AT&T Looks to Transform Itself Into a Cloud Czar

Advertisement

AT&T - AT&T Looks to Transform Itself Into a Cloud Czar

Source: Shutterstock

Now that AT&T (NYSE:T) has finished swallowing Time Warner, renaming it WarnerMedia, its true ambitions have become clear.

AT&T wants to be a Cloud Czar.

AT&T is already a huge company. It had revenues of $160 billion last year, before it bought Time Warner. It has a market cap of $235 billion.

But Facebook (NASDAQ:FB), the smallest of the five companies that dominates cloud computing in this decade, opened for trade Tuesday with a market cap of $592 billion. The other big cloud players are another $200 billion further on.

CEO Randall Stephenson’s plan for making up the gap is to use WarnerMedia content, and an ad platform called AppNexus, to replicate what the Cloud Czars do online, then build out AT&T’s cloud footprint to match them.

Investors don’t believe it will work.

Make HBO Netflix

The first step in the plan is to turn HBO into Netflix (NASDAQ:NFLX), which has a market cap of $182 billion, and which could, if present trends continue, equal AT&T’s market cap on its own.

John Stankey, AT&T’s top media executive, recently told HBO it needs to raise market penetration and be more like Netflix, something people watch for “hours a day” instead of “hours per week.”  The data from that would then go into AppNexus, which would push the company’s ad revenues to the sky.

The HBO Now streaming service has 5 million subscribers, against 125 million for Netflix. Stankey thinks it can make up the gap by ramping up content production and pushing that content on its UVerse and AT&T Wireless customers.

The end of net neutrality, which AT&T pushed for, lets it give away the bits of HBO, on wired and wireless platforms, while continuing to charge for those of Netflix. The problem is that data caps that were meaningful five years ago are, with 5G and fiber, irrelevant today.

The only way to make HBO into Netflix is to increase the programming budget, and Stankey didn’t promise that.

Squeezing the AT&T Customer

To get more budget for content, AT&T is already squeezing customers, hiking prices on DirecTv Now and increasing phony fees that go directly to its bottom line. Customer pushback has already begun.

This is the problem. The Cloud Czars give away user-generated content, and their costs for delivering it is nominal. AT&T charges for content, and the cost of last-mile systems is enormous.

AT&T’s capital budget will be $25 billion this year, against Facebook’s $14 billion.  The difference is that Facebook’s spending gives it new capacity, while AT&T’s spending just keeps up with customer demands.

A family buying UVerse and AT&T Wireless services pays over $400 per month for the privilege. (Full disclosure — I do.) We notice phony fees and price hikes. We complain when service goes out, not to Facebook, but to AT&T. A customer using Facebook pays nothing, and Facebook’s revenues are just one-quarter of AT&T’s.

But over one-third of Facebook revenue goes to the net income line, which is growing 50% per year.  AT&T took less than 19% of its revenue to the net income line last year, and half of that is required to pay the $2 per share annual dividend on 7.33 billion shares. Facebook has no debt. AT&T has $125 billion in debt.

The Bottom Line on AT&T

AT&T made its choice decades ago, before the Web was spun. It chose to be a dividend stock, requiring profits before investment. The Cloud Czars build before they monetize.

Buying content, and forcing that down the throats of captive consumers, isn’t going to make AT&T into Facebook. The only thing that might? Selling the company to Facebook.

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.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/att-t-stock-looks-transform-itself-cloud-czar/.

©2024 InvestorPlace Media, LLC