AT&T Is Still Struggling to Justify Its Time Warner Deal

(Bloomberg Opinion) -- AT&T Inc.’s leadership says proudly that it’s delivering on its promises. Investors aren’t sure if they even like those promises.

Fourth-quarter results released Wednesday once again revealed how AT&T is struggling to justify CEO Randall Stephenson’s costly decision to turn a strong wireless company into a riskier communications and entertainment conglomerate. Earnings per share beat analysts’ expectations, thanks to a subsiding price war among the U.S. wireless carriers. But AT&T’s pay-TV operations continued to be a drag, losing 1.2 million subscribers during the period, nearly double the amount analysts figured. That brought total video disconnections for the year to 4.1 million, far outpacing cord-cutting at rivals such as Comcast Corp. Meanwhile, investments in the HBO Max streaming-TV app — which will face fierce competition when it launches in May from Walt Disney Co.’s Disney+, Comcast’s Peacock, Apple Inc.’s Apple TV+, Netflix and other lower-priced services — reduced AT&T’s revenue by $1.2 billion. The shares slipped more than 2%.

AT&T Is Still Struggling to Justify Its Time Warner Deal
Stephenson and his team did manage to sell about $18 billion of assets in 2019. That helped AT&T pay down more than $20 billion of debt, meeting a crucial net-debt-to-Ebitda target that was promised to shareholders while allowing the company to maintain its plush dividend. The entertainment division, which is made up of DirecTV, AT&T TV Now and other services, also didn’t deteriorate any further on an Ebitda basis, holding at $10 billion as executives said it would. Having fewer subscribers reduced costs. “We’ve checked every box,” Stephenson said on Wednesday’s earnings call.

But there’s still the feeling that AT&T is trying to jump through an awful lot of hoops for a transformation it arguably didn’t need to make. Why hold on to DirecTV and all of its headaches? Why take on all that debt to buy Time Warner? Why join Netflix at its money-torching party?

The AT&T team would say that’s the wrong way to think about it. They would like for everyone to stop viewing AT&T as a disparate conglomerate comprising an attractive wireless business on one side and finicky media assets on the other. Instead, they want the entertainment brands and pay-TV services to be seen as reinforcing the wireless business over time. It comes back to the idea of bundling, a remnant of the cable era that is likely to be reborn in the streaming era. The idea goes like this: In a 5G world, where wireless connections are significantly faster, video consumption on mobile devices should only increase. Access to HBO Max and AT&T TV Now could give consumers greater reason to choose AT&T and stick with the network.

As it is, AT&T’s unlimited elite plan — which includes HBO Now at no extra charge — has lower churn, meaning fewer of those customers are leaving, John Stephens, AT&T’s chief financial officer, said in a phone interview Wednesday. But very few of AT&T’s 75 million postpaid wireless subscribers actually have that specific plan (and in fact, overall churn was up at AT&T in the latest quarter). The goal is to use the new HBO Max app to achieve the same reduction in churn across a broader swath of its subscriber base as it has with those unlimited elite subscribers, Stephens said.

John Stankey, a longtime AT&T executive who heads up WarnerMedia and serves as chief operating officer of the parent company, took it a step further in an interview last October (see my deep-dive: “Is AT&T’s Hollywood Plot Too Far-Fetched?”). AT&T is no longer just competing with Verizon Communications Inc. and other carriers. “We need to make this move to compete with companies that are incredibly strong and capable like the Googles, Amazons and Apples of the world — and so we’re playing big,” Stankey said. His perspective is important because he could end up CEO when Stephenson retires.

Verizon has taken an entirely different tack. Instead of launching itself into Hollywood like AT&T has, Verizon has partnered with Disney+ by giving the service away free for a year to customers who sign up for an unlimited data plan. It’s a simpler, less fraught strategy, and investors have rewarded Verizon for keeping it that way. But Verizon is also no Apple or Amazon, and perhaps AT&T deserves credit for trying to be. Plenty of companies — retailers, health-care companies, grocery stores, parcel-delivery services — have been criticized for not better intuiting and preparing for how innovation by Big Tech would overtake their industries.

AT&T did what it said it would in 2019, and by 2022 it’s promising better profit margins, stronger free cash flow and a smaller debt load. It’s just that Wednesday’s results make it harder to believe the company will be able to balance it all.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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