Analysts are starting to pound the table for AT&T Inc. (NYSE:T), saying its big court win to get Time Warner Inc (NYSE:TWX) and the end of net neutrality guarantee its dominance over consumers.
I’m one of those consumers. I pay AT&T nearly $400-per-month for my family’s TV, internet and wireless services. That’s due to go up as my two-year “teaser rate” expires. I am also an AT&T shareholder, and the dividends are sweet.
But to pretend, as some now do, that AT&T is now about to put Netflix, Inc. (NASDAQ:NFLX) out of business and squeeze Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) is to completely misread how the competitive landscape has shifted over the last decade.
The Era of Cloud
AT&T skipped the cloud era, preferring to continue its very-generous dividend (thank you again), and double down on last-mile assets.
The Cloud Czars — Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Alphabet, Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc. (NASDAQ:FB) — have since built a cloud internet that rides over the consumer internet, at terabit speeds. These companies — not AT&T — are now spanning the oceans with fiber cable. Between them, their market cap is almost $3.9 trillion as trading opened June 13, while AT&T is worth just $211 billion.
While AT&T generates $160 billion in revenue each year, both Apple and Amazon generate far more. While AT&T brought 18% of that revenue to its bottom line, the profit margins of the cloud czars are far higher.
AT&T stock fell after Judge Richard Leon ruled it could buy Time Warner because investors realized it has to pay for it. Time Warner’s $85 billion price tag means its shareholders will own about 14.4% of the combined entity, which will be burdened by another $40 billion in debt. AT&T had $125 billion in debt on $444 billion in assets at the end of March.
Unlike the Cloud Czars, which usually buy their assets for cash, AT&T regularly takes on substantial debt to build and maintain its last mile facilities. Much of its wired network still runs on copper. The company was a minor player in the 2017 spectrum auction because it couldn’t afford to buy more, and another auction, for 5G services, is due to start within months.
TV Not So Fast
When net neutrality was first being debated a decade ago, TV streams represented the cutting edge of consumer service. Today you can stream video in as little as .5 megabits per second, HD video at 5 megabits, in a world where broadband is defined as requiring connections at 25 MBps.
Both Netflix and its rival services, Amazon and Google’s YouTube, have been working on technology to make last-mile service more efficient, and less intensive for ISPs such as AT&T. Netflix’s Open Connect, and Amazon’s chip-making efforts, are both aimed at reducing the load.
Also, 5G services will be even faster. Once that technology is defined, Google is expected to expand its Google Fiber plan, overbuilding AT&T’s most profitable service areas.
AT&T is not going to slow down Netflix to make it unwatchable. Instead it will try to bundle content it owns as “free” service, inside its internet contracts, as part of the industry’s TV Everywhere plan. In other words, instead of charging more for others’ services, it will make its own services free.
The Bottom Line on AT&T
The media “giants,” not just AT&T, but Comcast Corporation (NASDAQ:CMCSA), Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOXA), are tiny next to the cloud czars.
They’re tiny for a reason. It’s the cloud’s world, and they must adapt to it. The cloud czars can buy out their media “competitors” and not even notice. AT&T knows this. The Time Warner buy makes it competitive, but it’s too late for it to dominate the future. The cloud train has left the station.
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 shares in T, AMZN and MSFT.
