Network convergence has been going on for almost a decade. What we’re really focused on right now is what we call ‘Phase 2,’ which is the delivery of converged services.- Brett Feldman
Key Themes: Communacopia 2014
Brett Feldman, senior equity research analyst in Global Investment Research (GIR), describes the next phase of network convergence and its implications for investors, consumers and businesses.
Key Themes: Communacopia 2014 [3:44]
Recorded on September 5, 2014
Every year, Goldman Sachs hosts our Communacopia Conference, which brings together senior executives from the leading media and telecommunications companies globally.
One of the key themes that we’re focused on this year is convergence. When investors think of convergence, what they're usually thinking of is network convergence, which is the coming together of wireless and wireline networks under the ownership of a single company. That’s been going on for almost a decade. What we’re really focused on right now is what we call ‘Phase 2,’ which is the delivery of converged services. A converged service is any network service that takes advantage of multiple network platforms. So a great example would be a broadband service that works when you're in both fixed and mobile locations, meaning it would work when you're at home, or it would work when you're out on the road.
There are four key trends that we see driving convergence. The first is network evolution, which means that you have increasingly ubiquitous access to a broadband network, both in fixed locations and when you're mobile. So, for example, by the end of 2014 there are going to be four nationwide 4G wireless networks for the first time ever. We also estimate by the end of this year, nearly 75 percent, if not more than 75 percent, of households in this country will have a broadband connection.
The second trend driving this is device adoption, or more specifically the adoption of smartphones and tablets. Right now, over 70 percent, and we think nearly 80 percent, of consumers have a smartphone. And at the end of last year, we already saw over 40 percent of consumers with a tablet.
The third trend driving convergence is changing consumer behavior. More specifically, we are seeing consumers increasingly consume digital media on smartphones and tablets. And here’s an interesting data point: in 2013, for the first time ever, there was more consumption of media in digital format than on television.
So these three trends that we just discussed are creating opportunities for network operators to drive new revenues; meaning they have assets they can take advantage of, they have devices in the ecosystem they can take advantage of, and most importantly their consumers have told them that they want to buy services from them in new ways.
The fourth trend is pressures that we’re seeing emerge on standard network operator business models. So, for example, the wireless market is pretty mature. And as a result you're starting to see network providers use price as a tool for attracting customers to their networks. If you're a network operator, you really never want to compete on price. You want to compete on service differentiation and service quality. So as a result of the first trends, what we’re seeing are opportunities for network operators to capitalize on them, by bringing new services to market, thereby sidestepping the need to compete using price.
So looking ahead into 2015, a key thing we’re going to be focused on is whether the network operators are actually able to capitalize on these trends by bringing new services to market. So, for example, we do think at least one major network operator is going to launch something called an ‘over-the-top video service,’ which means that instead of buying video from them through a standard cable pay TV package, you'll actually be able to buy a subscription to an Internet-delivered video service. That would be a classic example of a converged service.
The reason this matters for investors is because it’ll show the extent to which network operators are actually well-positioned to benefit from these trends and drive long-term profit and cash flow growth.