And it finally happened: Alltel goes private

On a much expected deal, TPG Capital LLP and the private-equity arm of Goldman Sachs Group Inc., agreed to purchase wireless operator Alltel Corp. for $27.5Billion, in the largest venture of private-equity money into the wireless business. The buyers will pay $71.50 per share for the company, which represents a price of about 10% higher than where the shares traded last Friday. The buyout group will put $4Billion of its own equity, while banks led by Citigroup Inc. will make “equity bridge” loans of greater than $600Million.

Now, let’s see the strategy behind this deal. Alltel has 12 million subscribers mostly in the Midwest, West and South. The company became an attractive target after spinning off its wireline unit last year to put more focus on the faster-growing wireless telecom business. From the finance standpoint, Alltel shares trade around 9 times its cash flow, an attractive multiple to private equity buyers who are increasingly paying in the double-digits as competition for deals grows tougher. So far, so good.

There are two key points that trouble me a bit. How about the strategic questions that new buyers will face? First, it is unclear how the company will approach the bidding in a coming Federal Communications Commission auction of radio spectrum for wireless broadband communications. This new spectrum and the building out of a new high-speed wireless network would be very costly; however, it might be necessary as larger competitors, such as AT&T, Verizon Wireless and Sprint Nextel are all increasing the speed available on their networks to offer new applications. Up to now, management said the company is willing to invest in its network. However, it seems to be very difficult to predict which direction the company will take, but this is a key fact or to consider moving forward.

I think the Alltel deal is just the beginning of a huge wave of telecom deals. Private-equity investors are showing strong interest in telecom companies. Just to mention a few deals, in Canada, Kohlberg Kravis Roberts & Co. and three pension funds have been in discussions to buy BCE Inc. In the U.S., Sprint-Nextel has also been a rumored target during the last month. So, let’s expect more deals and action to come in the always exciting telecom sector.

Welcome IPTV: Part II

Last month, CBS announced the imminent launch of the CBS Interactive Audience Network: a free, ad-supported network that will digitally deliver CBS programming and third-party content across digital media channels. CBS's ability to partner with leading next-generation interactive platforms is the best way to evolve from a content company to an audience company. The CBS Interactive Network's list of new content deals and online distribution partners in the emerging IPTV space is really long. Included are AOL, Microsoft, Cnet Networks, Comcast, Joost, Bebo, Brightcove, Netvibes, Sling Media and Veoh. Also, CBS previously negotiated content distribution arrangements with Yahoo, Apple's iTunes, Microsoft's Xbox, Amazon's UnBox and others. Mirroring its online strategy, CBS Mobile has concluded direct agreements with the three largest U.S. wireless carriers, AT&T, Verizon Wireless and Sprint, as well as leading next-generation platforms such as Qualcomm's MediaFLO.

What about cable providers? Comcast's strategy is to be the company that delivers entertainment, information and media on multiple platforms. The Fan, Comcast's broadband video player, is proving a successful enhancement to the TV experience as well. It is generating more than 80 million video views per month. Further, Comcast was quick to get involved in the DVR (digital video recorder) market. Their DVR is integrated with the digital cable service, which means that in addition to recording their favorite programs, customers have hundreds of channels to watch, and they can choose from more than 9,000 video on demand titles each month, many of which are not available on traditional, linear television. Speaking more broadly, Comcast is focused on developing applications built to take advantage of quad-play digital delivery. These applications will enable customers to receive television content, surf the Internet, make phone calls, and check e-mail or voice mail on multiple devices. They are piloting a new wireless service called 'Pivot' as part of a joint venture with Sprint that lets customers take their integrated home entertainment experience on the go. Through a new co branded wireless device, customers will be able to access TV content, music, video clips and games; access content on home DVRs and program their DVRs; use a single voice mailbox for home and wireless; surf the Internet using Comcast's Internet portal; and e-mail with Comcast e-mail addresses. That is amazing.

How about Hollywood? A number of film and tech industry superstars were among the earliest innovators in the digital video technology field, George Lucas' Industrial Light & Magic and Steve Jobs' Pixar notable among them. ClickStar, backed by Morgan Freeman's Revelations Entertainment and Intel, is digitally distributing first-release films by top industry names, as well as exclusive educational and documentary programming, before they hit the DVD and cable markets. A growing number of major studios, cable and TV production companies, including Sony Pictures Home Entertainment, Universal Studios Home Entertainment and Warner Bros. Home Entertainment, have agreed to provide films and programming in what might be viewed at least as partial acknowledgment that ClickStar has the right idea.

