Convergence: the dirty buzzword from the nineties is back with a vengeance

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On December 8, analysts and investors will get a vision of the future, with a presentation ranging from a new video-on-demand system to online gaming and a service that will allow homeowners to monitor their property remotely while on holiday.

This will not be a presentation from a broadcaster or a security company with a new product. Instead, the vision will be laid out by BT, a company once known for running a large fleet of vans and employing engineers to fiddle with bunches of multi-coloured spaghetti on street corners.

Welcome to BT’s vision of “convergence” – the dirty buzzword associated with all the hype of the late 1990s.

It is back with a vengeance in the telecommunications, technology and media industries. But this time, the talk is backed up by technology that works and by real money.

In recent months, Ebay, the US auction site, has spent $2.3bn (£1.3bn) on Skype, one of the leaders in the emerging “voice-over internet protocol” industry, and ITV, the terrestrial broadcaster, has emerged as the most likely buyer for Friends Reunited, the online communities company that could command a valuation of £170m.

British Sky Broadcasting has spent £211m buying Easynet to expand into the broadband internet market and joined the list of broadcasters partnering with mobile phone companies by unveiling a mobile television alliance with Vodafone.

The deals are examples of media companies’ search for new distribution platforms and ways to keep viewers’ attention as audiences begin to drift away from television screens towards mobile phones, computers and devices such as Apple’s new video i-Pod.

They also reflect telecoms operators’ attempts to find new areas of revenue growth as their traditional voice market comes under attack from new market entrants, such as Skype, and their need to embrace broadband, where a flat-rate charging structure is undermining the per-minute charging model of old.

One core offering of BT’s version of television will allow broadband customers with the right set-top box to download films from a back-catalogue on demand via their phone-line and to watch and rewind the movie as they please for a certain amount of time. The same set-top box will have a digital signal decoder built in, so customers can watch the free-to-air digital terrestrial offering enjoyed by Freeview subscribers.

BT insists it has no plans to become a broadcaster but nevertheless it is attacking Sky’s market place. Many analysts believe Sky is encroaching on BT’s market.

Not so, says Ben Verwaayen, BT’s chief executive. He claims Sky’s decision to buy Easynet is an attack on NTL and Telewest, the cable operators that are in the process of merging.

While it is true that Sky is targeting the cable operators, which can offer telephone, internet and television programming in one, analysts pour scorn on the suggestion that BT is not a target too. One says: “BT customers will get video-on-demand and Freeview channels. What BT is doing is aimed directly at Sky, so wouldn’t Sky fight back?”

Mr Verwaayen is relying on many of the services that BT plans to offer over broadband to replace BT’s diminishing traditional revenues as more and more rivals plan to take control of the access to customers’ telephone lines in the local exchange. “Over time, value-added services will be much more important to the business than access by itself,” he says.

Traditional media companies, in turn, have long been aware of the disruption being caused to their industries by the internet. Many have already begun to make money from convergence strategies, such as encouraging viewers to send premium-rate text messages during shows such as Big Brother or X-Factor.

Now, however, they are spending more serious money on convergence.

One driver for diversifying away from their traditional core activities is that these are suffering from the incursions of new online rivals.

Advertising spending, for example, is shifting away from mass-market channels such as ITV1 to the more targeted environment offered by the internet.

Another big reason for the renewed interest in new media, five years after the bursting of the dotcom bubble, is that “these [online] businesses are cash flow positive”, according to one banker who has advised several media companies.

That change is a result of the third factor driving convergence – the explosion of broadband and mobile access in the UK in recent years. This has created a new mass audience and prompted changes in consumer behaviour that traditional media companies can now follow rather than try to predict.

One reason why media and telecoms companies lost so much money in the first round of convergence attempts five years ago was that they misjudged how quickly consumers would adopt the new technology on offer. Products such as the iPod, the Sky+ personal video recorder or video-
enabled mobile phones have since then shown the strength of consumers’ appetites for the new technology.

However, Tony Cooper, head of the telecoms practice in Deloitte & Touche’s consulting practice, says companies that are so carried away by new technology that they lose sight of the market’s readiness for it still risk being the losers in the race to converge. He says: “Media and telecommunications companies realise that, in a converged world, they can’t do it all themselves.”

Having realised this, however, companies will have to decide whether to achieve their ambitions through acquisitions or through partnerships. Both strategies carry risks.

The initial reaction to ITV’s pursuit of Friends Reunited has shown the level of scepticism among analysts and investors about a traditional media company’s ability to value, understand and manage a company operating in such a different environment from its core business. Similarly, the history of joint ventures is littered with tales of partners falling out.

The final, and perhaps the biggest, dilemma as companies eye each other across the telecoms/media divide is how they will divide up the spoils. Mr Cooper says: “The media companies come from the position that content is what holds value. The telecoms companies are saying ‘we can give you tremendous access to customers and that has got value’.”

It may take longer for those disparate positions to converge.

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