AT&T and Verizon’s failure to differentiate themselves through media consumption is a stark warning to all telco operators that they need to do something very special in order to avoid being packet pushers.
First, it was Verizon that decided that it was unable to make a go of its 3rd rate media assets and sold them to Apollo which somehow thinks that it can do better.
This did not come as a huge surprise as the current CEO of Verizon comes from a company that also struggled with media and eventually returned to its roots of selling the equipment for pushing packets.
Verizon had already written down the majority of the goodwill attached to these assets and took a further hit when it agreed to sell 90% of these assets to Apollo for $5bn.
Verizon failed because it lacked the depth of management to turn these assets around as well as I suspect the will of its senior executives.
Then on Monday, AT&T announced that it would spin off its media a mere three years after paying $109bn to acquire Time Warner and saddling itself with mountains of debt.
AT&T’s media assets will be combined with Discovery to create a separate entity of which the vast majority of the shares will be distributed to existing AT&T shareholders.
However, AT&T wants to paint this, there is no way to escape the fact that this is an embarrassing about-face in terms of strategy and that AT&T shareholders have been paying the price for poor execution on media since 2014.
I think that only the very high dividend yield has supported the valuation of this company.
It is clear that both Verizon and AT&T will now focus on delivering the fastest, most reliable, and cheapest mobile network available and will compete purely on this basis.
In effect, they are becoming commodity packet pushers and all other telcos should look at these events to decide what strategy suits them best.
I have advocated for more than 15 years that a telecom operator has one of two strategic paths to go down.
- First, packet pusher: Here, the telco focuses on being the fastest, most reliable, and cheapest provider of connectivity.
- There is some differentiation to be had by combining fixed, mobile, and maybe content connectivity, but in the end, it will always come down to price.
- This means that the telco must also be the lowest-cost provider of packets as it will always be forced to compete on price.
- Scale will also be a factor here as operating leverage will also be a factor in determining profitability.
- I have always believed that this is the default route that a telco will be forced to take unless it is capable of doing something different.
- Second, Differentiation: This is where the operator decides to try and add value to its packets through the provision of services that are exclusive to its network.
- Assuming that the service is popular, then the operator would be able to charge a premium price for its packets as users would be willing to stay in order to get access to the other services.
- There are many variations of this strategy, the latest one being AT&T and Verizon’s attempts to compete in the digital media bonanza.
- Operators have also tried custom phone software, digital services, digital assistants, and so on but with very little success to date.
The latest events are yet another example of how hard it is for telecom operators to break out of their connectivity mould.
There are many examples of how not to execute the differentiation strategy, and so far, no one has really worked out how to compete on this basis.
With the biggest operators who have the most resources now admitting defeat, the hill for the smaller operators to climb now appears to be much higher.
However, the smaller operators can be more nimble and take more risks so it is not impossible that we finally see some innovation in this sector.
I have been holding AT&T for its dividend and for the potential for it to take a bite out of Netflix, but I have now sold it as my reason for holding it has now evaporated.