The first day back from the long Labor Day holiday weekend here in the U.S., as everyone knows, witnessed two huge stories dominating technology industry news—Verizon finally mustered the financial resources and Vodafone finally agreed to allow Verizon to purchase the Vodafone 45 percent stake it has held in Verizon Wireless for $130 billion, and Microsoft is forking over $7.2 billion to purchase the device business and patents of Nokia.
Since the Internet has been blanketed with coverage of both deals, including the links on the TechZone360 site by my colleagues cited above and other news and commentary, I will spare you the details. As I have been predicting for over a year, the communications industry is well into a critical period of restructuring, and these deals mark an acceleration of a trend that is likely to produce quite a few more headlines in the coming months as the window of opportunity of what is a critical juncture of an industry tipping point reaches a crescendo.
Image via Shutterstock
A quick historical perspective
Let’s start with the Verizon deal to buyout Vodafone. There is an old Chinese proverb that says of joint venture that goes as follows, “same bed, different dreams.” This has been the case with the Vodafone investment in Verizon Wireless almost from the day Verizon reached across the pond for financial assistance and took on its sizable minority investor as a partner. It liked not having to finance the expansion of Verizon Wireless by itself, but each partner has been wary of the other ever since.
In fact, Verizon has made no secret of its desire to purchase the Vodafone stake for quite some time. It was just a question of price and how to work around a tax problem the buyout could create for Vodafone. For its part, struggling financially and in the face of broad shareholder discontent, while not interested in getting rid of its crown jewel for making its balance sheet look a lot better than its own performance, Vodafone needed a way to placate investors and a big sale at a really big number (this is after all the second largest deal of its kind in history, according to various calculations) gives Vodafone management some money to calm the waters with more than a bit left over to do a bit of restructuring itself.
On the Microsoft side of things, Nokia has been a long-time strategic partner, and the company’s platform for being a player in the mobile device market and thus the vehicle for what it hoped will be a Windows everywhere strategy that can make inroads against the increasingly powerful Apple and Google ecosystems. Just as Google bought Motorola’s device business, it’s better to have in-house core competency in a critical part of the ecosystem, and in many ways Microsoft had no alternative but to do likewise. I happen to be in the camp that believes the old axiom that, “Two wrongs don’t make a right.” In the vernacular of American football this looks like a desperation “hail Mary” pass where the probability of it being incomplete and thus a losing toss is relatively high.
In short, the Verizon move makes dollars and sense, while the Microsoft one may return just cents on the dollar. The only question about the Verizon buyout is whether it paid too much given what the lifetime value of the customers they will now have 100 percent control over given falling mobile revenue in most markets around the world. Meanwhile, there are lots of things to question as to why Microsoft thinks it can make the Nokia brand rise from the ashes.
It is all about the ecosystems
At TMC’s ITEXPO Las Vegas last week, I was on a panel whose task was to look at the technology trends and try and discern what lies ahead for industry players in the future. I noted that technology was fascinating because of the speed at which things are changing and that change is accelerating, but that the thing everyone needed to keep an eye on was what it was enabling and could deliver as an improved and sustainable differentiated user experience, and not what it could do per se.
In fact, Las Vegas provided the perfect metaphor for the really big trend we are watching that is at the heart of industry restructuring, i.e., the battle of the ecosystems. After all, Las Vegas is optimized to assure that when you check into a resort: a) you never leave, and b) you spend as much (hopefully more) than you planned on. The odds are not in your favor, and from not having clocks on the casino floors to not having coffee makers in the room, the customer experience is designed for maximum user expenditure. It is why drinks and food which used to be free or nominally priced are now “competitively valued.”
Such is the case with the battles of the evolving ecosystems. As I have noted on prior occasions, the big guys each have come from a position of strength —Google with Android, Chrome, Google Play and obviously Search, Apple with iOS, the Apple Store and “i”things, and a crippled Microsoft with IE, Windows, Lync, etc. What the traditional service providers bring to the table as their competitive ecosystem advantage is infrastructure, subscribers and most importantly, billing. Indeed, while OTTs have eaten up huge chunks of what could have been, some would say should have been, network providers’ next generation value-added, the fact remains the network service providers still bill all of us.
In addition, if the network providers get it right, they are positioned better than anyone in an increasingly distrustful world to leverage their billing capabilities and their ability to host our identities so they can be protected as well as serve as gatekeepers for trusted transactions, to be more than just the “dumb pipe providers many are writing them off to be going forward. However, they are going to have fast and adroitly.
In this context, the value Verizon obtains from owning the customer in the longer-term may prove to be a value. This is not just a wireless play; it is about providing quadruple play capabilities. It is basically to use its infrastructure and billing to be the “E”vironment that others use but that you never leave and that is optimized so everyone in the ecosystem never leaves and pays a premium for the privilege.
It should be noted that one of the things the Verizon buyout does for Vodafone is to ease the pain of its pending acquisition of Germany’s large cable operator as the company seeks to be a quadruple play player in its own right, and a dominant force in Europe’s largest and healthiest economy.
The problem with the Microsoft acquisition of Nokia is that while it fills in one ecosystem hole in terms of having more control over what cannot be under-estimated as a critical part of any ecosystem, it does nothing to improve the customer experience, which still rests squarely on relationships with service providers to a large extend, especially without the traction of a powerful store behind it.
The wild card here is if Windows-reliant enterprises (most of the world), as they become more mobile/wireless and look to create their own enterprise app stores to avoid security and compliance, decide that Microsoft devices provide them an easier glide path through the minefield that the BYOD phenomena has created for IT departments. Based on the huge cash stock pile available to Microsoft, $7.2 billion is small change and obviously management has concluded -- see Steve Ballmer’s e-mail to employees about the acquisition -- that like the lottery you have to be in it to win it.
As noted, the industry game of musical chairs is far from over. For the moment, the music has stopped and a chair has been eliminated. There are not that many left that are of significant value when the music starts up again and manifest destiny of the hunters cause more chairs to be removed. What happens next is impossible to predict, but if you want to speculate look no further than the evolving ecosystems and who is missing what critical pieces. And, as a cautionary final note, don’t rule out any entity from trying to play.
Cable combatants and financial services companies are going to have significant says in the outcome. After all the years of talk, industry convergence as a result of technology is here and we are witnessing the consequences of large companies trying to figure out how to dominate the Internet so we never leave their ecosystems and willingly pay to stay.
It is time to fasten the seat belts. This is going to be a bumpy ride.
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