October greetings from Lake Norman the place we’re having fun with an virtually excellent fall.  Pictured is Monday night’s peaceable Lake image from our dock.  The view by no means will get outdated. 

This week’s Transient is dedicated to diagnosing AT&T’s illness.  We’ve highlighted their misplaced market worth regularly this 12 months (see newest chart under), and the corporate’s underperformance is obvious.  We are going to chronicle their current strategic strikes, and try and diagnose the “cocktail” required to heal the affected person.

The week that was

The Fab 5 had a little bit of a bounce again this week, including greater than $277 billion (a bit of over one Verizon) in market capitalization.  There have been broad good points throughout every inventory, with notable power in Amazon (+$82 billion wk/wk), Microsoft (+$74 billion) and Apple (+$69 billion).  Subsequent Tuesday, Apple will probably be holding an occasion the place we must always see the brand new 5G-equipped iPhones (extra on what to anticipate from CNET here).  We’ll cowl that evaluation in subsequent week’s Transient. 

The Telco High 5 continued to hover round breakeven as a bunch, with elevated strain on AT&T (-$3 billion) and Comcast (-$2 billion).  As we be aware under, Comcast’s restoration from April lows has been exceptional ($49 billion recovered since April 1).  As a bunch, the Telco High 5 have recovered over $162 billion because the April 1 low. 

Former Microsoft CEO Steve Ballmer went on CNBC this week to touch upon the House Committee’s report on Antitrust actions of Amazon, Apple, Google, and Fb (a bit of over 3 minutes of that interview is here).  Ballmer, who appears politically impartial, began the interview with the assertion “Once I learn this report, it blew my hair again – that’s how loopy [the report was].”  Ballmer went on to say that there continues to be a necessity for some authorities regulation of expertise, and that these giant corporations ought to have interaction with regulators now. 

Along with Ballmer’s feedback, WIRED columnist Steven Levy penned one of the vital insightful columns on the report Friday.  Whereas prolonged, Levy describes the underlying situation as being a lot bigger than tech:

“The questionable conduct the committee exposes within the hundreds of pages of proof right here is much less in regards to the uniqueness of tech platforms than it’s about how our system permits corporations from any business to conduct themselves. The large, anticompetitive acquisitions listed within the report—like Fb’s purchases of Instagram and WhatsApp—are a lot within the spirit of mergers we’ve seen in industries like banking, media, and airways. If regulators look the opposite means when grocery store chains favor their home manufacturers on show, why be stunned when Google pushes its providers on search pages, and Amazon sends us its Fundamentals line after we bark a request to Alexa? When a sport firm is deprived by paying 30 % of its income to Apple—whereas Apple’s competing product pays nothing—it sounds just like the routine battle of cable networks who favor content material they personal over these of corporations who don’t have unique entry to customers. The report even takes the tech corporations to job for utilizing a few of their fortunes to rent lobbyists to curry affect. Like, um, each different large business in America? And, hey, Congress, whose fault is that?

In different phrases, Large Tech is doing enterprise the American means. Exposing the sins of Amazon, Apple, Fb, and Google is like pulling a curtain from a mirror.”

This isn’t the final we’ll hear from tech media on the Report.  However the Home Subcommittee’s place, that structural separation of market leaders is one of the best ways to regulate anti-trust conduct, is unquestionably aggressive (and, as analysts instructed this week, tone deaf to the speedy adjustments that redefine markets and competitors every month).  This isn’t the final commentary we have now heard from the tech neighborhood on this matter, and each Steven and Steve make some salient counterpoints to the report.

Curing AT&T’s Illness – Telecom 3Q Earnings Preview (Half 3)

There’s one thing mistaken with AT&T and shareholders comprehend it.  The inventory’s incapability to recuperate from pandemic lows earlier within the 12 months (one thing Verizon and Comcast have carried out – see close by chart) is noticeable.  Over the previous 12 months (excluding the yield influence of dividends), AT&T’s has underperformed Verizon by 22% and Comcast by 40%.  Many questions are being raised by institutional holders, retirees, and potential companions about AT&T’s technique and techniques.  In brief, AT&T is sick, however there is no such thing as a consensus on the particular sickness. 

This week, AT&T CEO John Stankey gave an in depth interview this week to The Wall Road Journal (article here) the place he known as offers “step one in a “wash-repeat cycle” that firm leaders have used successfully for many years to construct a continually evolving money generator.”  Stankey went on to remark that AT&T’s excessive yield (ensuing from its continued low inventory value) “doesn’t make sense to me, and I can solely conclude we should not have carried the day in individuals believing in that regard.  However the choice to get to this place was a acutely aware one.”

We’ve studied AT&T’s historical past for just a few many years now (see our Briefs here and here), and have come to the conclusion that AT&T a) has a poor observe document executing most acquisitions (this goes way back to 1991 and NCR), and b) regularly adjusts their technique to rationalize particular acquisitions, a coverage we discover each disturbing and harmful. 

