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AT&T & Verizon admit defeat. AT&T and Verizon’s failure to differentiate themselves through media consumption is a stark warning to all telco operators

For more than 20 years, I have analyzed the global technology sector and prepared equity sell side research, first for Nomura Securities, and now for my own firm Radio Free Mobile. I have a PhD in physics which allows me to analyze the engineering of technology as well as the finance. My daily newsletter describes technology and business models in a crisp, bulleted, bottom line summary.

Here is my analysis on Telco operators as Packet pushers and how they failure to differentiate themselves through media consumption.

  • 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 mold.
  • 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 sold it as my reason for holding it has now evaporated.

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