What about the people? It's the programmers and engineers working away at tech companies, cable and TV networks, telcos and equipment manufacturers who are collectively driving digital media convergence forward. A loose but resilient web of young entrepreneurial companies is playing an outsized role in the process. While companies such as Sling Media are offering new digital TV experiences through TV enhancement equipment and streaming wired and wireless IP services, companies such as Extend Media continue to work on increasingly powerful and flexible delivery platforms for digital content services. For example, the OpenCase solution from Extend Media is not simply an Internet TV distribution technology. The software doesn't simply distribute or push out video: It allows content and rights holders to control, secure, manage and, most importantly, monetize their broadband video assets. That's a key feature set for Internet TV deployments today, whether they make money via direct to own sales, rental, subscription or ad-supported models.

So, while threatening established TV networks, cable broadcasters and film studios, the emergence of IPTV and digital video also opens up a new world of opportunity. With more screens large and small popping up all over, people are watching more TV, films and advertising to the point where the danger may lie in over saturation. The battleground is less telco vs. MSOs (multi-cable systems operators), or even telco/MSOs against media and entertainment companies, than a sea change where open IP networks are taking over what was formerly requiring proprietary networks. Content owners and rights holders, as well as retailers, want to carve out a role that reaches the consumer directly without having to go through either Apple and its paid model or Google and its ad-supported model, the two opposing ends of the continuum in the industry right now. There is no question IPTV will be the next big wave in TV, entertainment and media. The big unknown, however, is how established and emerging providers of content and technology figure this entire difficult puzzle out.

Welcome IPTV: Part I

There's a new wave of changes headed for the TV and film industries: Television viewers can choose what they watch, when and how they view programs and where they catch up on their favorite shows. That's just the beginning. The interactivity of the Internet, the emergence of DVR (digital video recorder) technologies, easier access to wired and wireless broadband services, and the development of digital network distribution formats for streaming multimedia content are forces that are combining to provide viewers with more choice. The great Internet TV race is on, and the field is crowded and getting more crowded all the time. Welcome IPTV. But with that the TV and film industries are in the midst of a major shakeup.

Whether the heat now being generated by IPTV can be maintained depends on the performance of still-evolving digital services delivery platforms. They have to seamlessly manage a huge variety and amount -- and it's still growing rapidly -- of digital video content on offer. Then they must navigate through a maze of networks, wired, mobile IP, 3G and 4G cellular, to reach a broad range of stationary and portable media devices that utilize a variety of proprietary and open standard formats. Not an easy task.

There is little doubt that the emergence of interactive Internet and mobile TV offerings poses a threat for established companies and new market entrants all along the respective industries' value chains. Still, there are huge opportunities as well. Equipment manufacturers, distribution partners, content producers, TV networks and film studios are all struggling and experimenting with ways to tap into the rapidly growing Internet TV and film markets and get a handle on how viewers can, and want, to make use of them. Viewers themselves are struggling to come to grips with how to use set-top boxes and portable devices, and figure out which content and services are accessible and affordable.

The idea of watching appointment TV is being disrupted by the DVR, which has taken the 'water cooler' chatter out of the mix. Consumers now watch what they want to watch, when they want to watch it. Technologies like Slingbox from Sling Media take that a step further by giving consumers the ability to watch TV not only when they want to, but also wherever they want to. The interactive nature of IPTV, as well as the unsettled state of devices, formats and standards, stands in severe contrast to the passive nature of traditional TV viewing. Social networking sites such as YouTube have demonstrated the potential for interactivity to attract viewers and drive network traffic.

The key technological drivers pushing IPTV viability are high-speed bandwidth, powerful hardware, evolved codecs and DRM (Digital Right Management). There are numerous technical hurdles in the path toward widespread IPTV adoption, including the variety of consumer software and hardware options, the rapid proliferation of viewing devices, and the need to establish links between multiple vendors. But the major challenge is really about defining a business model that works. That's why just about every media and entertainment company is experimenting with Internet TV-related applications. The market is uncertain which models for delivery will prove profitable and sustainable: download, rental, subscriptions, ad-supported, or some combination of the above. This has created the need for companies like Extend Media that can supply and/or stitch together the many moving parts required to deliver these services. However, it's emphatically clear that IP-based distribution, instead of proprietary networks via satellite or cable, is now a viable video distribution mechanism with the potential to eclipse all other methods in the future. Refashioning and re-engineering themselves to deliver programming to fragmenting mass markets that are getting comfortable with various new media channels has not only led established players to ally themselves with numerous new content and distribution partners, technology providers in particular, but also to rethink their business models and devise new ones suited to the nature of digital channels.

On my next blog, we will discuss how different players are pushing IPTV in very diverse ways.