As mentioned under, we see the next hill for AT&T to climb as a broadband challenger to cable and doubtlessly wi-fi alternate options (as one of many linked articles above signifies, they’re not an incumbent), and likewise consider that they are going to deplete worth via aggressive bundling techniques (beginning with HBO Max).  Backside line:  AT&T isn’t terminally unwell – every situation we describe under could be mounted – however the timing and nature their path to full well being stays unsure.

The present image:  Broad-based broadband averageness

“What’s AT&T actually good at?” one among you requested me just a few months in the past.  My first thought was “relationships.” Whether or not it’s document low postpaid cellphone wi-fi churn, or their long-standing relationships with federal (DoD this week), state, and municipal governments (or enterprises), AT&T has a protracted historical past of nurturing their relationships. 

These relationships are challenged, nevertheless, as new applied sciences emerge.  Their bread and butter legacy (voice) providers have been diminished to a mere 6.4% of revenues in 2Q 2020.  That’s primarily a operate of engaging substitutes resembling desktop VoIP/ video/ conferencing,  cable (VoIP) residential and SMB providers, and wi-fi substitution.     

Nowhere has the expertise influence been better than in client and small enterprise broadband.  Cable DOCSIS commonplace has dominated DSL (no matter taste) for the final 12 years.  The influence of information and voice losses has created a “Swiss cheese community” of penetration.  AT&T has dedicated to deploying further fiber (see AT&T Communications’ President Jeff McElfresh’s feedback here), however, as proven under, the corporate has merely managed to stem the bleeding from IP-Non Fiber clients via fiber upgrades.

AT&T’s broadband connections have fallen 1.2% because the starting of the 12 months.  The quarterly development price of their flagship AT&T fiber product is now 5-5.5% (4Q 2019 – 2Q 2020), down from double these ranges in 2018.  New housing begins are nonetheless robust, even when multi-family housing was down in August.  Pending residence gross sales are at record levels.  Why is the fiber enterprise development stagnant?

Our solely clarification for that is poor native market execution.  This begins with a mentality that makes an attempt to use the identical mass market “wash-rinse-repeat” method that’s used for Apple cellphone launches.  Native wired connections are totally different – they require an understanding of each foot deployed to the pole (if aerial) and from the pole to the house/ house.  Native data, monitoring, and follow-up is required.  AT&T seems to lack this functionality, particularly in comparison with their cable rivals.  

T-Cell took direct purpose at AT&T’s IP-Non Fiber and DSL base this week with the launch of their Dwelling Web product in 450 communities ($50, taxes and charges included, no month-to-month commitments).  From our channel checks, it seems to have been met with overwhelming response.  Listed below are just a few of the AT&T “cities” the place T-Cell is providing the service:  

    • Atlanta- Sandy Springs- Alpharetta, GA
    • Birmingham, AL
    • Charlotte- Harmony- Gastonia, NC
    • Chicago- Naperville- Elgin, IL
    • Detroit- Warren- Dearborn, MI
    • Jacksonville, FL
    • Indianapolis- Carmel- Anderson, IN
    • Kansas Metropolis, MO
    • Louisville, KY
    • Los Angeles- Lengthy Seashore- Anaheim, CA
    • Miami- Ft. Lauderdale – Pompano Seashore, FL
    • Saint Louis, MO
    • San Francisco-Oakland- Berkeley, CA
    • San Jose- Sunnyvale- Santa Clara, CA
    • San Diego-Chula Vista- Carlsbad, CA

In contrast to wi-fi service, which includes phone quantity porting (a transparent signal that clients have switched carriers, often triggering winback efforts), attempting a service like T-Cell Dwelling Web triggers nothing besides a disconnect.  Prospects merely join the T-Cell supplied router to their Wi-Fi entry level, see a velocity change (ought to be a optimistic comparability to DSL and a few IP Non-Fiber providers), and both proceed or return the tools. 

Issues are about to get quite a bit worse for AT&T’s non-fiber residential broadband prospects, due to their Bellevue competitor.  They should reply as a challenger regionally – community accountability, quick decision occasions, power situation elimination, and maybe a daring transfer like a completely built-in relationship with Best Buy Total Tech Support

Enterprise providers relationship story isn’t significantly better

AT&T has lengthy held robust relationships with enterprise clients, together with SMB.  Because the close by chart exhibits, nevertheless, their lead on wireline providers seems to be transferring to cable.  Utilizing Q1 2018 enterprise wireline revenues as a baseline, AT&T has seen quarterly income deterioration of about 5.2%.  Comcast has seen robust development of 16% and Constitution (Spectrum Enterprise), even with adjustments to their coverage on wholesale transport gross sales to different carriers, has grown 4.4%,  Neither Comcast nor Spectrum Enterprise are newcomers to the area – their market good points will not be a shock to AT&T (or Verizon or CenturyLink).  However they point out that AT&T isn’t the chief it as soon as was in enterprise wireline.  Not so dangerous a narrative as residential broadband, however, with enterprise wi-fi providers certain to come back from Spectrum Enterprise and Comcast as CBRS suppliers (together with Dish as a bandwidth  wholesaler), AT&T’s market benefit simply received smaller – it’s one other entrance to defend. 

