Telecom companies tend not to be particularly good at anything, including running their own businesses. They never seem to learn — only to spend incompetently on expansions into new markets involving content and media. I would go as far as to say that, when it comes to shareholder value, their repeated attempts at “diversification” are weapons of mass destruction.
Three years ago, AT&T spent $85.4 billion (plus $23.3 billion in debt) to buy TimeWarner’s media business. AT&T dreamed of building out a streaming media platform to compete with Netflix, the current (and likely future) big kahuna of the streaming revolution. That misadventure is coming to an end.
So is another ill-planned fling. In 2014, AT&T spent almost $67 billion (with $18.6 billion in debt) and bought DIRECTV. Earlier this year, AT&T hived off its three video businesses into a new company. This entity includes DIRECTV, AT&T’s fiber-to-the-home TV service called U-Verse, and something called AT&T TV. The new entity is unimaginatively called DIRECTV (New DIRECTV.) It’s hard to believe people got paid for this.
Here is the kicker: TPG, the private-equity giant, got 30 percent ownership of the new company and valued the company at $16.25 billion, a third of what AT&T paid in cash, and less than the debt it took on when it bought DIRECTV. TPG paid $1.8 billion for its stake in the company. I wonder if that may have been too much — in 2020, DIRECTV lost 3.03 million customers. AT&T TV lost 270,000 customers. U-Verse added only 42,000 customers.
Now, the botox-enhanced, rhinestone-wearing version of Ma Bell has announced that it will spin out WarnerMedia and merge it with Discover. The new company will be 29 percent owned by Discovery’s shareholders (including the indomitable John Malone and Advance.) AT&T gets 71 percent of the ownership. For this deal, AT&T will get a combination of $43 billion in cash and debt. Given the original outlay of over $109 billion (including debt), it is hard to see this as a win for AT&T.
There are other examples of a telecom operator’s dream of vertically integrated content creation and distribution turning into a nightmare. Earlier this year, Verizon sold its media business to Apollo Global Management, a private equity firm, for $5 billion. Back in 2015, Verizon paid $4.4 billion for AOL and another $4.5 billion for Yahoo. It seems they are even better at losing money than AT&T, which is really saying something!
Joseph Epstein once wrote that “Of the seven deadly sins, only envy is no fun at all.” He must have been talking about the telecom chief executives. Envy is the driving force behind their explorations — and the reason their efforts repeatedly fail. They are almost always envious of the success of Internet-based companies. They hated Google for making money from advertising. They hated Apple for making money from music. They were envious of Netflix making the big dollars from streaming.
Envy is the driving force behind their explorations — and the reason their efforts repeatedly fail
This envy makes the big dogs at telecom companies easy prey to the sale pitches from investment bankers. Analysts show them the growth of web giants and want them to diversify. As my good friend and longtime telecom writer Dave Burstein put it in an email, it’s all “bullshit unless the telcos can really compete in the new fields, which they almost always can’t.”
As someone who covered telecom shenanigans for a long time, it is easy to understand why telecom chiefs who survived the internal game of thrones think they can succeed in everything. The sad reality is that most incumbents, especially telecom operators, are run by people who are rewarded for activity, not for actual achievement. Former CEO Randall Stephenson, who managed to get AT&T — a monopoly, no less — loaded with $165 billion in debt, is no doubt enjoying his millions in retirement.
A very long time ago, a smart person, when talking about telecom operators, pointed out that “these guys think because they can play baseball, it means they will be awesome at football and basketball.” Sadly, the telecom industry bosses don’t pay heed to common sense and keep making the same mistakes. And as they flounder about, they forget their core strengths.
About a decade ago, at the start of Netflix’s climb to the top of the media mountain, I pointed out that telecom misadventures in content will only end in tears, frustration, and value destruction. I noted that, in 2007, when video downloading became the trendy thing to offer, everyone followed and failed. And even that example had a feeling of deja vu, because in 2005 when Apple’s music business was starting to boom, the market was flooded with copycats. Among them were Verizon and Cingular, a now-forgotten part of AT&T’s mobile business.
As part of the Discovery deal, AT&T has indicated that it will lower its dividend and spend more on capital expenditures. Goldman Sachs estimates that the dividend cut “would represent a 40-45% reduction from the current total dividend payout of approximately $15bn to an implied payout of approximately $8bn to $9bn.” Let’s face it: AT&T needs the money.
Announcing their deal to carve out WarnerMedia — a mere three years after closing the deal — is a sign that things were getting desperate for AT&T. To remain a player in the content/streaming media business, they would have had to spend around $20 billion to stay competitive with Disney, Netflix, and Amazon. Meanwhile, its pressing need to spend heavily on its core businesses, which are rapidly falling behind, has become an existential crisis for the company.
AT&T’s mobile wireless service is starting to get into the red zone. Over the past nine quarters, AT&T added a mere 2.5 million net new postpaid subscribers — and that’s after heavily discounting its service. (Verizon wasn’t any better. It added a million net new postpaid subscribers, but it did so without discounting.) In comparison, T-Mobile added a whopping 11 million net new postpaid subscribers.
AT&T has also fallen far behind in the 5G race. Sure, there aren’t many applications that benefit from 5G at present. But consumers with 5G handsets, such as iPhone 12, want a shiny new 5G network, and AT&T is losing the marketing battle.
AT&T will be looking to increase investment in the 5G network with C-band coverage to reach 200 million by 2023. This mid-band version of 5G can offer speeds of 100-to-450 Mbps — not that much better than LTE. Sadly for AT&T, by the end of this year, T-Mobile will have the same capabilities across its network.
In 2020, when demand for broadband services boomed across the planet, AT&T lost 5,000 customers and ended the year at 15.38 million subscribers. It is a remarkably insufficient showing considering that the pandemic pushed more and more Americans to work from home and opt for better broadband.
Major US broadband providers added 4.86 million net new subscribers last year. Comcast alone accounted for 1.97 million net new subscribers. During the past three months, AT&T had added 51,000 new subscribers for its broadband service. This is because it has started to push its fiber-to-the-home broadband aggressively. “Net broadband losses among Telco non-fiber subscribers were more than offset by over 400,000 net adds via fiber in 1Q 202,” research firm Leichtman Research noted in a recent press release.
Selling Fiber-based broadband is a good business. This can be confirmed by asking any telecom operator in Europe — or any cable provider in the United States. For about $1,500 to $2,000, you get a customer who pays off in three years. With the new cash, AT&T can finally get aggressive about its fiber-to-the-home plans. The company had a fiber footprint of 14 million homes at the year-end 2020. The target is to push to 30 million homes by year-end 2025. AT&T wanted to add 3 million new homes to its fiber footprint in 2021 and another 4 million in 2022.
Ironically, these big telecom companies are finding themselves in a financial pickle at a time when the importance of our networks to our daily lives has never been more critical. The large-scale transformation of our society from analog to digital includes a need for omnipresent connectivity.
In the future, everything from our cars, logistic networks, health establishments, and supermarkets will need a network backbone that works. Here lies a significant opportunity for all comers and not just telecom companies. As long as they remember who they are, and don’t go chasing chimeras of growth-from-diversification. Focusing on their core capabilities might not be sexy or shiny, but it works.
As Tyrion Lannister said in Game of Thrones: “Never forget what you are. The rest of the world will not. Wear it like armour, and it can never be used to hurt you.”
PS: Many thanks to Twitter follower Josh Rubin for coming up with that clever title.