In Focus: AT&T Value or Trap?
May 2009, Time Warner announces it will spin off America Online (AOL) as a separate company. The announcement would bring an unceremonious end to the eight year marriage of the two companies.
The merger of old Time Warner and new AOL was announced back in 2000 by AOL. AOL, the relatively new kid on the block was buying an old media company in what would be the largest merger in U.S. history at the time. The newly formed business was supposed to usher in a new type of media company, and lay a path for other new and old media companies to follow.
Unfortunately for investors the synergies that the two management teams had hoped for never materialized for the mega media company. From the day before the merger, up to the eventual split Time Warner's stock dropped 80%. The merger was a disaster. Ted Turner, Time Warner's largest shareholder at the time lost $8 billion of his worth, and other investors lost billions of dollars on what would be labeled the worst deal in history.
Time Warner would eventually recover from the failed AOL takeover just by having ownership of an extreme amount of content, which during the digital era became a very valuable commodity. The digital era made content king, and that made Time Warner a major target for any old company looking to make a place for itself in the digital era.
Old, Lost, and Confused
AT&T (T), a company which has found itself behind the curve for the last 20 years envisioned a play where it could make itself new and relevant again. The telephone giant would purchase Time Warner in 2019 for $85 billion making the old company, not quite so old.
But a new partner, with new content, new offerings, and the same old management, equates to an old, just not so old company.
In the world where AT&T was a titan, people paid for everything, all of their goods, and all of their services. People did very little for free outside of broadcast television. When AT&T was king, local calls cost a certain amount of money per minute, long distance calls cost two times as much as local calls did, and international calls were two times the cost or more of long distance calls. When the internet spread, and dial up was king, AT&T experienced another win, as homes across the U.S. added a second home line just for their internet, and AT&T got to charge consumers by the minute for the time they were connected to the internet.
AT&T would learn the hardware that the digital era and the era of the internet was about value and ecosystems. Companies like Google (GOOGL) copied Microsoft's top selling Office program and allowed customers to use it for free, giving Google search users more reason to stay in the Google ecosystem. Before that Yahoo (VZ) gave users access to free news, sports scores, and stock prices. What Yahoo provided for almost nothing, newspapers charged for. Giving consumers "free" products and services in hopes that they stay engaged with a website or an ecosystem was becoming the new way of doing business. Charging customers for every single thing a company produced was dying, AT&T and others never got the message, and still haven't.
Help Us... You're Our Only Hope
Jason Kilar, the fairly new CEO of Warner Media (the Time Warner division of the new AT&T) is the only member of AT&T's top five leaders with a background in new media. Kilar was the founding CEO of Hulu and co-founded an online video platform Vessel, which was later acquired by Verizon. The rest of AT&T's top five are people with a lot of experience in old media and old business.
What separates the winners from the losers in the digital era is value and distribution. Customers gravitate towards platforms, services, and ecosystems where there is a perceived sense of value (Amazon Prime, the Google ecosystem, and Netflix (NFLX)) and where the content is easily accessible. The assumption by me is that Jason Kilar understands this concept, but do the other leaders of the new AT&T understand it?
My initial answer is no. If value and distribution are truly the keys of success for a new age media company, then Apple got it right by offering a free year of Apple TV+ to every new iPhone, iPad, and Mac purchaser. AT&T wasn't so generous with it's HBO Max offering.
HBO and the ideal of HBO Max was the meat of the AT&T - Time Warner deal. If rolled out properly HBO Max would be a legitimate competitor to Netflix and add another subscription based revenue stream to AT&T's business.
HBO Max gained 4.1 million subscribers within the first month of its launch, a nice number, but still a long way off from Netflix's 72 million subscribers and Disney Plus' 60 million subscribers.
Bulls and Bears
Currently AT&T's stock trades at $28.04 per share, down 28% for 2020, but it is still attracting investors who are mesmerized by the 7% dividend ratio ($2.08 per share) and a forward P/E of 8.77x as of this writing.
A recent Forbes article suggested that the stock is oversold from a technical analysis point of view. Fundamentally, there aren't many believers on Wall Street. Most buy cases for the stock revolve around the high dividend yield, but with the caveat that the dividend ratio is high for a reason (because the share price is falling).
The AT&T bears point to the company's massive debt load, $175 billion. Pre-COVID-19 the plan for AT&T was to divest assets and pay down their debt. But when the coronavirus appeared the company had to tap the debt markets, and issued $3 billions in new debt in May 2020 to boost its liquidity.
Content in the Wrong Hands is Worthless
Investors should not be blinded by the AT&T dividend or the digital streaming aspect of the business at this point. It's still an old company trying to figure out how to be new.
The content is there for the company to be a real player in digital media, but good content in the wrong hands can be worthless, and to date AT&T has not proven they are the right hands for all that Time Warner/ Warner Media provides.
AT&T is still stuck in doing business the way it did business when it dominated the telephone industry. It still wants to charge every customer it can for every product and service leaving the building. For AT&T wireless customers, only those with an unlimited plan and 5 phone lines are eligible for a free HBO Max subscription. With over 150 million wireless customers, I expected AT&T to follow Apple's lead and give six months to a year of free HBO Max to any AT&T subscriber starting a new contract, a move that I felt would've provided value for its customers, and distribution for its content, but it dropped the ball.
The lesson for investors is to be weary of the old merging with the new, it rarely ever goes well. Old companies and old executives who reigned during the days where the consumer paid for everything upfront continue to have a hard time adapting to the new way of doing business in the digital era. Their failure to recognize and play by the new rules stunts growth for their companies and investor portfolios.
Side Note: Why is Quibi Failing?
Quibi, the struggling content company that launched in April 2020, has several well known giants of old media running the show and one former Netflix executive, Juan Bongiovanni. There is a lot of old thinking in the C-Suite at Quibi. This became very apparent when people for MrBeast reached out to Quibi for a content deal and Quibi passed. MrBeast is one of the most successful and relevant content creators on the YouTube platform, and currently has over 43 million YouTube subscribers.
Quibi is expected to end 2020 with 7 million subscribers, which is 30% below their target according to Variety. Quibi execs have blamed the pandemic for the app's struggles out the gate. But it's not the pandemic, it's their old way of thinking.