Will the AT&T-BellSouth merger hurt IP TV?

The term IP TV can mean a range of things, but to most people in networking it means AT&T’s Project Lightspeed. Promising broadcast channels over IP using multicast technology, Lightspeed would drive a radical shift in metropolitan and access networking. It’s no wonder people are speculating about the effect AT&T’s acquisition of BellSouth will have on Lightspeed. Although most think it will be positive, they’re probably wrong.

There are three possible reasons why AT&T wanted BellSouth. The first is the Cingular mobile service the two companies own: AT&T buys BellSouth and gets it all. The second is economies of scale: consolidation in an industry under continuous price and margin pressure. The third is to obtain BellSouth’s customers to exploit them for existing and new services. Obviously, if the merger is to promote IP TV, reason No. 3 has to dominate.

Wireless has been more profitable than wireline or broadband for U.S. carriers overall. AT&T and BellSouth’s joint ownership of Cingular may have limited AT&T’s willingness to throw capital at the wireless venture. Spectrum investment could be a priority in the next several years. The FCC is promising to open up new space for wireless services, and what Cingular doesn’t get will become available to competitors. Lose spectrum space to a wireless competitor, and it haunts you forever. AT&T might well want to focus its investment dollars on buying up as much spectrum as possible.

Then there’s fixed/mobile convergence (FMC). One application of FMC is to offer customers the ability to transfer calls between home and office phones and cellular seamlessly, using 3G/Wi-Fi dual-mode instruments. This makes both wireless and wireline voice stickier, meaning it’s harder for competitors to steal customers. Owning all of Cingular lets AT&T gain all the benefits of any FMC investment it makes.

Consolidation also makes sense as a reason for the merger. AT&T has indicated $2 billion could be saved through operational consolidation. Since the collapse of the dot-com bubble, Wall Street has tended to reward companies more for reducing cost than for investing to obtain future profits. The merger could help consolidate long-haul voice and data costs, letting AT&T funnel all its traffic onto a common national backbone.

But how about the customer base? At the business level, BellSouth’s doesn’t look that promising. My statistics indicate the BellSouth region contains only about 11% of enterprise headquarters sites. Most enterprise services are purchased where a company is headquartered. Furthermore, business service revenues have been consistently trending downward, so unless AT&T has some magical approach to reversing this trend, buying more business customers means buying losses.

That leaves the residential base and IP TV. It’s pretty clear the opportunities in IP TV are related to the number of a territory’s households and their overall distribution by income level. What you’d like to see in an IP TV prospect base is a bunch of yuppie households dedicated to the latest gadgets and eager to spend their disposable income on new stuff like video content. Does that describe BellSouth’s territory?

It doesn’t describe even AT&T’s current territory all that well. The median household income in Verizon’s territory is a bit more than $60,000. For AT&T that number is $52,000, and for BellSouth it’s about $45,000. No state in BellSouth’s territory has a median income matching the AT&T territory’s average, and only one Verizon state has a median income lower than that in BellSouth’s states.

The relationship between household income and IP TV potential is controversial, with many believing the RBOCs are cherry-picking upper-income and avoiding lower-income areas. Such a move would seem to violate current regulations, but the fact is, target locations for RBOC video deployment have been a bit upper crust. Given this, how can you justify believing that the BellSouth territory’s income would promote more IP TV deployment?

Bottom line, the AT&T and BellSouth states’ combined prospect base is a more difficult market for IP TV than the AT&T states’ base alone. Lightspeed was supposed to roll out last year, then early this year, then late this year . . . and this was before the BellSouth deal. It’s just not logical to believe adding BellSouth to the mix will change things for the better. Lightspeed’s future is getting darker.