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Vertically horizontal: the new world order

guybissonBy Guy Bisson, Research Director, Ampere Analysis (@tvintelligence)

If 2016 showed the world one thing, it’s to always expect the unexpected. Trump, Brexit, political turmoil in the East and what looks like a return to the cold war. That life is most definitely a cycle is the only constant.

Those who remember the 1980s, before the fall of communism, might be feeling a bit of déjà vu, as walls (today metaphorical, rather than literal) go up and society looks inward to become a breeding ground for fear and loathing. We are entering uncertain times.

Business has a tendency to reflect the world around it; not least because business, of course, must respond to the ebb and flow of economic change. The cable industry is no exception.

In some ways, the industry today faces a double uncertainty. Uncertainty over the global economy, and the power struggle between East and West, and uncertainty over the ultimate impact of Over-The-Top (OTT) television; perhaps the antithesis of cable’s infrastructure-led investments.

Within the technology, media and telecoms (TMT) sectors, cable has over the past two decades been a major driver of M&A activity. That was true during the 1990s when the first wave of mass cable consolidation was fuelled by a boom in media and tech stocks. It was true again in the mid-noughties when, emerging from the hangover that was the tech-stock crash of 2002, cable operators again sought to combine for scale.

Apart from occasional forays in and out of content investment, European cable operators have generally been exponents of horizontal integration throughout their history, clustering similar assets to create geographic groupings of scale.

But if we look back over the history of our industry, it is when times are uncertain that companies shift from an expansionist horizontal strategy to a more protectionist one of vertical integration: that is, buying assets that can bring supply and delivery costs within full control. Vertical integration was the hot topic in the 1990s, as the world responded to the global political and economic uncertainty that the previous decade had brought.

Today, over in the US, the potential combination of AT&T and Time Warner is a classic example of a vertical content-plus-distribution play. It’s my prediction for 2017 and beyond that the cable industry in Europe (and TMT companies as a whole) will increasingly seek vertical M&A opportunities.

But it’s not quite that simple. Because while cable has the distribution, the rise of OTT means that the content players are not only changing shape, but acting to some degree as virtual distribution platforms. Where in the past cable operators may have looked to linear TV channels as offering dream vertical integration opportunities, that’s unlikely to be the case today.

Short of trying to buy a major player like Netflix, positioning for an OTT future means cable needs to look at full control of content at source. Focus, therefore, will be on production assets and content owners across multiple formats.

But where should cable place its bets content-wise? In Europe, a major studio-plus-cable combination doesn’t make as much sense as it does in the US. But piecemeal assets that can feed on and off-platform OTT services certainly do.

And when times get tough, there is another way to shore up defenses. That is to seek combination opportunities not along the supply chain, but across business models. In a way, embracing quad-play has been an on-going example of that in the cable business. But as we continue into a future where content control has ascended again to the fore, what are the opportunities?

Combining business models like pay and free TV… or more accurately: subscription and advertising-supported, is one route. Liberty Global has already started to explore this option with its stake in ITV and control of Ireland’s TV3. ITV also brings a plethora of production assets to the party.

So, while I think that the re-emergence of vertical integration will be a key theme, the options for that integration will spread to encompass the new business and distribution models that have emerged in TV in recent years as well as the new audiences that they address.

Cable operators will thus look to combine with production entities, OTT distribution players, free or advertising supported TV operations and with aggregators, technology companies and digital-first producers that specialise in, and deliver, a younger millennial audience.

In one sense that’s all classic vertical integration, but because one could reasonably place OTT players in the same horizontal plane as both platforms and channels, we need a new phrase. And so, to sum up the direction I believe cable will head in the coming months and years, I propose: ‘vertically horizontal’ integration… a perfect reflection of the muddled and uncertain times that we all must now navigate.

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