Every few years I read something that resurrects the old question of whether ISPs should be dumb pipe providers or something more. Some ISPs have fought against the idea of being dumb pipe providers and want to believe they are far more than that. The latest event that raises this question anew is AT&T’s debacle with ditching DirecTV and WarnerMedia. AT&T was clearly not content with being considered as only a dumb pipe provider. The company was lured by the perceived higher earnings of both cable companies and media companies, and AT&T went on a buying spree and purchased both DirecTV and WarnerMedia.
At the time of the DirecTV purchase, when AT&T paid $67 billion for the satellite company, there were already rumblings in the industry about cord-cutting. There hadn’t been any evidence of large numbers of customers dropping traditional cable TV, but the industry was already in a holding pattern of zero net growth, with new customers roughly equaling customers who were ditching traditional TV. Since the DirecTV purchase, cord-cutting materialized with a fury as the traditional cable industry lost over 13 million cable subscribers.
The lure for an ISP to become a media company has hovered over the industry for over twenty years. Those of us that were in the industry in 2000 still remember being flabbergasted by the merger of AOL and Time Warner. The merger was blessed by Wall Street and by the consensus of analysts that the Internet was going to subsume media and that the merger was a defensive move by Time Warner. But it was hard to picture a path where the combined companies could grow to justify the astronomical $350 billion valuation that was awarded by the stock market at merger. And sure enough, the wheels came quickly off in what was possibly the worst merger of all time.
AT&T was also lured by the continued growth in the valuation of media companies. The stocks of media companies like Disney climbed in value year after year while AT&T’s value stagnated. AT&T was convinced that the merger with Time Warner would put the company’s stock on an upward trajectory like other media companies.
Underlying AT&T’s decision in both purchases to branch out was a dissatisfaction of being viewed by Wall Street as a dumb pipe provider. AT&T is the ultimate dumb pipe provider with a huge base of cellular and broadband customers – all who buy basic connectivity from the company.
AT&T was obviously jealous after watching companies like Apple and Google profit by putting apps on AT&T’s phones. AT&T was equally unhappy to see companies like Disney prosper from sending video signals over AT&T copper and fiber. I believe the entire AT&T debacle boils down to a company that did not want to be perceived as only providing dumb pipes. I think it’s that simple.
But something happened in the industry in recent years while AT&T lost over $90 billion from the two acquisitions in just five years. In recent years, the valuation of fiber-based dumb pipe providers is up significantly. In the last year the industry has seen transactions for fiber-based ISPs getting huge valuations. I honestly can’t fathom some of these high valuations any more than I could understand the AOL / Time Warner valuation. But the current high valuation for fiber networks is real since there are investors willing to pay big prices to get fiber companies.
All of the big ISPs have grasped this fundamental market shift. Most of the big ISPs have announced strategies to build significant amounts of fiber this year and next year. AT&T is building fiber past 3 million more homes this year. Verizon is on a tear and says it will build fiber-to-the-curb past 25 million homes by 2025. We see big fiber expansion plans from Charter, CenturyLink, Altice, Frontier, Windstream, and a long list of others. All of a sudden, everybody wants to be a bigger dumb pipe provider.
It’s going to be interesting to see if this trend continues. For now, investors are betting that fiber companies will beat the cable companies in the broadband market – there is no other way to explain the higher valuations. The cable companies have thrived during a decade of lopsided competition against telephone DSL. Are the cable companies faced with being on the opposite side of the competitive battle and seeing fiber become the consumer choice? As always, this industry continues to provide interesting trends to watch.