FTI Consulting: How Convergence is driving change in TMT

Michael Knott

Michael Knott, Senior Managing Director - Corporate Finance Practice - Head of TMT for EMEA at FTI Consulting talks to Joseph d’Arrast, Deputy Editor, TMT Finance about media and telecom convergence and M&A, ahead of the TMT M&A Forum 2017, taking place on March 28-29 in London. 

JA: Michael, you will be chairing the Opening Telecom & Media Leaders Panel at the TMT M&A Forum 2017 next week, which includes CxOs from Vivendi, Altice, Liberty Global, Entertainment One and Endemol Shine– how will you approach the discussion and what is particularly interesting about these companies in the context of M&A and convergence?   

MK: Firstly, I’m really excited to be chairing this panel with such a great collection of companies. I’m really looking forward to it. 

What’s really interesting about the panel is that these companies all approach the topic of convergence in a somewhat different way. 

If you look at Liberty Global, obviously they’ve come at it largely from a cable-first perspective and then they’ve branched out more recently investing into content, with ITV, all3media, Lionsgate , Formula One. 

On the other side you have Altice, which is a mixture of telco and cable – largely coming at convergence from an infrastructure perspective until the very recently announced acquisition of video ad-tech start-up Teads. 

Vivendi has divested itself from telecom infrastructure. They appear to be looking at convergence more from a horizontal content perspective, with not only film and TV (e.e., recently acquiring the IP for Paddington Bear) but also gaming as well as aspects of media-tech including ticketing and video hosting/streaming services. 

As part of 21st Century Fox, I’d be curious to hear Endemol Shine's thoughts on their role within that broader group. James Murdoch has been quoted recently on the growing importance he sees of proprietary content so I think they are in a privileged position to talk from that perspective. 

Entertainment One, largely in the context of having rejected the recent ITV offer, is currently the only standalone of the five. It will be interesting to have their perspective on how they see convergence unfolding. They are one of the last scale independent producers of TV content.

It is a great diverse panel and I think it will come out with a lot of different perspectives and drive some really interesting conversations. 

Convergence now seems vital for telcos and media companies, which are continuing to lose revenue share following the emergence of Over-the-top content (OTT) players. Do you agree, and what strategies are proving most successful in this space? 

It was recently highlighted at another conference that the market cap of top 5 OTT players is US$2.2 trillion which exceeds the market cap of the top 30 telecom, media and cable companies in the US and the UK. So you can see how OTT companies have been creating tremendous value over the last several years.

That being said, I don’t think convergence is critical for success at this point in Europe. 

Firstly, from a shareholder perspective, there can be an optimal way to manage a declining business in a profitable way. That can be a valid strategy. Often it’s not a strategy that aligns with what management wants to do with the business, but it’s feasible.

More interestingly, in Europe at least, the impact of OTT players on video and telco revenues has, to date, largely been incremental rather than substitutional. Cable revenues in Europe grew by approximatively 4.6% in 2016 and the biggest commercial broadcasters are still grew somewhere between 2.9% and 4.1% in 2016. 

OTT cannibalisation has hit first and hardest on the whole press and printing industry and more recently on the US cable sector. But the Cable dynamic is different in the US where customers buy much bigger bundles and generate a lot higher ARPU. There is a more obvious incentive for cord cutting as customers can now get more-or-less what they want for US$30 instead of US$200. Viewership of linear TV may be declining in some European geographies, but, to date, it has been more than made up by new revenues in digital (catch-up and other online). 

So to summarise: To date, I don’t think the convergent play has been an absolutely critical one in Europe Without a doubt the long term trend is there though - over time, traditional telecommunication and linear TV businesses will be declining. 

M&A transactions are an obvious way for telecom and media companies looking to bridge the gap between connectivity and content.  What kind of M&A deals do you anticipate for this year in this area? 

There are a numbers of transactions that are currently in play or have been rumoured. In the US, we can obviously mention AT&T and Time Warner. Verizon is also being linked not only with Yahoo! but also with Comcast or Charter. 

