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European telecoms industry weighs value of betting big on content

Telecoms giants' push into media has ushered in a wave of new content deals. As operators scoop up exclusive sports rights and build vast portfolios of broadcast content, a debate is brewing in Europe over its impact on their bottom line.

There are compelling reasons behind consolidation. Video continues to act as a growth driver for telecoms companies looking to complement their wireless business, such as the proposed $85.4 billion merger between AT&T Inc. and Time Warner Inc., announced in 2016.

More recently, Sweden's second-largest mobile operator, Tele2 AB, acquired Swedish cable TV company Com Hem Holding for $3.2 billion.

In a saturated and mature industry with limited growth opportunities, content acts as a potential new source of revenue for companies in fixed broadband and in mobile broadband, according to Bengt Nordström, CEO of telecom consultancy Northstream.

"It is not in the DNA of a telco op to be a media owner," Nordström said in an interview, adding that "what [telcos are] doing now is upgrading the capabilities of the networks … and that is not increasing revenue."

That said, competition for video content has inflated content prices. As such, Vodafone Group Plc CEO Vittorio Colao recently expressed doubts about the value of Vodafone creating and owning its own content.

"I am skeptical about the need to own production assets. I am skeptical about the ability to monetize exclusive content rights," Colao said during a Feb. 1 earnings call, adding that soccer rights in particular had become "more and more expensive [and] very hard to monetize in a direct way."

In 2015, British pay TV giants BT Group and Sky plc spent a combined £5.14 billion for the English Premier League soccer TV rights, which saw prices grow 71% from the previous deal. BT has since admitted that investment in sports rights has put pressure on its earnings and said that it would take a more "disciplined" approach in the future.

Similarly wary of content ownership, Verizon Communications Inc.'s CEO Lowell McAdam recently suggested in an earnings conference call that being a large distributor might be a "reasonable" substitute for owning content. As such the company said it would not consider a "large media play."

Like BT, Spain's largest telecoms operator, Telefónica SA, has faced similar pressure in its domestic market, where it paid €2.4 billion for the rights to Spanish soccer and Champions League matches, noted Banco Sabadell analyst Andrés Bolumburu.

With European operators increasingly offering identical quad play strategies of fixed and mobile telephony, along with broadband and pay TV, exclusive content does stand out at a time when differentiation is hard to come by, Bolumburu pointed out. That said, Telefonica's big bet has been far from profitable, he continued.

"Content is very volatile and very expensive. This is a world that is difficult for telcos," Bolumburu explained, adding that the challenge is made more acute by strong competition and higher spending power from U.S. peers with deeper pockets.

Also working against telecoms companies' attempts at creating media empires is that they have historically struggled to monetize content due to their inability to contend with an inherently different business model that relies on creativity.

"Telcos do not traditionally have a culture of creativity in them [so] such a move does carry risks," according to CCS network operator analyst Kester Mann.

Large bets placed on content by the likes of BT, Telefonica and Altice would likely be difficult to maintain, he added.

"The more prudent and logical strategy is to focus on the networks and become an enabler and distributor of content rather than actually owning premium rights or creating it yourself," Mann said.

To avoid the skyrocketing prices of content, some operators are launching productions plans with smaller budgets.

Last year, Germany's Deutsche Telekom AG ordered its first original series, called "Germanized," for its streaming platform EntertainTV, while Telefonica's pay TV arm, Movistar Plus, announced plans to spend €100 million on as many as 10 series each year. Meanwhile, French carrier Orange SA will invest about €100 million in developing its own series during the next five years.

Mann acknowledged that production could potentially drive cross-selling opportunities but said that such a strategy has its limits.

"It is a strategy that makes a lot of sense but it can only be deployed by those operators with the deepest pockets. It won't necessarily work for every player," he concluded.