Award Winning Blog

Saturday, October 22, 2016

AT&T—Time Warner and the Mixed Results in Vertical Integration by Bellheads

              Another day, another multi-billion dollar merger in the telecommunications marketplace.  See  Despite the disinformation about how incumbents have closed their pocketbooks to investment because of network neutrality and assorted regulation, AT&T appears ready to push the antitrust envelop with yet another massive $80 billion acquisition.  Not content to acquire more than 50% of the satellite television market, with its $49 billion acquisition of DirecTV, AT&T has its sights on the content Time Warner creates.

            AT&T has a business plan to integrate vertically throughout the information, communications and entertainment (“ICE”) ecosystem.  Acquisitions provide the fastest way for the company to move up and down the ICE “food chain” of content creation, syndication, distribution and delivery to consumers.

            Vertical integration can achieve operational efficiencies as a single company can achieve savings through scale and a wide footprint of related business ventures.  On the other hand, it takes remarkably talented and nimble management to handle different components in the food chain.  Companies like General Electric have succeeded, but ironically this company has launched a campaign to divest itself of non-core business lines.  Other companies have failed even when they thought consumers would welcome having a “one stop shopping” opportunity, e.g., one call to book air travel, rental car and hotel.

            Depending on how your rate AT&T senior management, the company has wisely invested in the convergence of content and conduit, or it has unwisely deviated from its true competency.  Bear in mind that at divestiture from AT&T, companies like Verizon (then Bell Atlantic) invested heavily in content creation.  Verizon failed, because it did not ascend the content creation learning curve quickly enough.

            Simply put, the ICE marketplace has Bellhead, Nethead and Contenthead players with core competencies in legacy network conduits, next generation, Internet carriage and content, and core expertise in entertainment content.  The Bellheads historically have concentrated on installing and managing the networks needed to deliver content.  Incumbent Bellheads see the conduit business as having declining profit margins coupled with substantial capital expenditure requirements in new distribution technologies.  Bellheads have a twin mission to eliminate the need to maintain the fast becoming obsolete copper wire telephone networks, but also to invest in 4th and 5th generation wireless infrastructure.  Additionally, they hedge the network bet by moving up the food chain into content.

            Bellheads envy the profit margins Contentheads sometimes achieve and the business plans of some Netheads who use software to achieve unicorn status (multibillion dollar valuation with miniscule staff and investment) by using Bellhead networks for value added content delivery.

            Can you teach old dogs new tricks?  Bellhead telephone company senior management have to acquire the skills and understand the culture of Netheads and Contentheads.  Companies like Verizon and AT&T have made the transition into the Nethead world through acquisitions of companies such as MCI and UUNet.  Now comes an even harder challenge to embrace the Contenthead culture of Hollywood.   Good luck with that!

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