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Scenario - Utilities Included
TRANSCRIPT
Goldman Lazard—CommuniMedia 2010
Panel Session
Utilities Included: Whatever Happened to Telcos?
Panelists:
- Steven P. Jobs – Chairman and CEO, Apple Computer (Nasdaq: AAPL)
- Terry S. Semel – Chairman and CEO, Yahoo!Pixar (Nasdaq: YPIX)
- Steven J. Heyer – CEO, The Coca-Cola Company (NYSE: KO)
- H. Lee Scott, Jr. – CEO, Wal-Mart Stores, Inc. (NYSE: WMT)
Moderator: (applause) “Gentlemen, thanks so much for joining us here today. I’d like to look back at how and why it is that telecom carriers have become as anonymous as electric utilities. Telcos have been largely displaced from direct-to-consumer communications and entertainment markets, and today’s panelists are among those who drove the changes that made that happen.
“Let me start by asking, are you surprised by who’s not sitting here? Someone, say a few years ago, you would have thought would be part of this newly-evolved consumer communications, services, media world? Terry, let’s start with you.”
Terry Semel: “I thought Microsoft (Nasdaq: MSFT) would eventually do better in consumer services. I’m still surprised at how Microsoft remained so fixated for so long on the software-on-endpoints view of the world. “
Steve Jobs: “I’m not surprised in the least.” (laughter)
Terry Semel: That whole Longhorn problem…(unintelligible), I don’t really know. Well, all I can say is they had opportunities to do what we did, yet for whatever reasons it doesn’t seem to have come together for them. Our model, frankly, was cable – including more open, standards-based interfaces to our services, just as cable has with their networks and set-top boxes. It was clear that our internet-delivery model of a whole range of consumer and small business services could learn a lot from Brian [Roberts] or James [Murdoch], adapting their mix of content and distribution control to our own business model.”
Moderator: “Terry, you know since we have you here we’re going to have to ask you to look back on the Pixar deal for us.
Terry Semel: “The Board, and especially Jerry [Yang] and David [Filo], were fully convinced the Pixar acquisition was good long-term value, and the fact that I know studios helped them get comfortable with the risks. So, I never paid a whole lot of attention to the naysayers, ‘oh, see, we told you Terry’s just a studio guy at heart’, etc. when we did the deal. It’s really just a continuation of our fee-based, more content-heavy strategy, but driven by a unique opportunity that came up. Besides, I trust Steve, and now that we live a few miles apart, I know where to find him. (laughter)
”...content has given us a new generation of interactive entertainment, plus the internet equivalent of, say, two premium O&O channels…”
But I do think our paid subscription revenues and our effect on cable ARPU is proving us right. Pixar’s an important part of that – they brought astonishing capabilities in creating original, story-driven content, often computer-animated, but the technical part wasn’t the point. This content has given us a new generation of interactive entertainment, plus the internet equivalent of, say, two premium O&O channels stocked with a couple of thousand hours of high quality, usually exclusive, content, which we keep repackaging and refreshing. And, if anything, this strengthens the impact of the filmed-entertainment side of our Pixar unit that’s still making great movies. I mean, look at what Electronic Arts (Nasdaq: ERTS) has done – same kind of thing. Their core game business is really boosted by the joint ventures they have in other video content.”...by the time they got to video, the content/delivery business model had so evolved that the telcos were aiming at yesterday’s target…”
“Anyway, on the panel topic, as to the telcos, well, I know it’s been well-discussed in the last couple of years, especially when we dissolved our relationship with SBC (NYSE: SBC), but by the time they got to video, the content/delivery business model had so evolved that the telcos were aiming at yesterday’s target. You could sort of see a train wreck about to happen, they seemed to struggle to understand our industry and, obviously were so caught up in regulatory and technology issues that … well, I’m just glad they’ve got that higher bandwidth now, though.” (laughter)
Moderator: “Lee, Wal-Mart is relatively new to telecom and media as product categories – when you started out down that road, did you expect you’d wind up in the company of Yahoo or Apple?”