In Europe, we can mention ITV. There have been multiple rumours of the company being acquired, maybe from people on the panel or others like BT, which has been mentioned recently in that context. Liberty Global and Vodafone is another obvious one, as that rumour doesn’t seem to go away!  Sky’s acquisition by 21st Century Fox is also ongoing and hoping for a clearance in 2017. 

Entertainment One is certainly one to watch if someone is willing to pay the right price. There aren’t that many scaled independent content producers left. 

From a more global perspective, there’s a lot of chatter around Netflix, although if it were to be acquired, it’s more likely to be one of the other OTT players. 

I would also mention other trends around the “tech” side of things. There are plays to watch around IoT, the data analytics space, programmatic advertising or digital platforms to reach new audience, in a comparable way to Snapchat or Instagram. 

To what extent could convergence trigger further consolidation in the telecom sector and reshape the European landscape?

To date, most telcos have been focusing on in-market consolidation and the view that it drives the bigger synergies if one looks a reducing costs.

It has always been my view than the European Commission wishes to create a “single market” and, hence, would rather have cross-country consolidation. But for now cross-country incentives/synergies have been lacking. 

Three elements could change that perspective looking forward:

-The evolution of international roaming, has resulted in a significant decline in prices and profits - making the EU look more like a national market from a roaming perspective. 

-The digital single market (DSM), still to be finalised, is likely to impact the way IP is managed and bought which could add some rationale for bulking-up in Europe.

-As software-defined networking evolves, there will be a greater cost synergy motivation associated with managing pan-European networks. 

I believe  the above three factors will influence cross-country consolidation beyond 2017. 

Broadcasting, VOD, TV production, sport rights – convergence embraces a large variety of activities. Which subsectors would you say are most effective to achieve synergies for telcos? 

In Europe, telcos that have bet big on sports are more successful than those who haven’t. The examples of BT or Telefonica support this perspective quite well. 

Of course, this strategy needs to be supplemented with a fuller portfolio of services in order to retain more customers (and the interests of the whole household).But so far, the “football first strategy” has worked best and I would expect that to continue even though the inflation of football rights is becoming problematic from a margin perspective.

What is the importance of scale when it comes to convergence? Does it rather increase or limit risks?

Scale is important but the question is: what sort of scale? There can be a lot of different answers depending on one’s view of how profit and revenue pools will evolve over time. For telcos, the answer has been national scale. They must ask themselves how can they leverage their national coverage to compete with OTT player, who they will never beat at a global level? Bidding on local (e.g., football) contents rights has been one answer. 

But these rights are not cheap. Sometimes a company can buy just what it wants but in other cases they need to take on a broader risk associated with developing proprietary content and then be confident that, if they don’t have a larger scale, at least they can offload these rights through alternative means. For these companies, it’s either having an element of scale and/or the capability of making sure that they are able to fully monetise their investment even in geographies where they don’t have presence. 

For the reasons mentioned earlier, Pan-European scale is more uncertain from my perspective – both revenue and cost synergies are currently margin but could increase going forward. 

We know BT, Altice, Liberty, Telecom Italia/Mediaset are among some of the companies leading the way in persuing convergent strategies. Which other players do you see accelerating in that space in 2017 and beyond?  

Vodafone is one, of course, as we discussed earlier, but also Hutchison’s Three at an infrastructure level. Hutchison failed in the UK but managed in Ireland and, more recently, in Italy with WIND. 

Sky has been pretty active too, not just with the consolidation of their three operating companies in the UK, Germany and Italy, but also with the acquisition of various small tech companies that have helped enable them to launch their Sky Go, Sky Now, betting as well as programmatic advertising capabilities. 

Telefonica is always an interesting one to watch although they may decide to mostly focus in Latin America in 2017. 

Finally, Chinese giants such as Wanda, China International Holdings or Tencent are likely to continue to be active despite the new capital control imposed by their government. These players still have a strong appetite in sectors such as digital special effects, cinemas, or content.

 

Michael will be chairing the Telecom and Media Leaders Panel on March 28 at TMT M&A Forum 2017 

For more information on FTI Consulting’s TMT Practice, please visit: http://www.fticonsulting-emea.com/tmt