In the first part of this post, I defined the idea of a consumer identity cloud and connected it to the recent media merger frenzy. If you haven’t read that, you should! Also, as you can see above, I learned how to add captions to pictures on WordPress.
Here, I’ll break down some more of AT&T’s recent moves and share why it all may be moot anyway.
AT&T’s After-Dinner Snacks
Post-merger ruling, a fortified AT&T made a few moves in rapid succession that pointed to its ambitions over the near future:
- June 25: AT&T acquires AppNexus
- July 10: AT&T acquires Alienvault
- July 11: AT&T invests in Magic Leap and becomes its sole U.S. wireless vendor
Let’s go line by line to try to break these down.
AppNexus is a programmatic ad exchange. Programmatic ad buying means using data and technology to enable the purchase of ads in real-time. AppNexus is the largest independent digital ad exchange, which is a nice way of saying that it is smaller than the two largest players in the digital ad business, Google and Facebook. Those two companies collectively controlled 57% of the digital ad market in 2017, which is a slight decrease from 2016. That decrease was driven in part by strong growth from Snap and Amazon. All of these companies have strong and/or novel claims on their customers’ identity clouds.
AT&T is unique from these companies in that its businesses are rooted in broadcast media. Broadcast media is one-to-many entertainment, while digital media companies specialize in one-to-one content. One-to-many means that one broadcast stream is shown in the same manner to many end users. One-to-one means that the content viewed is personalized for each user. One-to-many aims to maximize aggregate profits while one-to-one maximizes profit algorithmically.
As AT&T looks to build out more of the latter, an ad exchange like AppNexus could enable it to do some interesting things with both real-time and scheduled ad buying. AT&T likely thinks that this will feed back into them being able to better monetize Time Warner content. I’m very doubtful they will be able to do that in a net-positive way given Time Warner has such a limited claim on identity. AT&T’s portfolio of assets via Time Warner is bulky and not well-suited to the flexibility and virality intrinsic to one-to-one content. Owning a portfolio of 10-20 disparate broadcast channels drives little-to-no advertising cross-sell because there is no fixed point of reference (read: identity) and data aggregation.
There’s also a growing gap in the U.S. broadcast television space between supply of ads vs demand. Ad spend is up 16% since 2010 while watch time is down nearly the same amount:
Surely, something has to give here.
Knowing this, it’s totally plausible to see Netflix, Amazon, HBO, and Apple become the dominant media advertising force. This could result in some awful income disparity dynamics, which are summarized in this thoughtful article by Shelly Palmer: “If you can afford to pay for (Netflix Amazon HBO Apple), you’ll enjoy the most compelling content served with the best on-demand user experience. If you can’t, you’ll be stuck with unwatchable fodder that is created as cheaply as possible and designed so that the fewest number of viewers will tune out.”
On top of all this, there are more entrants into the media and advertising business than ever. Target, Kroger, Wal-Mart, and Albertsons all recently launched advertising efforts. That’s right – grocery stores are getting into the ads business. This is a crowded and claustrophobic space.
Alienvault is an 11-year old threat intelligence business that looks to be one of the laggards in the startup cybersecurity space. This is firmly a B2B play.
AT&T actually gets the most money from businesses, which I didn’t know until doing research for this article. AT&T has four business units (all figures FY 2017):
- Business Solutions, 43% revenue contribution, 54% operating income contribution
- Entertainment Group, 32% revenue contribution, 18% operating income contribution
- Consumer Mobility, 20% revenue contribution, 29% operating income contribution
- International, 5% revenue contribution, -1% operating income contribution
If the business unit’s contribution to operating income is higher than it’s contribution to revenue, that business unit provides higher operating margins than AT&T’s overall business. Of these four (excluding International), Business Solutions and Consumer Mobility deliver higher operating income than AT&T’s overall contribution margin. So something like Alienvault will allow AT&T to bolster its B2B offerings and fatten margins in its largest business unit. I’ll leave it at that.
