Wednesday, October 26, 2016
Make Versus Buy in Information, Communications and Entertainment –Comparing the Strategy of AT&T with Facebook, Google and Other Unicorns
With ample lines of credit and a relaxed global monetary policy, AT&T can easily move up and down the ICE food chain with massive acquisitions. Sensing opportunities presented by changing marketplace conditions and threats to legacy business lines, the company has opted to buy market share and expertise. Other major ICE ventures have opted to make new products and services, or to blend make and buy as appropriate.
I believe differences in strategy largely depends on the confidence a venture has in its ability to integrate acquisitions into the family by exploiting the skills, expertise and market share the acquired venture offers. We hear how merged companies will exploit synergies and efficiencies, but doing this requires great finesse. Can AT&T embrace people, plans and skills not invented from within?
Consider what Amazon, Facebook, Google, Microsoft and other major firms have done on the make versus buy dichotomy for telecommunications transmission capacity. These firms have opted to build undersea fiber optic transmission capacity rather than lease it from incumbent carriers on a cost plus, plus basis.
Making content carriage instead of renting it makes absolute sense, because content companies can achieve savings in a major cost center, but one that is fungible. In other words, transmission capacity has substantial costs that content companies must incur, but transmission capacity does not significantly differ between carriers, or between a self-provisioning venture and one that leases capacity.
Content does not have such fungible characteristics, because of a far wider range of good versus bad quality. Fiber optic transmission capacity matches, best practice, global standards, while content can be nation specific, idiosyncratic and quite risky to produce. Perhaps Netflix has found ways to reduce risk of failure through data mining and a business plan where even large investments in single series will not threaten the ongoing viability of the company. Generally speaking, even today, generating a winning content formula involves gut instinct, a long learning curve and many failures. That explains why producers stick and copy with winning formulas resulting in countless sequels, prequels and duplicates.
AT&T has ample funds to experiment, but with such a deep pocket the company risks buying at the top of a market and paying too great a premium over the stock price. Consider its $48.5 billion DirecTV acquisition. AT&T has bought a venture that has substantial recurring investment costs including the satellites with ten year useable lives and launch technology that historically has a one third probability of failure or live reducing anomaly. Worse yet, AT&T did not get any internally generated content for its investment, at a time when consumers appear increasingly disinclined to pay for large and costly bundles of content, only a small portion of which they want to view.
On the other hand, AT&T has grown and become a major powerhouse through successful acquisitions. Only AT&T and Verizon remain from the seven divested Bell Companies. Additionally AT&T knows how to bundle services and bill for it.
Maybe AT&T can keep its acquisition success streak intact. If it succeeds, it will have beaten stiff odds and proven its superior management skills, forecasting talent and business acumen.
Sunday, October 23, 2016
AOL-Time Warner ($160 Billion in 2000) vs. AT&T-Time Warner ($85 Billion in 2017): Is It Different This Time?
A little over 16 years ago, the merger of Time Warner and America Online resulted in an unprecedented loss in market capitalization. Visions of synergy, efficiency and enhanced share valuation evaporated as reality kicked in quickly. By 2002, the merged company already had to write off $99 billion in goodwill, an implicit recognition that a lucrative transformation did not occur. See http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/.
A significantly changed Time Warner, in a substantially changed marketplace, welcomes another mega-merger. Proponents invoke the common refrain: This Time It’s Different.
So is it? The answer lies in the changes in the company, AT&T and the information, communications and entertainment (“ICE”) marketplace.
Time Warner has largely spun off non-core ventures, ironically an elimination of the vertical integration AT&T now seeks to achieve. Time Warner now concentrates on content creation and distribution. AT&T has invested heavily in migrating from wired and wireless telephony into a fully integrated and ubiquitous ICE venture. Like Time Warner, AT&T recognizes the absolute need to change its market targets, or risk loss market share and declining prospects. AT&T sees content ownership as key to its survival as the content carriage business declines.
So far so good: AT&T vertically integrates and move up the ICE food chain into content creation. It can better manage its transformation (there’s that word again) into a one stop shop for content access via any medium, including satellite, fiber, copper and terrestrial radio spectrum.
AOL and a more diversified Time Warner had similar goals and expectations. To put it mildly, it did not work out as planned. AOL’s stock capitalization dropped from about $226 billion to $20 billion. The merged company could not come up with a successful strategy for managing the transition from a narrowband, dial up Internet access environment to one with easy and low cost market access by content and app makers using the broadband networks of unaffiliated carriers.
Even if “necessity is the mother of invention” and adaptation, AOL-Time Warner could not make it work. Maybe AT&T-Time Warner can with new synergies and enhanced consumer value propositions. For example, AT&T offers its wireless subscribers a nearly unlimited data plan if they add DirecTV. Such upselling and bundling positively exploits synergies and the merits in one stop shopping.
We shall see in 2017 onward, because I expect the deal to achieve grudging, conditional, but not harmful regulatory approval.