T-Mobile’s Layer3 buy vexes analysts

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Why is an upstart wireless company looking to create a disruptive, individualized, open-internet-native video service hooking up with a fat-bundled, proprietary set-top-peddling purveyor of very traditional-looking pay TV?

And why is it doing this at a time when there are already so many disruptive over-the-top solutions on the market?

These are next-day questions from befuddled analysts, trying to make sense of T-Mobile’s announcement that it’s buying Denver-based pay TV startup Layer3 TV.

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While admittedly chummy with Layer3’s management team, MoffettNathanson analyst Craig Moffett said he’s always been a “little skeptical” about the startup’s business model. 

“At a time when the world seemed to want skinny bundles, Layer3 TV went fat,” Moffett said in a note to investors Wednesday afternoon. “At a time when the world seemed to be going purely virtual, Layer3 bet on proprietary infrastructure (the middle mile). At a time when everyone seemed to be trying to rid themselves of hardware, Layer3 bet on set-top boxes. And at a time when the secret to success in the OTT video business seemed to be to keep costs low (after all, there are no margins), Layer3 adopted a seemingly high-cost model. 

Moffett wonders what T-Mobile, which wants to create a personalized, disruptive video service that’s available anywhere, is doing with a proprietary-tech-based start-up offering premium pay TV service (around $100), currently in only five select regions. 

“Isn’t video—or, OTT video, at least—already delivered anywhere?” he asked. “And how, exactly, will T-Mobile’s national wireless footprint fit with Layer3’s city-by-city facilities-based (or partially facilities-based) distribution model?  And, more pointedly, why does T-Mobile need to own the video aggregator (or any video aggregator)?”

Perhaps the answer rests in Layer3’s delivery method, which isn’t pure OTT. 

“Their business is, in essence, a solution to the QoS vagaries of sending video over the public Internet.  By relying on a proprietary network, they can ensure a better experience than can ‘pure’ vMVPDs,” Moffett explained.

So does T-Mobile know something everyone else doesn’t about the FCC’s scuttling of net neutrality rules? Perhaps T-Mobile believes that the future of delivering video over IP will require Layer3’s technique of paid prioritization. 

“We doubt it,” Moffett wrote. 

“T-Mobile also alluded on their conference call today to a targeted ad-based capability—following in the footsteps of Verizon, with Oath, and AT&T, with Time Warner—but we have to concede we’re skeptical of that, too (not just for T-Mobile, but for all of them.  We suspect targeted advertising will be a source of lower, not higher, CPMs),” the analyst added. 

Like Moffett, Deutsche Bank analyst Matthew Niknam, meanwhile, questioned just how disruptive T-Mobile could be in a market which drew nearly 1 million virtual MVPD consumers in the third quarter.

“Calling out customer ‘pain points’ with traditional video providers, T-Mobile noted it would be launching a ‘disruptive new TV service’ in 2018 (we think this will be national, available via T-mobile/other carrier wireless or wireline broadband),” Niknam wrote. 

“However, the OTT video space is quickly becoming a crowded one, with Sling (DISH), DirecTV Now (AT&T), YouTube, Hulu, Sony Vue just some of the few involved,” Niknam added. “And, given T-Mobile’s limited presence in traditional video today, scaling up this business (and procuring content rights to go beyond a ‘skinny bundle') will prove costly (at least early on).”

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