Lee Scott: “Actually, we’ve had a place in media for years, just based on the number of DVDs we sell. Somehow many of Terry’s old friends managed to point their airplanes at Bentonville, Arkansas when the DVD release window for their movies rolled around, and pay us a nice visit. (laughter)
“I will say, once it became clear how commoditized wireless communication was becoming, Wal-Mart began looking at the market in a whole new light. We’ve always been aware of how big it is, and we’ve sold a few phones ourselves now and then. But on the services side, we could see that annual contracts, credit checking, billing, phones with features nobody could understand, all of which also contributed to pretty poor customer service which only declined during the carrier consolidations.
”...I will say, once it became clear how commoditized wireless communication was becoming, Wal-Mart began looking at the market in a whole new light.”
“Being global, we were also very aware that the US was pretty unique in the extent and depth of this dysfunctional model and its enormous unnecessary costs. We expected much of this complexity was likely to disappear, and that got us looking at the market more carefully. Also, it felt to us like the big phone and cable companies had overplayed the bundling card a bit – making everything bigger, more tied together, and pricier.
“We’ve never been comfortable selling complex services, even with nice annuities, but the simpler, more like consumer packaged goods telecom became, the more interested we were. We never doubted we could get decent prices from global handset suppliers – we’ve had a little experience by now in China. (laughter) So we started with private-label offers in Mexico and a bit in China, using wholesale network capacity. In the US we also began distributing service from Movida, a service targeted at the Latino community.
“All of them were more successful than we expected and, as we hoped, largely ignored by US carriers. It’s kind of hard to know if they really even noticed – only later did I really understand how inwardly-focused and domestically-centered they really are. So when 3G stumbled in the US, making wholesale capacity more freely available, that’s when we saw our real opportunity. It’s a bit like Terry was saying, timing, external opportunities, these are part of how we ended up here. We sent pretty strong signals that whoever came to us with the right private-label package, that offer alone could amount to the equivalent of the number four slot as far as wireless share in the US is concerned. Our customers love a bargain. We still can’t seem to get Mr. Jobs to let us sell those iPods, though.”
Steve Jobs: “Lee, I’m not sure we believe in the ‘Always Low Prices’ slogan quite as deeply as you do.” (laughter)
Moderator: “Turning to you Steve Heyer, you’ve done advertising, television, consumer goods, hotels, you’re back at Coke – in the driver’s seat this time – are you surprised you’re sitting here, and that the phone companies aren’t?”
Steve Heyer: “No, and No. (laughter)
“The reason I’m now running Coca Cola is in part the same reason the phone companies aren’t sitting on this panel today. About seven years ago or so, I gave a speech at the Madison & Vine conference – laid out a challenge. I talked about how marketing needed to be re-engineered to put in place a new set of relationships between consumers, advertisers, and marketers. But all the press managed to take away was, ‘Steve wants more ad agencies to propose product placements on ‘Friends’’, then make it sound better by calling it ‘brand integration’. (laughter)
“When I returned to The Coca-Cola Company, we were still in a rut. Even with focused acquisitions and international, growing our core beverage-related businesses faster than GDP was a struggle. My goal was to simultaneously reinforce and grow our brand, as well as turn it into hard cash with partners in product or service categories that made sense.
”...I’ve always considered cable companies the foremost media companies with their mix of content ownership, advertising, and distribution.”
“One of the first things I did was talk to Brian [Roberts] at Comcast (Nasdaq: CMCSA) about a whole new array of advertising-, content-, event- and, yes, product placement-related marketing possibilities. Despite cable’s great success in gaining market share in phone service, I’ve always considered cable companies the foremost media companies with their mix of content ownership, advertising, and distribution. We looked at how we could help each other with his growing video-on-demand business, and, after Brian bought Real Networks, his music service businesses. Also we were interested in equity in certain cable channels that fit our brand profile. Co-marketing our brand with lifestyle-relevant, quality partners achieves three things for us.
“First, it saves on advertising costs by shifting from high-cost, cluttered traditional advertising to much more effective messages, which in turn reinforces the value of our remaining traditional media buys.
“Second, the hard cash part – we get a share of revenues where we’ve ‘rented’ our brand to qualified partners for co-marketing.
“Third, we’ve created substantial barriers for our competitors – good partner brands make ours more valuable and relevant, and vice versa. It relegates competitors much more to a ‘product’ brand than a lifestyle brand. I think we’ve become as much a part of Comcast’s video-on-demand business as movie studios, and our Coca-Cola Red lounges with kiosks and mini-showrooms have driven Brian’s music services, bundled phone service, and many other things substantially as well. We didn’t see phone companies bringing a whole lot to the table as potential partners in these new kinds of marketing deals.”
