Updated from 12:12 a.m. E.T. to reflect AT&T comment and additional data throughout
NEW YORK (TheStreet) -- The CEOs of telecom, media and technology giants have often been referred to as moguls because of their spendthrift acquisitions and proximity to Hollywood and music industry celebrity. Increasingly, however, it seems that they are now bracing for trench warfare in a fast-changing TMT space that could require the skill set of a wartime general.
No front appears to be a better leading indicator of brewing unrest throughout the sector than Google's (GOOG) launch of a one-gigabit high-speed fiber network in select cities such as Kansas City, Mo. Analysts and some investors have speculated that traction with Google Fiber, a so-called virtual multiple systems operator (MSO), could eventually undercut traditional Internet service providers (ISPs) and lead to the un-bundling of cable TV packages.
The scenario of a nationwide virtual MSO -- or at least one with scale in most major metropolitan areas in the U.S. -- could be the foundation for the rise of a la carte media offerings from the likes of Netflix (NFLX), Amazon Prime (AMZN), Apple (AAPL) and even Google. It could also chip away at the video bundles that drive revenue at ISPs such as Comcast, Time Warner Cable (TWC), AT&T (T) and Verizon (VZ), while weakening the pricing power of Disney (DIS), CBS (CBS) and Time Warner (TWX).Google has moved quickly with its Fiber launch in Kansas City. Nevertheless, the offering has so far seemed more like a Cold War against the traditional media universe. Now, industry watchers may have a clear sign that a long-awaited melee is on the verge of breaking out. On Tuesday, AT&T said it will launch a fiber-to-the-home service with 300 megabit speeds in Austin, Texas, this December that will be upgraded to 1 Gbps by 2014. AT&T's move into high-speed fiber is being taken by some analysts as trying to run in front of Google Fiber's 2014 deployment in Austin. It could also amount to a price war waged by the telecom giant that might diminish the profitability a larger Google Fiber roll-out and possibly cause the internet-search giant to rethink its virtual MSO strategy. "[This] is clearly a reaction to Google's build out of its fiber network and service in Austin, with service expected to start in late 2014," Carlos Kirjner, a Bernstein Research analyst, wrote in a Tuesday client note. He noted that it makes the business case for Google Fiber in Austin harder, with the caveat that much will depend on AT&T's pricing and the specifics of its offering. Google Fiber is likely to offer its 1 Gbps service and a set of pay-TV channels in Austin for $120 a month, similar to Kansas City where the service has seen strong signs of adoption. Will AT&T in rolling out a competing service try to undercut that pricing package? If so, Kirjner says that what looked like a profitable virtual MSO offering with internal rates of return in excess of 30% could become a far more economically challenging proposition in a larger rollout. "AT&T's relatively aggressive response in Austin relative to its almost-no-response in Kansas City may be designed to steer Google away from its footprint when selecting the next cities where it will deploy Google Fiber... If incumbent actions leading to the upgrade of networks make the business less attractive or unfeasible, Google may very well stop," Kirjer concludes. He notes that rising investment in fiber networks plays to many of Google's other more established businesses. Much of Google Fiber's eventual size and that of AT&T's offering is left to the imagination, as is the impact on the status quo within the media and entertainment business. Would a wider Google Fiber network be the perfect venue for streaming media providers like Netflix, Amazon and even Apple's long-speculated un-bundled TV offering, given signs from the likes of Verizon and Time Warner Cable that they are ready to consider usage-based broadband pricing as a means to stabilize flat or falling video revenue? One thing is clear, firms like AT&T are investing heavily in broadband and wireless communications infrastructure as they try to tap growing consumer demand for streaming video. Google Fiber and AT&T's similar offering indicate improving service and consumer choice, even if the direction of industry-wide profit margins becomes muddled. Still, executives in the industry have good imaginations. It's why Disney's Bob Iger has spent about $15 billion in recent years on controversial acquisitions of Pixar, Marvel and Lucasfilm and its why Time Warner's Jeffrey Bewkes has won praise for his work in undoing the failed merger of Time Warner and AOL. For now, media industry executives are happy to play the mogul game. At the Goldman Sachs Communacopia conference in late September, the heads at Disney, AT&T, Verizon, CBS, Time Warner and Liberty Media took turns trumping the industry's increasingly profitable status quo, while noting that each of their respective businesses are in a prime position if a virtual MSO or an un-bundled video offering emerges. AT&T's move into Austin, however, and the prospect of a price war with Google could indicate a shakeup caused by rumblings taking place behind the scenes of the media landscape. It is too be seen whether moguls will be forced to abandon their Hollywood lounge-chairs and take up a war that will likely play out in Washington and in their respective corporate boardrooms. Company spokesperson Mari Melguizo wouldn't disclose AT&T's pricing plans but said in an e-mail they will be revealed at the product's December launch. AT&T shares were falling less than 1% to $33.89 in Wednesday afternoon trading. -- Written by Antoine Gara in New York Follow @antoinegara
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