A Blog by Jonathan Low

 

Nov 14, 2018

How ATT and Verizon Are Pursuing Different Strategies To Win A Similar Future

ATT is more diversified across media, telecom and entertainment. Verizon is more focused on IT.

The interesting question is whether, given the size of the market, they could both be right. Or not. JL


Drew Fitzgerald and Sarah Krouse report in the Wall Street Journal:

“Both of them have suffered from Google envy. They are looking at the same facts and came up with different decisions.”AT&T is diving into entertainment and advertising, spending tens of billions of dollars to control in-demand programming like HBO and live NBA games it can distribute throughout its wireless, satellite and fiber-optic networks. Verizon is doubling down on network upgrades to enable the commercial use of 5G, counting on industrial and consumer uses beyond smartphones to deliver fresh revenue. 
A maturing wireless industry has drawn sharply different responses from industry leaders AT&T Inc. T -1.46% and Verizon Communications Inc., VZ -0.10% two companies that used to move in tandem.
AT&T is diving headfirst into entertainment and advertising, spending tens of billions of dollars to control in-demand programming like HBO’s “Game of Thrones” and live National Basketball Association games on TNT that it can distribute throughout its wireless, satellite and fiber-optic networks.
Verizon, meanwhile, is doubling down on wireless-network upgrades to enable the commercial use of 5G technology, counting on industrial and consumer uses beyond smartphones to deliver a fresh wave of revenue. The media assets it owns sit in a small unit that includes advertising technology and an eclectic group of websites like HuffPost and Yahoo Sports.
AT&T and Verizon are the two largest wireless carriers in the U.S. by total subscribers. But they’re under pressure to find new sources of revenue beyond wireless services, where there is limited room for growth. Software and media companies have captured most of the earnings from a mobile economy built atop wireless networks, a fact not lost on either company.
“Both of them have suffered from Google envy almost from the beginning,” says Roger Entner, chief of wireless-industry research firm Recon Analytics Inc. “They are looking at the same facts and came up with vastly different decisions.”
The different game plans have driven a divergence of stocks that used to move in the same direction. AT&T shares have slid 10% over the past year as investors worry about its debt burden. Verizon shares have gained 30% over the past 12 months after five years stuck in neutral.
Lesson learned
AT&T started down its media-heavy path in 2015 by spending $49 billion on satellite-TV broadcaster DirecTV, followed three years later by an $81 billion takeover of Time Warner Inc., home of cable channels like HBO, TNT and CNN and the Warner Bros. film studio.
AT&T’s hard tack toward media stemmed partly from its experience over the past decade serving the smartphone economy. Chief Executive Randall Stephenson noted that while the carrier reaped the benefits of aggressive investments in its wireless network, tech companies like Apple Inc. took a much bigger share of the spoils.
Congratulations: You invested a fortune, and Apple becomes the most profitable company in the free world,” Mr. Stephenson recalled in a recent interview. “This is why, two years ago, I said, ‘I don’t want to run that same play again.’ ”
Media assets will keep growing more valuable, he said, as companies like his find ways to distribute them to wider audiences. He pointed to the recent bidding war over assets belonging to 21st Century Fox Inc. as proof of the trend. The media assets AT&T owns currently account for about 20% of overall revenue.
Some investors say AT&T is in a strong position because it has a mix of assets that span cable service, media content and wireless service—though its success, they say, will depend on its ability to keep its base of traditional TV watchers profitable as they flock to online video.
“They’re going to have to experiment a little. If they get it right, then I would imagine you’ll see some copycatting from the Verizons, the Comcasts and the Charters of the world,” says John Carr, senior research analyst at money manager Neuberger Berman Group LLC.
Banking on 5G
Verizon’s biggest transaction to date was the $130 billion purchase of full control of Verizon Wireless in 2013. Executives have stressed to analysts and investors in recent months that they are focused primarily on building out the carrier’s 5G network—which they say will generate additional revenue by powering new technology used in factories, hospitals and cities.
Verizon explored, but didn’t ultimately pursue, acquisitions of companies such as CBS Corp. , and this year told investors it isn’t interested in buying a content creator. Instead of acquiring content, it is offering its first 5G customers live channels, movies and shows through streaming partnerships with Apple TV and Google’s YouTube TV.
The carrier is in discussions with Apple and Google about partnerships that could extend the video services to a broader group of its cable and wireless subscribers and include some content from Verizon’s Oath digital-media unit, according to people familiar with those discussions. Those plans could be announced as soon as this month, the people said.
Sajod Moradi, a senior credit analyst at Macquarie Investment Management, says Verizon’s partnerships will allow it to benefit from expanded content offerings without creating the pressure to generate excess cash flow to pay down debt.
Verizon acknowledged last month that Oath was unlikely to meet longer-term revenue targets, and is now pulling the business closer to its parent company. It is also rebranding it as Verizon Media Group as part of a restructuring of the carrier’s business lines by CEO Hans Vestberg.
The business houses a collection of online news, finance and video brands as well as digital advertising technology.
Mr. Vestberg said in a recent interview the carrier was exploring ways to apply 5G technology to the media, augmented-reality and virtual-reality brands within the unit.

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