Activist investors are always the bane of company management, and AT&T is surely no exception. Elliott Management bought a stake in the company, and that sent AT&T’s stock on a rally. Elliott thinks that AT&T has lowered shareholder value through its aggressive M&A, and management (not surprisingly) disagrees. The question is who’s right and why, and what might happen if “right” ends up being different for shareholders than for the industry.
Shareholder value is the key goal of any company, for the simple reason that the company is responsible to its shareholders not the industry, or even its customers. M&A generally builds debt levels, which are often seen as an increased risk. Thus, what Elliott might be saying is that AT&T’s position in M&A, particularly with Time Warner, is a strategy that’s bad in the fairly limited timeline of investors, whether it’s logical in “the long run” or not. But it’s possible that AT&T did the wrong thing from any perspective, and also possible it did the right thing. To figure out which, we have to look at AT&T’s position.
All network operators are historically bit-pushers. They sell capacity and connectivity, and they do that by building networks. What we’ve seen over the last two decades is that broadband Internet has generated a thriving market for data connectivity to everyone, but at the same time has depressed the revenue per bit. The impact of that depends on what I’ve called “demand density”, which is essentially the dollar opportunity passed by a mile of infrastructure. Operators with high demand densities can expect lower cost per bit, thus making the revenue decline less an issue. AT&T has a much lower demand density than rival Verizon, so they have to worry more.
It’s no surprise that AT&T’s has-to-worry status means it works harder to establish things like opex automation (ONAP) and open-source and open hardware models. However, cost management can only take you so far, and so AT&T is also looking at climbing the value chain. Hence, DirecTV, streaming video, and Time Warner.
A decade ago, it was TV delivery that justified wireline networking. Operators like AT&T and Verizon got into the TV delivery business for that reason, and so all of AT&T’s moves would make perfect sense if this were 2009 instead of 2019. It’s not, and so the question is whether the up-the-value-chain approaches AT&T has taken are still valid.
The Internet has messed up a lot of business models, and you can see by current reporting that content and TV are among the recent casualties. Streaming video works directly on Internet “dialtone” and so you don’t need cable companies, TV services, and so forth. Not only that, advertisers have been shifting budgets more to online services because they get better targeting, which means that there now have to be more commercials per minute of show. In short, content may not have fallen from its royal “Content is king!” state, but its crown is getting seedy-looking.
So now, if we take stock, do we decide that AT&T’s strategy is bad? After all, content is circling the drain too. But is it doomed? Simple truth; we have to watch something. Reruns of old shows, movies, and series don’t carry us to the infinite future. Amazon, after all, and Netflix are producing original content. Might AT&T unfetter itself (gradually, of course) from a traditional TV-network-ish model and jump into producing content for streaming only? Could they be looking to emulate Netflix and Amazon more than Comcast?
This is exactly what I think is happening. AT&T’s automation and open-box strategies will take time to pay off. In fact, they’ll take time to get right, because they’re not right yet. In the meantime, AT&T has the opportunity to leverage original I-own-it content, which is worth something. They can start to shift to the same model that Amazon and Netflix and Hulu, and now Disney and Apple, are promoting, with original content to leverage. They can even offer other content producers a conduit to market, and they can reap some financial benefits from this during the period when they work their magic in network modernization.
But what about demand density? The answer to that is Internet dialtone services. If you look at “the network” as the source of all revenue, demand density matters. If you look at Internet dialtone as the infrastructure of the future, then so what if your own home area has low demand density. Service someone else’s area instead, riding on their increasingly unprofitable infrastructure. There is an issue as to how we provide incentive to keep offering more capacity that’s steadily less profitable, but that’s a public policy problem. We subsidize rural broadband in the US now. Maybe in the future we have to subsidize more broadband than just rural. It’s separate from the Internet dialtone economy, because you know that somehow everyone will get their Internet fix.
AT&T isn’t doing dumb stuff, in short. It’s not as smart as I’d like it to be, or as smart as it thinks it is, but it’s doing generally the right thing. In fact, if anything, AT&T should be doing more to exploit Internet dialtone, looking for additional investments it can make in the higher-layer experiences that represent what people really want from the Internet. Now, when the value of these higher-layer experiences isn’t fully realized, even by people like Elliott Management.
IoT isn’t about sensors, it’s about services. Advertising isn’t about serving ads, it’s about contextualizing them. The future of “the network” is building what it connects users to, not building the connections themselves. Content, meaning video content, is the obvious on-ramp to services above the network. AT&T is right to jump into video content, providing that it isn’t mistaking the on-ramp for the Interstate.
The fundamental problem AT&T has, and that all network operators have, is that there will never be a time when bandwidth earns more revenue per bit. The best that cost management can hope to do is slow the erosion of profit on connectivity services. That means that you have to look elsewhere for increased profit, and with a thriving OTT industry in place, it’s not hard to figure out that the place to look is up the value chain toward the experiences users really pay for. Bits are just the plumbing to deliver them.
The higher-layer services of OTTs are built almost universally on a cloud-native platform. Thus, you could argue that AT&T’s focus should be taking a cloud-native slant on everything, starting with content delivery but expanding into a service-centric ecosystem that can host future experiences. This is where we can’t yet tell if AT&T gets it. Does AT&T understand what their next step is?
Elliott isn’t the one to answer that question. They’re “activist investors” that many would label “corporate raiders”. But AT&T may not be able to answer the question either; they’ve not answered it so far. No revenue strategy is endless. Companies succeed by reinventing themselves as needed, and AT&T deserves applause for having done more than most of its carrier partners worldwide in doing that up to now. They have to keep it up.