Moderator: “Thanks Steve. Speaking of lifestyle brands, let’s hear from our other Steve… Steve Jobs, you are by far the longest-serving CEO in the computer industry and on our panel and, I believe, the only one two run two public companies at once when you were CEO of Pixar as well. You’ve gone from iMacs to iPods with iTunes, to an entire suite of iLife devices and services – are you surprised by the relatively low profile these days of telecom carriers in the consumer marketplace?”
Steve Jobs: Yes, I’m shocked, shocked. (laughter) As you know, I’m not surprised in the least. I also don’t think it’s really all that relevant. It took a while for telcos to realize that once the infrastructure boom, bust, consolidation, turn-around, etc. was all over that they should go back to doing exactly what they should be doing and are good at – ubiquitous connectivity, period. Telecom services are like batteries or the power cable to our iLife devices. They’re important, you want them to be reliable, cheap, and not to have to think about them.
“Telecom services are like batteries or the power cable to our iLife devices. They’re important, you want them to be reliable, cheap, and not to have to think about them.”
“The fact that consumer communications now happens mainly through wholesale services embedded in other companies’ products and services is a sign of progress, and also the result of a lot of hard work. It’s analogous to the Macintosh over twenty-five years ago – a breakthrough in getting out of the way of a computer user and letting him or her focus on the work at hand instead of the operating system.
“At Apple, we continue to make money and be out front by re-inventing what are, frankly, truly awful, badly-designed consumer technology experiences. It turns out you can’t do that just by offering cool, well-designed products, you need the services that complement them too. The iPod connected to iTunes, and I’d also have to credit TiVo (Nasdaq: TIVO), marked the beginning of the hybrid device and service combination – our iPhone wireless phone service is another great example. Do any of those customers really know or care what network they’re connected to? They don’t want to worry about it, and thanks to us, they don’t have to.
“Sometimes we combine or present partner services in more useful ways – our relationship with Sirius XM Radio (Nasdaq: SRXM) is a perfect example of this. What came to be called “podcasting” means an iLife user can either listen to Sirius XM content live on the iPod, or mark it in their iTunes library for later listening, whether on an iPod, or through the iRoom home media system, or in the on-board iWheels system in their car. There may be as many as four or five different networks, wireline, wireless technologies, etc. involved. The point is the consumer should never have to worry or care about any of this.”
Steve Heyer: “This is what I mean by new marketing relationships. Constantly plugging your products at investment banking conferences.” (laughter)
Steve Jobs: “I think one of the fundamental errors telecom carriers and our device competitors made was trying to shoehorn everything into one solution, believing their own convergence hype. For example, the notion that anything but the most trivial video content could be delivered wirelessly over 3G cellular networks always struck me as absurd. This combined two wrong ideas: extending an unsuitable “general-purpose” network architecture with capacity and economics that were clearly known to be marginal, and the ‘Swiss army knife’ device model.”
“The 3G video case is hard to excuse because the ‘satellite’ radio case, i.e. satellite plus 1,400 terrestrial repeaters in the continental US demonstrated how a purpose-built network could have both good economics and promote certain device combinations, such as our high-end iPods. While the DVB-H standards for video may have been late in developing, it was clear enough that 3G was not the way to go.”
“Finally, on the Swiss army knife point, one of the reasons we’ve continued to leave skeptics in the dust with our product successes is exactly because we understand what device combinations make sense and consumers are willing to pay for. Somehow the ‘BlackBerry-killing’ agenda and camera phones turned the handset industry into the Sorcerer’s Apprentice meets Edsel Ford (laughter) — they just couldn’t stop trying ever-clumsier device combinations, gamephone musicplayers, or whatever, while we continued to make headway with simplicity, good design, and integrated content services.”
Moderator: “Gentlemen, thank you all for your time and a great discussion. (applause) We’ll open it up to questions from our audience now.”
* * * * *Disclaimer: This “transcript” is entirely fictitious, created to illustrate simulated strategic outcomes in telecom and other industries. We use the names of actual companies and publicly-known individuals in order to add a measure of realism, detail, and interest to discussions of industry strategy. We are entirely responsible for the views expressed in these simulated scenarios; they are not endorsed, sponsored, or in any way the responsibility of the entities or individuals named herein.
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11 October 05
