Figuring Out AT&T

Like has happened many times during my career, AT&T is changing the trajectory of its business. Over just a few months, the company has shed major parts of the business and has taken huge losses in doing so.

At the end of February, the company spun off its cable TV business that includes DirecTV, AT&T TV, and U-Verse. The business went to a newly formed company that will be owned 70% by AT&T and 30% by TPG Capital. AT&T received $7.8 billion in cash which values the new business at $16.25 billion. This represents a huge loss for AT&T which originally paid $67 billion to acquire DirecTV in 2015. That’s over a $50 billion loss after six years.

AT&T recently announced an even bigger deal and sold off WarnerMedia to Discovery Inc. The sale net’s $43 billion in cash to AT&T to pay down debt. The newly formed company will become the second-largest Media company and will combine HBO, Warner Bros. studios, TNT, TBS, and CNN with Discovery, Oprah Winfrey’s OWN, HGTV, The Food Network, Animal Planet and others. The new company will have a huge sports presence between TNT and TBS and Discovery’s worldwide sports coverage.

The sale represents another big loss for AT&T. The company paid $85 billion for Time Warner and will lose $42 billion in only five years. The two sales will allow AT&T to pay down about $51 billion of its $169 billion in debt. But a lot of the remaining debt is still due to the original two purchases.

I find these transactions to be ironic because AT&T lobbyists have been harping for years against municipal broadband saying that it generates huge losses. The vast majority of municipal broadband ventures are cash self-sufficient, and AT&T’s claim is aimed at convincing legislators to ban municipal competition. But it’s ironic to see that the same company that rails against municipal broadband is absorbing over $90 billion in losses. If AT&T had instead put this money into fiber it would now own the US market and we’d have solved much of the lack of broadband in the country. As we saw from the recent blast at municipal broadband from USTelecom, the irony isn’t stopping AT&T from continuing to make the same false claim against muni broadband.

The company also shifted directions in the broadband market when it decided last October to stop selling DSL to new customers. One has to think that this is the precursor for AT&T pulling down rural copper. In urban areas, this decision will push remaining customers to the cable companies. In rural areas, some of the DSL customers might be able to convert to cellular broadband from AT&T, but for many households, the AT&T decision just means less choice for broadband.

This largely means that AT&T will be focusing on the cellular business and fiber broadband business. The company is still primarily a cellular company and for years the telecom business has been relegated to back pages and footnotes in the company’s annual reports. But AT&T has quietly been investing in fiber. The company has passed over 14 million homes and businesses with fiber in the last few years and is building to pass 3 million more this year. This appears to be a profitable venture for AT&T since the network builds are efficient as AT&T is mostly overlashing fiber onto existing copper wires.

AT&T is still the largest cellular company in the country, but the competition has gotten a lot stiffer over the last five years. The T-Mobile merger with Sprint put them in close second and on AT&T’s tail. We’re now seeing the big cable companies picking off significant numbers of cellular customers. Within a few years, we’ll see the market entrance of Dish Networks which already is saying it’s going to gain market share with low prices.

Back when AT&T moved heavily into media and cable TV, many analysts wondered why the company didn’t stay focused on its core competency. I guess those skeptics were prescient since the new ventures barely made it past half of a decade before AT&T abandoned the new direction.

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