticket prices are high because of the limited number of screens - a market-controlling force not unlike what the broadcasters and telephone companies once had.
The competition from the new screens has produced damn good and creative new video that can be seen at home or anywhere. Breaking Bad, Mad Men, Boardwalk Empire, Homeland and other made-for-cable content is crisper, edgier, more accessible and less costly than the latest shoot-‘em up, blow-‘em up film mayhem. The cable-Verizon alliance holds the potential to expand the number of screens even more, thus continuing to expand quality video entertainment outside the movie theater.
For those of us who move through the day without thinking of the God Particle or Einstein’s Theory, the late 2011 revelations were simply matters of interest. The other end-of-the-year development, however, just might up end the way we live our lives.
Tom Wheeler, a Managing Director at Core Capital Partners, is the former president of the National Cable Television Association and Cellular Telecommunications & Internet Association. He writes the Mobile Musings column for TMCnet. To read more of Tom’s articles, please click HERE to visit his columnist page.