T-Mobile: Layer3 TV Hindered by High Programming Costs

In making its case for a proposed merger with Sprint, T-Mobile argues that the retail and customer scale achieved via that deal will help T-Mobile develop and launch a truly competitive and disruptive national pay TV service.

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T-Mobile acquired Layer3 TV in late January, setting the stage for a national OTT TV service that will compete against other virtual MVPDs as well as incumbent pay TV providers. T-Mobile has not outlined specific plans for how that national offering will be priced and packaged, but has stressed that it will disrupt the pay TV market and take advantage of speedy, next-gen 5G-based mobile networks.

RELATED: T-Mobile Paid $325 Million for Layer3 TV

Prior to the acquisition, Denver-based Layer3 TV has focused on a full-freight, in-home, in-market managed IPTV service featuring 4K-capable boxes and a lineup of more than 275 HD channels starting at about $89 per month. Layer3 TV currently offers service in a handful of markets -- including Los Angeles; Chicago; Washington D.C.; Dallas/Ft. Worth; and Longmont, Colo. -- and had plans underway to extend service to New York, San Francisco and Philadelphia.

In the redacted public interest statement (PDF), T-Mobile noted that the acquisition of Layer3 TV gave it a “foothold” in the pay TV market, but also pointed to a challenge faced by Layer3 TV in the early going -- it is paying a sizable premium for its programming deals.

Per T-Mobile’s estimates, Layer3 TV’s content acquisition costs are between 20% to 30% higher than its larger MVPD rivals for the same programming. That challenge isn't Layer3 TV's alone, as it's also faced by other new pay TV entrants that don’t have large subscriber bases and, therefore, possess limited bargaining power with programmers.

Because of those higher licensing costs, T-Mobile held that further expansion of that business “will be limited for T-Mobile on a standalone basis” as Layer3 TV’s smaller customer base “does not provide the scale needed to leverage volume discounts.”

While that challenge will continue as Layer3 TV tries to beef up its sub base before the next round of programming renewals (T-Mobile added 5,000 “branded prepaid customers” to its reported sub base as of January 22 following the Layer3 TV acquisition), T-Mobile said a combination with Sprint will go a long way in creating scale for a mobile distribution network that can deliver a new pay TV service on a national basis.

T-Mobile also held Layer3 TV’s business, on a standalone basis, is presently hindered by consumer dependence on in-home broadband service from incumbent cable operators.

“Without these offerings, which are expensive and often contain monthly usage caps, Layer3 customers cannot access the company’s services,” T-Mobile said.

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However, T-Mobile believes that by matching up with Sprint, they can drive scale into 5G deployments that can expand the reach of Layer3 TV’s service. T-Mobile held that its current standalone network won’t have the capacity to handle projected future consumer demand for mobile video, absent the Sprint transaction.

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“In the near term, the customer and retail scale created by the transaction [with Sprint] will enable T-Mobile to more rapidly expand the current Layer3 model than possible without the transaction,” T-Mobile said. “This scale should allow the company to acquire content at lower rates and on better terms than T-Mobile and Layer3 can do on their own.”

T-Mobile’s estimate on how much lower those rates would be were redacted in the public version of the document, but believes that it would allow it to create a more affordable pay TV options for consumers. “The competitive imperative will demand that Layer3 pass these cost savings on to consumers through lower prices and more flexible rate offerings,” the company said.

T-Mobile: 5G Poised to be Viable In-Home Broadband Alternative

T-Mobile also used the filing to characterize 5G as a “bona fide alternative” to traditional in-home broadband service providers rather than just a more limited complement.

“The new 5G network’s speeds, capacity, and low prices will allow consumers to ‘cut the cord’ and use their mobile wireless service as their broadband service both inside and outside the home and pocket the savings from eliminating an unnecessary and costly wired broadband bill month after month,” T-Mobile claimed.

By combining with Sprint, the merged company is positioned to create a national 5G network that will close the speed gap between mobile and wired broadband and enable the company to compete in the in-home broadband services market against conventional ISPs and drive down prices.

By way of example, T-Mobile said a consumer might pay $80 per month for wired in-home broadband and $60 for mobile wireless service. Using 5G, T-Mobile argued that the same customer could take the wired broadband portion out of the picture and pay $60 for an equivalent combo of mobile service and in-home broadband.