Currently, speculations arise more often than usual that Vodafone is considering the acquisition of Liberty Global.
The key driver for such an acquisition – according to most of the industry’s media – is that Vodafone would see major benefits in adding the Liberty Global cable business in Europe to its infrastructure.
I have speculated myself at the beginning of this year that we will see the start of a busy M&A era in our industry in 2014 and beyond. Even last year – when Vodafone acquired Kabel Deutschland – I brought up the Vodafone & Liberty Global merger as a likely outcome of this process.
There are a couple of benefits that would come with such a merger for the parties involved. Let me highlight some of them:
Economies of Scale:
Economies of Scale have always been one of the key drivers of the telecommunications industry – not matter if it is mobile or cable. Both operators are driven by gaining more subscribers and at the same time reducing costs. The best way to reduce cost is by applying the infrastructure to more clients while keeping your base cost level at the same. After all, the infrastructure is there and adding a client is only incremental cost while it adds extra revenue. The industry is always looking for creating these economies and hence, building scale through M&A is one key element in every telco strategy. In this context, the same principles apply that I outlined when Vodafone bought Kabel Deutschland in 2013.
Keeping and increasing Customer Base:
As explained above, the economies of scale is not only an infrastructure topic but also in regard to increasing your customer base. The operators always need to not only keep their customers but ideally adding new customers. In the markets they operate though adding new customers has become very difficult. These markets are all heavily saturated and it is now more a matter of keeping churn low and maybe stealing away subscribers from your competitors. You can only do so by offering better products and services at better prices. For that you need to have the ability of providing these products and services at low cost. Otherwise you will loose not only clients but also revenue. A combined company of Vodafone and Liberty Global will have these abilities .
Product Bundling:
The product bundling will be key to attract existing customers and getting new ones from the competition. Even now already, cable operators try to allure new clients or enhance the offer for existing ones by offering not only Triple Play (TV, Internet, Telephony) but Quadruple Play by adding mobile services, too. Consumers seem to see the advantage of such an offer and at the same time are rather price sensitive when choosing such offer. Hence, the above two topics are driving the product bundle: economies of scale to reduce cost and customer retention. A combined company will make such offers much easier and attractive.
Content Cost & Offer:
TV has become a commodity for many subscribers and this problem is even deepened with the proliferation of distribution infrastructures. Netflix & Co carve out slowly but steadily their market share in the TV content distribution business and both cable and mobile operators need to protect themselves against such competition. It is important to offer attractive content to the consumer not only in the typical linear TV model and traditional VoD services. Operators need to have their own OTT services and also bank on the growing Mobile TV segment (see our Global Content Compass for these trends). Acquiring attractive content is becoming a significant cost element for operators – especially so since the consumer itself is only willing to pay incremental extra fees for content, if at all. Combing mobile and cable delivery with new OTT services is a matter of survival for traditional operators and with a combined infrastructure for distribution and budget for content acquisition, better content deals are possible for operators.
Are there alternatives?
I strongly believe that the merger of such major players will come eventually. In this game it is either about driving the merger strategy yourself or alternatively gaining the best price for your assets when [blockquote style=”” align=”right”]Malone was always good at selling at the right price and then investing wisely in the area of the industry that will see future profits rise[/blockquote]selling it. Hence, my feeling is that Liberty Global (or John Malone respectively) will eventually sell at the right price. My guess is, that they will use the cash flow from the sale for acquisitions in the content business instead. After all, Malone was always good at selling at the right price and then investing wisely in the area of the industry that will see future profits rise and eventually also have M&A opportunities – which is content.
However, what other scenarios could happen if this merger is not going to happen? Firstly, Vodafone will look to acquire other infrastructures that match their portfolio and bring the benefits as outlined above: maybe going after Sky might be a plan or even a bold move like Deutsche Telekom. But none of these will bring the leverage that a Liberty Global acquisition would bring. Liberty Global on the other side could also look for a completely different exit by selling out to Comcast – maybe even in a swap of assets in the USA and international when it comes to content businesses. If Liberty Global stays put in the cable business they need to look at alternative merger partners if Vodafone is not a candidate anymore. Telefonica comes to mind as an obvious partner in such a scenario.
Whatever we will see happening, I bet on 2015 as the year of mega mergers in our industry. And I would not be surprised to see the Vodafone & Liberty Global merger happening rather sooner than later. A match made in heaven should not wait too long to be consumed.
