The Great Re-bundling: The Wireless Future of Music and Video

Bundled media services are becoming table stakes in the wireless business. With plain old wireless service (POWS?) at or close to the saturation point in the U.S., wireless operators are increasingly fighting over slices of a fixed pie, and feel a growing need to differentiate from their competitors in pursuit of market share.

With the costly build-out of 5G networks looming, operators also need to increase ARPU by adding services.

Thus, it was no big surprise this week when Softbank-owned Sprint snapped up a 33 percent stake in Jay-Z’s Tidal music streaming service. Sprint already had a partnership with Tidal, but as MIDiA Research analyst Mark Mulligan noted in a blog post,  the bundling game has changed for wireless operators, and meaningful differentiation increasingly means having your own skin in it.

“The original thinking behind telco bundles was differentiation, but when every telco has got a music bundle there’s no differentiation anymore,” he wrote. “Additionally, if you are a top tier telco and you haven’t got Apple or Spotify, then partnering with one of the rest risks brand damage by appearing to be stuck with an also-ran. By making a high profile investment in Tidal, Sprint has thus transformed its forthcoming bundle from this scenario into something it can build real differentiation around.”

No one is putting more of its own skin in the game than AT&T, which spent nearly $70 billion to acquire DirecTV Now in 2015 and spent millions more in 2016 to launch the DirecTV Now mobile streaming service. It’s now awaiting the fate of its $85 billion bid for Time Warner.

Just how high the stakes are was shown when T-Mobile announced last year that it would offer its subscribers a free year of DirecTV Now, both to prevent defections and to make the point that DirecTV Now is not exclusive to AT&T. This week, it gleefully announced it will offer customers who left AT&T for T-Mobile to take advantage of the free year a free of Hulu as “compensation” for DirecTV Now’s widely reported technical glitches.

“It turns out DirecTV Now is barely watchable, but we’ve got our customers’ backs,” T-Mobile CEO John Legere said in a statement. “Even I can’t believe AT&T spent $67 billion on DirecTV and still couldn’t roll out a streaming service that worked.”

T-Mobile was itself a pioneer in the bundling game when it introduced its zero-rated Music Freedom offer in  2015, which eliminated data charges for select music streaming services, and adding its Binge On package of zero-rated video services last year.

Verizon has tried to play the game on the cheap, launching its internally developed go90 video streaming service last year. But go90 has failed to gain traction and this week Verizon began laying of go90 staffers.

Right on cue, though, the Wall Street Journal reported this week that Verizon is now considering anteing up for Chart Communications, the No. 2 cable operator in the U.S., which presumably would foundation for a bundled wireless video service in the mold of DirecTV Now.

What all the M&A activity suggests is that media services, particularly aggregators like pay-TV providers and digital music services, are becoming more valuable as a component of the wireless business than as standalone enterprises.

That’s not particularly surprising for music streaming services, which are yet to show they can be profitable on a standalone basis. But it’s a new world for video services, which have long been profitable on their own.

For those pay-TV operators that remain independent, the trend could eventually raise questions about their own valuations.  But it also introduces a complex new calculus for rights owners.

For now, broadcasters and other content providers are sellers in a sellers’ market. When AT&T wanted to launch DirecTV Now, for instance, it needed to go back to the networks to renegotiate DirecTV’s carriage deals to add mobile streaming rights, creating a windfall for the networks.

The task — and the price — could be even bigger for Verizon should it acquire Charter. Under DirecTV’s national satellite service, Charter’s carriage and retansmission deals are tethered to its physical footprint. Not only would Verizon need to secure mobile streaming rights, it would need to negotiate out-of-footprint rights as well.

At a certain point, though, those bulked up buyers will start to look — and probably act — more like gatekeepers, controlling access to critical masses of both in-home and mobile viewers. At that point, rights owners may find themselves no longer in a sellers’ market.