Where Will the Money Be in Wireless?

For Sprint Nextel Corp., the joint venture announced last week with four top cable operators is all about the “third screen.” But for the cable operators — Comcast Corp., Time Warner Cable, Cox Communications Inc. and Advance/Newhouse Communications — it’s more about the “fourth play.”

The widely watched partnership was touted by Sprint last week as the advent of the “third screen” for customers — giving them information, film clips, TV shows and data on their cell phones, in addition to their televisions and computers.

Sprint Nextel CEO Gary Forsee said cable customers would remotely program digital video recorders and watch snippets of television programming using wireless handsets. But cable operators were more interested in keeping their customers from defecting to telephone companies, who are now matching it punch-for-punch in offering TV, phone and Internet services. Just giving their customers the fourth play — wireless communications — justifies the deal with Sprint.

“The initial phase will allow us to offer wireless phones as part of our bundle, and that’s nice,” Comcast chairman and CEO Brian Roberts said the day after the deal was announced.

But this is not just a resale agreement, he said. It could lead to new sources of revenue — such as ring tones or video clips, downloadable for a fee.

Cell phone customers typically download a 30-second snippet of a song for about $1.99 for use as a ring tone, Roberts noted. That’s double the 99 cents that Apple Computer Inc.’s iTunes music store gets from customers who download complete songs.

Ring tones are a $5 billion-per-year business, Roberts said, while iTunes generates about one-tenth of that annual revenue.

“Consumer behavior is sometimes hard to forecast,” Roberts said on the call. But this “creates in my mind the real promise of the 'video ring tone’ — the idea of another set of applications that people will pay a small premium for.”

But how much money cable operators can make from this partnership via the small screen, or even from mobile phone calls, is not clear. According to the agreement, the cable operators get to keep the cable telephone, video and high-speed Internet revenue generated by new customers to the four-play, while Sprint keeps the wireless revenue.

Sprint will pay the operators a nominal charge for billing and customer service. And each participant will receive a commission if it sells the others’ services.

“Given that Sprint will retain the core subscriber economics on an ongoing basis, we do not expect this service, in the near term, to generate material cash flows [for cable companies],” wrote Lehman Bros. cable and satellite analyst Vijay Jayant in a research report.

The wireless-communications market is large. According to the Telecommunications Industry Association, wireless spending will reach $158.6 billion this year and grow to $212.5 billion by 2008.

The mobile-TV market is small, but has the potential to grow rapidly. According to Jupiter Research, revenue from mobile-TV subscriptions will rise from $136 million this year to $7.6 billion by 2010.

The deal with Sprint will last 20 years, but is only temporarily exclusive — cable participants will not be allowed to offer wireless service from another carrier for three years. Under the agreement, cable customers will — one day — be able to access live TV programs through their cell phones, view music and other video clips, read their cable-provided e-mail and access a centralized voice-mail system for both home and mobile calls.

The operators will contribute about $100 million to the partnership; Sprint Nextel will pony up the same amount. The $200 million kitty will mainly fund development of services such as integrated wireless and cable telephony voice mail and e-mail, national marketing initiatives and administration.

Pricing for services has not been set, nor have any revenue splits been worked out for the advanced-television and telephony services the partners are planning.

Indeed, advanced services are not imminent. Sprint Nextel CEO Gary Forsee and Roberts said the first “integrated” service might be available by the middle of 2006.

This would be a service giving cable customers the ability to program their DVRs from their phones, as well as watch clips from their DVRs or their cable company’s on-demand video libraries. Eventually, Forsee said, customers would also be able to watch TV shows live.

“This is about more than stapling wireless onto the triple play,” Forsee said. “This is about integrating services and making the power of the two networks, the two technologies, come together.”

The power may not be fully turned on for a while. For starters, none of the cable operators’ current deals with programmers allows them to distribute content via a wireless network. A dual-mode handset — one that connects via cable inside the customer home and to cellular towers outside of it — probably won’t come until late 2006 or early 2007, according to Forsee.

But Roberts was confident content would come, because infrastructure to readily deliver video to small screens would now be in place.

“I would use the analogy of on demand — first you’ve got to build the platform and then you go out and try to procure the rights,” Roberts said.

Roberts said programmers would warm to the prospect of extending the rights to distribute their content to viewers using handheld devices — if they get a cut of advertising or subscription revenue.

But some major programmers already have made deals with wireless carriers to deliver video programming to their customers. That makes cable operators potential competitors, on wireless networks.

ESPN is leasing Sprint Nextel’s wireless network for the Mobile ESPN product, which is due out in February.

Programmers such as Fox News, ABC News Now, TLC and Discovery also offer content via Sprint Nextel wireless. MobiTV, a standalone service that is available through Sprint Nextel and Cingular Wireless, offers content to subscribers from MSNBC, ABC News Now, CNN, Fox Sports, ESPN 3GTV, NBC Mobile, CNBC, The Discovery Channel, The Weather Channel and others.

“Why is Comedy Central going to use Comcast to distribute its programming on a cell phone? Why isn’t it going to go directly to a wireless operator? How does Comcast become the gatekeeper in this business?” asked Fulcrum Global Partners media analyst Richard Greenfield.

The competition may not be that intense for a while. Video delivery will only be available on Sprint Nextel’s PowerVision data network. According to Jayant’s report, the 2 Megabit-per-second PowerVision service is available mainly in airports, central business districts and along major highways in 75 markets across the country,

But the cable partners could assist in the expansion of the PowerVision network, if watching video on the move keeps their customers happy.

“The fact of the matter is our customers will stay with us longer and more of them are gong to stay with us with more products by having wireless in the mix,” Cox CEO Jim Robbins said at the press conference.

“The devil is in the details,” said Fulcrum’s Greenfield. “It’s interesting to program your DVR over the phone, it’s interesting to be able to check your voice-over-IP voice mail over your cell phone, but the big game-changer side to this [video], there is not a lot of clarity exactly how it plays out.”