Magic Leap is a secretive AR/VR company that managed to raise $1.9 billion dollars before announcing or releasing a single product. I’m extremely bearish on Magic Leap because I think that AR content will only be cohesively delivered by a full stack identity manager like Apple or Google, but if you’re anywhere near optimistic then AT&T getting involved is a smart move.
Magic Leap will release its first device later this year, which will likely cost thousands of dollars (Update: they launched their product and it costs $2,295). If you think that most interactive media will be streamed from the cloud and not delivered on-prem, then this device will require substantial data throughput to enable delivering real-time audio spatial information layered on top of the real world. AT&T’s upcoming 5G network would be a perfect way to power those types of interactions. However, without key partnerships, I don’t see a device that is only affordable by a very small number of households and which has no touchpoints to our existing identities succeeding in any way that justifies Magic Leap’s current valuation. However, AT&T is at least thinking towards a future in which entertainment is delivered in more interactive ways. Which leads me to my final point.
Dumb Content Through Dump Pipes
The term ‘dumb pipes’ is used to describe a piece of technology used to deliver data to some end source without providing any additional layer of intelligence or enablement. The delivery method (the pipe) has no additional value-add (it’s dumb!). In our case, the internet services provided by AT&T are dumb pipes that enable a connection between the consumer and higher-level services/applications. Most mobile phone providers have dumb networks in that all value-add services happen at the endpoint used by the consumer. For example, your home internet provider enables you to access the internet through the delivery of data over their network. Yet, it’s services like Facebook that provide the value-add at the endpoint of that connection.
There are a few other meanings to the term as it is applied in network theory, but I’m generalizing by saying that dumb pipes don’t enable anything beyond the delivery of the data they transmit. AT&T owns the actual copper wires powering their network, which means that AT&T is stuck with dumb pipes at a time when media is increasingly enabled by end-user interaction. Alas, the repeal of net neutrality means that AT&T can take its dumb pipes and in effect make them discriminatory towards other content, but I won’t go there.
At a simple level, old media companies like AT&T want to try and deliver next-gen content in the same way that they’ve always delivered broadcast television. Take the news that Blizzard and Disney have signed an ‘exclusive multi-year broadcasting deal’ to stream the Overwatch league championships on ESPN. Blizzard is a video game publisher and Overwatch is one of its most popular recent titles. ESPN is going to be showing more video game competitions.
While this deal still may be successful on a cash flow basis, it kind of misses the entire point: delivering new forms of content on an old medium may seem forward-looking but is actually highly regressive. The real innovation comes from finding novel ways to provide layers of interaction on top of the content (which is more difficult to do on a dumb network). See these two recent efforts by Facebook: first, they launched the ability to add polls and game-show features to their Facebook Live video platform, and second, they started testing augmented reality ads. Forget that the former of those two announcements is a blatant ripoff of HQ; the important point is that Facebook is leveraging its extensive user identity clouds to enable new forms of interactive media and advertising on top of the videos played on its website. Also, these innovations will only be possible on Facebook.
This is where ESPN showing Overwatch competitions misses the point. Disney doesn’t understand that the birth of a new form of content has always been accompanied by the invention of a new way to consume that content.
Take long-form scripted series, for example. Shows like the Sopranos are some of the earliest modern successes of this type of content. They were enabled by DVRs and on-demand streaming, plus online forums for fans to interact. Sports, as we know them today, have been enabled by HDTVs, Twitter, instant highlights via YouTube, and internet fantasy sports leagues. Put another way: new forms of content must be accompanied by something akin to a new go-to-market strategy for that content. Disney senses that e-sports will be huge, but I’m not convinced it will be because casual fans can watch them from their living rooms.
In Modern Identities and Misguided Mergers, I said that AT&T had no choice but to buy a content producer like Time Warner. In the same vein, AT&T has no choice but to do things like stream Overwatch on ESPN. That’s the only enabling relationship it has to next-gen content.
