Why a Netflix-Killer Will Be AT&T’s Smartest Move Yet

• By Issie Lapowsky
• 04.22.14  |
• 3:24 pm  |
• Permalink

In the frenzied race to move television online, AT&T will not be left behind.

At least, not if they can help it. On Tuesday, the telecom giant announced that it’s teaming up with The Chernin Group, a media and entertainment company, to create a new joint venture dedicated to internet video. AT&T and Chernin have committed a total of $500 million to “acquire, invest in and launch over-the-top video services,” according to a press release. In other words, they’re gunning for Netflix and Hulu.

The news comes on the heels of similar announcements from Verizon, Dish Network, and Disney. The question is whether any of these traditional cable companies, internet service providers, and media companies will really get it right — whether they’ll go whole hog with these services, unafraid of cannibalizing their existing old-school services. Though many of these tech and telecom juggernauts put one foot into the future, they keep another in the past. The Supreme Court battle raging between Aereo and a slew of major television networks is one example. Comcast’s attempt to ban Netflix from its set top boxes is another.

The news comes on the heels of similar announcements from Verizon, Dish Network, and Disney. The question is whether any of these traditional cable companies, internet service providers, and media companies will really get it right

That may sound like smart business, but history has shown us that it’s the companies that are willing to take risks, undercut their existing business models, and invest in the future, who ultimately survive. Just look at Philips, the world’s biggest manufacturer of incandescent lighting. Rather than fighting the natural migration to LED lighting, which could have killed the company if they had resisted the change, Philips led the charge. It became the first lighting manufacturer in North America to begin phasing out incandescent lightbulbs, and therefore, the company best positioned in the market when the U.S. instituted its light bulb ban earlier this year. Sometimes, undermining your business is the best way to preserve it.

Which is why, as tempting as it is to write off AT&T’s foray into online video as an also-ran service in a world dominated by Netflix, Amazon, and, yes, even, Hulu, it’s important to remember that this is a smart, bold move on AT&T’s part. “They would be in worse shape if they didn’t have an alternative offer,” says Mike McGuire, a Gartner mobile marketing analyst. “Otherwise, they’d be feeding broadband to everyone else like Netflix. Better to have an alternative in place, than watch competitors take money out of your pocket.”

But it has to be done right, and that means that AT&T must be willing to build a standalone service that gives consumers what they want to watch, when and where they want to watch it, regardless of whether they’re AT&T customers. HBO’s stab at online video with HBO GO, by contrast, has somewhat missed the mark. It gives users a slew of a la carte viewing options on almost any device, but only people with cable connections can sign up. It’s a perk. But to truly win consumers over, AT&T would have to avoid the temptation of releasing just another feature to prop up its own fiber optic cable service U-verse.

All that said, there are still plenty of ways this could go terribly wrong. For starters, there’s a potential conflict of interest in this deal. If AT&T is behind both a Netflix competitor and the ISP that enables services like Netflix, it could run afoul of regulators down the line. “I think that’s very likely to come up,” says McGuire.

Meanwhile, AT&T will now be in the content game, which is foreign territory. That’s why the telecom giant partnered with The Chernin Group, which was founded by former Fox Broadcasting Company head Peter Chernin. Despite Chernin’s pedigree, though, it seems the group’s only significant foothold in the video content world right now is its majority stake in the anime streaming site Crunchyroll. That means the new joint venture still has a lot of work to do to acquire content. “They’re now in the same boat Netflix is in, which means you need to come to the table and start negotiating. The others have an advantage,” McGuire says. “AT&T really knows communication. Do they know content? We’ll find out.”