Look out for friction in the market place as a move to quadruple play forces four seemingly unrelated communication channels to converge.
Telecom companies have stumbled onto a new strategy that may transform their business models significantly. It is called quadruple play, though it has also been called the Fantastic Four.
Quadruple play refers to four seemingly unrelated communication channels that are converging to form one. These are high speed Internet, television, mobile telephony and conventional landline telephone services. It is said to supersede triple play, which brought together TV, the Internet and telephones. It also trumps dual play, which combined telephony and the Internet.
NTL was the first company in the UK to offer quadruple play when it acquired Virgin Mobile for £960m. The acquisition may also give NTL additional marketing clout.
Exactly how quadruple play is supposed to pan out is a little unclear. After all, the four separate channels have yet to converge to an extent that is valued by users. Nevertheless, it is reckoned that eventually the four distinct communication channels may become almost indistinguishable. For instance, customers may download television programmes from the Internet, which they could then view effortlessly on their personal computers, television sets or mobile phones.
Some evidence of convergence is already here. For example, BSkyB
(LSE: BSY)
has launched a broadband service that allows customers to legally download films from the Internet. Meanwhile, Vodafone
(LSE: VOD)
customers can watch news, sports and entertainment programmes on their 3G handsets. Elsewhere, BT Group
(LSE: BT.A)
says its Vision service, which is yet to be launched, will allow subscribers to access its library of old and new films, television shows and music videos provided by Emap
(LSE: EMA)
.
Another example of convergence can be seen at Orange. The mobile phone company, which bought Internet provider Wanadoo, allows customers to use a mobile handset to make unlimited calls through their home broadband Internet connections. The Orange deal is similar to BT's Fusion package, which is a joint venture with Vodafone.
In my view, the rationale behind convergence is three-fold. Firstly, as broadband becomes cheaper, providers are turning to additional services such as Internet TV and Voice over Internet Protocol to bolster revenues. Secondly, it is reckoned that customers who subscribe to several services are less likely to switch providers. Thirdly, these "converged" customers are cheaper to manage, which may help providers increase margins.
But convergence is likely to increase friction in the market place as providers of once-unconnected industries vie for customers. Evidence of friction surfaced this week when Vodafone ditched Carphone Warehouse
(LSE: CPW)
as a re-seller of its contract phones. The termination of the deal came a day after Carphone Warehouse bought the UK Internet assets of AOL. Not only did the acquisition promote Carphone Warehouse to the UK's third biggest broadband provider, but it may also eventually pit the retailer against Vodafone, which plans to launch its own broadband deal.
From a consumer's perspective, competition in the telecom market is likely to bring better deals. So it may pay to keep an eye on what is available when you current contract expires. From an investor's perspective, convergence is likely to create uncertainty in the market place. Richard Branson, who founded Virgin Mobile, said the media sector is entering a "pioneering period", but cautious investors may want to ask where is the return on investment going to come from!
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