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April 18, 2008

Thinking About Mobile TV

At the recent National Association of Broadcasters conference, one of the more popular topics was mobile TV. Mobile TV is the ability for consumers to watch live TV on their cellphones. Standards are still being set but according to SNL Kagan, MobiTV has 4 million subscribers of various global wireless companies using its platform.

For content owners, broadcasters, wireless operators, and smartphone manufacturers, mobile TV could represent a new multibillion revenue stream. How quickly it ramps up and how revenues are divided remain open questions but for the industries in the question the incremental growth opportunity is significant as secular headwinds present growth challenges to their core businesses.

I believe the most likely winners are wireless operators, specifically AT&T and Verizon. Next in line would be handset manufacturers. Nokia as the dominant global player and Research In Motion and Apple as the highest profile smartphone manufacturers would surely benefit from pull through demand if mobile TV became a "must have" service. Content owners like Disney, Viacom, and Time Warner will gain incrementally as new subscription and advertising revenue will come at extremely high margins. Local TV broadcasters seem least likely to benefit. They are still facing technological bottlenecks to merely get on mobile TV platforms. Furthermore, the same secular trends that are hurting local TV, radio, and newspaper advertising seem likely to carryover to mobile TV.

Mobile TV is not a sure thing....

....In Europe, early enthusiasm has given way to muted expectations as after a quick start, over the past year consumer usage and interest appears to be waning. Nevertheless, there are reasons to expect that US interest in mobile TV may be high. First, there is a clear trend in favor of smartphones with big, high resolution screens. Goldman Sachs just put out a report stating that smartphones will move from 11% market share today to 40% by 2012. The same report sees mobile video revenue growing form a few hundred million in 2008 to $3 billion in 2012. Second, the US has a TV centric culture that may overcome the cumbersome experience of watching TV while on the move.

Verizon and AT&T are becoming increasingly dominant wireless service providers in the US. However, with wireless penetration nearing 100% growth in subscribers is likely to continue a slowdown that may have began in 2007. Loss of subscriber growth as a revenue driver does not mean that growth will end, however. Rising minutes of use for voice, increased number of data subscribers, and increased usage of data services should allow monthly cellphone bills to continue to rise. Mobile TV is a driver of the data driven growth. Fears of a price war due to slowing voice subscriber have moderated in the past few months so the idea of rising average revenue per user and slower but still growing subscriber growth driving double digit top line growth for the next three to five years remains realistic. In a growth starved world, investors seem likely to pay up for consistent and financially strong companies like Verizon and AT&T.

If mobile TV takes off, there is risk to cable TV companies like Comcast, Cablevision, and Time Warner Cable. One of the reasons investors have abused these stocks is because of fears that they will be required to dramatically increase their capital spending to enter the wireless business. Initial worries were focused on adding voice the triple play bundle of TV, broadband, and VOIP telephony. I am more worried about the loss of broadband subscribers to high speed wireless networks. Broadband is the highest margin part of the cable bundle and represents the industry's competitive advantage due to its speed and geographic reach. The advent of mobile TV over higher speed wireless networks also represents a threat to the core cable TV product, a product already under attack from TelcoTV and still aggressive satellite companies. Thus, while I still feel current cable valuations are cheap compared to my expectations for growth in operating and free cash flow, success in mobile TV would by wireless operators would be yet another reason to keep investors from paying up for cable stocks.

Posted by Steve Birenberg at April 18, 2008 12:59 PM in Media