It’s Time to Get Smart About Dumb Pipes

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(Bloomberg Businessweek) -- The telecommunications industry’s default terror is that it will become little more than the provider of so-called dumb pipes to Silicon Valley and Hollywood: investing heavily in networks, only to have the companies that distribute content and services derive the most benefit from them. The lockdown prompted by the Covid-19 pandemic has demonstrated the extent of our reliance on those networks—billions of people are depending on their internet connection to work, study, and play from home.

In the 13 years since the release of the iPhone, investors have bemoaned network operators’ lack of creativity. Why did it take Apple Inc. to catalyze the smartphone market? How come it was Netflix Inc. that popularized streaming video subscriptions? AT&T Inc. finally responded in 2016 with its $109 billion deal to buy Time Warner Inc., adding a vast entertainment arm whose content it would distribute to its more than 100 million customers. Verizon Communications Inc. has concentrated on improving its networks while hoping investors will forget about its ill-fated acquisitions of AOL and Yahoo Inc. at about the same time.

Since the market rout began in the middle of February, Verizon’s stock has performed considerably better than AT&T’s. Because Verizon can count on the predictable recurring revenue it gets from customers’ monthly bills, investors think it’s a relatively safe bet. Meanwhile, AT&T’s shares have lost almost a quarter of their value, underperforming the S&P 500. That’s partly to do with the company’s $188 billion debt pile but also with the reliance of its television stations on advertising income. In a downturn, marketing spending is usually the first thing a brand cuts; AT&T’s income is therefore a lot more cyclical.

As we tentatively consider how we will emerge from the crisis, the question is whether there will be a sustained change in perception from regulators and customers alike. Operators will of course suffer a little as their enterprise customers go under and unemployment makes it harder for consumers to afford hefty phone and broadband bills. But given the importance of both mobile and fixed networks, governments could prioritize ensuring that those networks are resilient enough to cope with future shocks: by making it easier to build more cell towers, lay more cables, share network capacity, or perhaps consolidate, especially outside the U.S. “Current regulations that companies are subject to will require a rethink,” says Herbert Blum, head of the telecommunications practice at management consultant Bain & Co. “The resiliency thinking will start to permeate the public at large.”

There’s a balance to be struck. Too much consolidation could mean too much pricing power, and telecommunications executives will just go and buy another film studio. Too little, and they’ll have scant incentive to invest in networks. The pipes might be dumb, but we need to be more intelligent about how we invest in them. —Webb is a columnist for Bloomberg Opinion.

©2020 Bloomberg L.P.

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