Coping with the consequences of a COVID-induced recession are going to influence each AT&T and cable.  They are going to each expertise potential points, particularly with high-margin business video providers (bars, eating places, and many others.).  Out of their native footprint (and particularly after the NFL season ends in early 2021), AT&T goes to battle to maintain these small companies from transferring to cheaper, higher-bandwidth choices.  And for these companies that shut, the propensity to enroll with AT&T at a brand new location will depend on bandwidth efficiency, not model.  Cable tends to win this share of recent choices, and “shaking it up” probably performs to cable’s favor. 

Little question, AT&T continues to dominate with federal, state, and native authorities enterprise, particularly in states the place they’re the incumbent communications supplier (FirstNet was an enormous win).  And, not like within the residential area, T-Cell doesn’t have the wi-fi scale (but) to firmly place itself because the SD-WAN/ small enterprise connection of the longer term.  That day is coming, nevertheless, and a swift TMO mounted wi-fi response pushed by 2.5 GHz + 600 MHz stand-alone 5G deployments might produce a headache for AT&T.

Then there’s WarnerMedia

In our earlier conversations on AT&T, we have now ignored WarnerMedia as a manufacturing home (placing it the identical context as when petroleum big Gulf+Western owned theater big Paramount within the Sixties and Nineteen Seventies).  However then we’re reminded of former AT&T CEO Randall Stephenson’s two unassailable truths:

  1. Shoppers will proceed to spend extra time viewing premium content material the place they need, when they need, and the way they need, and;
  2. Companies and customers alike will proceed to need extra connectivity, extra bandwidth, and extra mobility. 

From these rules come further methods and techniques (our interpretation of AT&T’s statements justifying the Time Warner acquisition):

    • Earnings/ money flows from content material will fund deeper enlargement of wi-fi and wireline connectivity 
    • Extra connectivity bundles will create a extremely aggressive product versus Verizon (Disney+, Apple Music) and T-Cell (Quibi, Netflix)
    • Producing extremely desired, AT&T-sourced content material will present further leverage when renegotiating retransmission agreements with corporations like Comcast (NBC Common)
    • Promoting alternatives will abound from the combination of extremely customized/ valued content material

The jury is out on whether or not it was price $85 billion in money and inventory (and one other $20 billion in debt assumption) to satisfy this imaginative and prescient.  John Stankey responded to this within the Wall Road Journal interview talked about earlier, imploring present shareholders to present the corporate extra time (presumably post-COVID) to show out the funding.  Right here’s the 8-quarter efficiency for Warner Media via 2Q 2020:

Observe the rolling four-quarter revenues line we added which exhibits that income development was starting to stall previous to COVID-19 (down 1.6% from 4 quarters ending in June vs. December) however nosedived (down 8.4%) within the first half of 2020.  Round 10% of the quarterly pre-tax section contribution could be consumed by the curiosity on the $20 billion of debt introduced into the acquisition.  Value pressures are rising, and studies of great layoffs on the WarnerMedia unit are leaking with The Wall Road Journal reporting that the most recent spherical will minimize complete prices on the unit by 20%. Conservatively, this could carry complete layoffs on the unit to ~ 5,000 staff or about 17% of the division.  

If no blockbuster emerges in 2021, what does this imply for AT&T?  What incremental income stream is required to declare HBO Max successful?  At what level is the $85 billion buy value written down (identical query for the $49 billion ($67 billion with debt) buy of DirecTV)?

The array of potential outcomes with WarnerMedia is giant, however the justification of an $85 billion buy goes to be   extremely depending on constructing blockbuster franchises.  What’s simpler to foretell with certainty is that neither Verizon (now aggressively looking for consumers for The Huffington Publish per the New York Post) nor T-Cell are going to observe on with their very own content material purchases.  

Whereas we don’t dispute Mr. Stephenson’s two unassailable information, the “subsequently we must always spend over $100 billion together with debt on WarnerMedia” has all the time been extra perplexing to us.  When an organization strikes from content material relationship administration (e.g., Verizon’s relationship with Apple and Disney+) into possession (or manufacturing administration), quite a bit adjustments.  We see the result right here as binary – both a legacy franchise is created that catapults mobility and broadband into unique/ most well-liked suppliers of content material, or inner miscues and execution failures muck up AT&T in a company quagmire simply as aggressive pressures are starting to speed up. 

Backside line:  AT&T faces the longer term as a broad-based telecommunications supplier in a world the place champions are topped for his or her agility, focus, aggressive paranoia and management.  AT&T must exit 2021 with a extra route miles of fiber, extra SMB and broadband clients, increased wi-fi and broadband ARPU and blockbuster content material franchises.  To win, they should act regionally, act competitively, and assume creatively.  The jury is out, writedowns are looming, and time isn’t on their facet. 

We might write much more on AT&T (particularly their current retailer closures – see right here for Jeff Moore @ Wave7’s take), however that’s it for this week’s Transient.  Till then, if in case you have buddies who wish to be on the e-mail distribution, please have them ship an e-mail to [email protected] and we’ll embody them on the record (or they’ll enroll immediately via the brand new web site). 

Keep secure, hold your social distance, and Go Chiefs!