Overwatch also plays second fiddle to the phenomenon that is Fortnite (I’ve written about it and the New Yorker has an excellent piece on this subject). While AT&T might not know this, Facebook certainly does, and launched their recent media efforts with the stated goal of being “more participatory and community-centric.” I made this exact point in my last post: “unique media properties like…Fortnite have exploded in popularity by satisfying consumers’ needs for highly interactive and communal content.” Facebook wants its video content to have the same features as these hit games. Modern gaming platforms are their own social networks.
Another feature of these new social networks is personal emojis from companies like Bitmoji. The notion of a persistent online avatar has been around since the beginning of the internet but has only started to take off most recently with the proliferation of apps like Snap (who bought Bitmoji in early 2016). Apple is going all-in on this too with the launch of Memoji on iOS 12. Snapchat is even taking Bitmoji to its logical next step and plans to launch a game platform this fall. These things may look trivial, and they might be, but today’s youth are building their online identities around them. The next big thing in tech looks like a toy.
The successes of Bitmoji and Fortnite were made possible by the rich social graphs enabled by new media companies. These entities have thrived on top of the data that AT&T delivers. Future media interactions will be agnostic of the device you are on but will be enabled by the online identity you subscribe to.
Putting a Bow On It
It’s pretty simple:
- Modern media consumption is driven by identity
- Identity is driven by the sum of all actions we take on the internet
- Those identities are controlled by new media
- Old media is merging distribution and production but with no gains in leverage
- Media is becoming increasingly interactive
- Interactivity is enabled by identity
- New media continues dominance and old media suffers
- Ben Thompson: AT&T, Time Warner, and the Need for Net Neutrality
- Microsoft 10K
- Netflix 10K
- AT&T 10K
- Recode: Content Spend of Big Media Firms
- Ben Davis: Media’s Big Bifurcation
- Netflix’s Content Budget for 2018 Balloons to $13 Billion
- WSJ: Netflix Topples HBO in Emmy Nominations
- Axios: AT&T Eyeing AppNexus Acquisition
- NYTimes: Net Neutrality Has Officially Been Repealed. Here’s How That Could Affect You.
- CNBC: AT&T wins: Judge clears $85 billion bid for Time Warner with no conditions
- Justin Kan: Why I Love B2B over B2C
- The Verge: Microsoft may be making a Movies & TV app for iOS and Android
- Apple Is Ordering So Many Shows With Nowhere to Show Them
- Apple Eyes Streaming Bundle for TV Music and News
- Netflix Creating Comedy Radio Channel With SiriusXM
- Facebook Acquires 200 million Premier League Broadcast Rights In South East Asia
- Harvard Business Review: AT&T, Time Warner, and What Makes Vertical Mergers Succeed
- Digiday: From Kanye to bust: Verizon is shutting down Go90, ending an expensive effort at mobile video streaming
- ShellyPalmer: Apple Is Getting into Original Content, Where Does That Leave Advertisers?
- eMarketer: Facebook and Google Digital Ad Dominance Fading
- TechCrunch: Instagram Launches IGTV
- Axios: Retailers are getting into the media and advertising businesses
- The Verge: Niantic is opening its AR platform so others can make games like Pokémon Go
- Lightspeed: Ten Ways Fortnite is like a social network
- The Information: Snap Gaming Platform Coming This Fall
- TechCrunch: Snapchat code reveals team-up with Amazon for ‘Camera Search’
- Fast Company: Inside Microsoft’s Quest To Turn Minecraft Content Into A Business
- The Verge: Microsoft Xbox Game Streaming Cloud Service
- Variety: ESPN, Disney, ABC Airing Overwatch League
- Facebook: Making Media More Interactive
- TechCrunch: Facebook is Testing Augmented Reality Ads
- WSJ: Magic Leap Headset Launch
- New Yorker: How Fortnite Captured Teens’ Hearts and Minds