As I write this, everyone on the tech beat is talking about net neutrality. Net neutrality, the idea that carriers should not discriminate for, or against, specific web sites, is going to be overthrown by the FCC, fulfilling Donald Trump’s campaign promise to carriers such as AT&T Inc. (NYSE:T) and Comcast Corporation (NASDAQ:CMCSA).
Web site owners large and small, led by Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and a handful of other Big Tech companies, including Facebook Inc (NASDAQ:FB) and Microsoft Corporation (NASDAQ:MSFT), are supporting the protesters, who argue the carriers could discriminate against their offerings, and force captive customers to use content their own, as from Time Warner Inc (NYSE:TWX), which AT&T is buying, or NBC Universal, which Comcast owns.
The plain fact is that most internet profits go to service providers, not to carriers. This is by design. The network is a utility. It’s supposed to be “stupid.” Carrier advocates say this leads to monopolies on content, an antitrust violation.
It’s to fight this concentration that the carriers are going after big content in a big way. Verizon Communications Inc. (NYSE:VZ) bought America Online and Yahoo. It recently shot down talk of buying Walt Disney Co. (NYSE:DIS).
But this could always go the other way. If companies like GOOGL were truly worried that big, bad telecoms were about to crush them by steering people to their own offerings, the solution is in their own hands.
They could buy the carriers.
What If Google Bought AT&T?
As the market opened July 13 Alphabet was worth $662 billion. Microsoft was worth $549 billion, and Facebook $466 billion. AT&T, which is down 13% on the year, is now worth $225 billion. Comcast, which is up a like percentage, is worth $185 billion.
This means that Alphabet alone could offer $200 billion in stock and $50 billion in cash, taking out AT&T shareholders with a healthy premium. AT&T’s $12 billion in annual dividends, 49 cents per share yielding 5.32%, would go right to Alphabet’s bottom line. It could re-invest them in the network, hand it to its own shareholders or just know that AT&T shareholders now have a better currency, one that’s rising in value, and cash in their pockets.
GOOGL tried to compete with AT&T earlier this decade, with Google Fiber. It launched the service in a few cities, and promised to deliver 1 Gbps service in several more, including Atlanta. Since promising last year it would continue the build-out in markets like Atlanta, construction has stopped. There’s dark fiber behind my house.
The reason construction stopped is because Google couldn’t compete. It could not win enough customers, even with low prices and faster speeds, to justify the expense of digging up streets. Much of the $855 million it lost on “other bets” in its first-quarter report, against $244 million in income, represented Google Fiber.
Getting the deal done would not threaten the operating control of co-founders Larry Page and Sergey Brin. They could simply print GOOG stock for AT&T shareholders, and not touch the GOOGL shares, which have the voting rights. They might promise, as a condition of the deal, to obey the Title II regulations they say AT&T should be following.
AT&T would not only give Google a huge chunk of the Internet core, and millions of captive wireline subscribers, but the largest chunk of the wireless market. It would seem to be a no-brainer.
Only, it isn’t.
Site Trumps Network
If Google proposed this kind of deal, its valuation might drop by as much as one-third. Its revenues would more than double, but its margins would be cut. Worse, it would be opening itself up to regulation competitors like Facebook and Microsoft don’t face.
No, this is a dumb deal. It won’t happen. And that is why GOOGL is waving a virtual picket sign instead of doing anything meaningful to solve the problems it sees with the end of net neutrality.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
