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As wireless growth slows, AT&T lays bet on mobile TV; Verizon looks to Silicon Valley

By Ryan Knutson 

Faced with the same saturated wireless market, the nation's two biggest telecom companies have placed divergent bets on the future.

With its $85 billion agreement to buy Time Warner Inc., AT&T Inc. has turned to television while Verizon Communications Inc. has looked to Silicon Valley, with its $4.4 billion purchase of AOL last year and pending $4.8 billion acquisition of Yahoo Inc.

Both operators are trying to solve the same riddle -- each with a different piece of the ill-fated 2001 merger of AOL-Time Warner. They both have millions of wireless subscribers who pay monthly fees to use their networks to share photos, watch videos and tap into social networks. But that wireless business alone lacks the means to drive growth now that the majority of Americans have a smartphone. At the same time, their two smaller rivals are chipping away at their subscriber base.

"They need to find a path forward for their core U.S. business that offers something better than inexorable decline," said Craig Moffett, an analyst at MoffettNathanson LLC. The internet, mobile phones and smartphones fueled rapid growth, but "for the first time in memory, there is no 'next big thing' in telecom."

AT&T's agreement to buy Time Warner doubles down on its view that traditional television's future is mobile. Last year, it bought satellite television business DirecTV for $49 billion, making the former Baby Bell the country's largest pay television provider. With Time Warner, the company would get a rich lineup of networks like HBO, CNN and TNT plus a library of TV shows and movies with its Warner Bros. studio that could help support a video streaming service it is developing.

"A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that," AT&T Chief Executive Randall Stephenson said in statement announcing the Time Warner deal.

The strategy to bring an entertainment provider together with a distribution network has been tried before when Comcast bought NBCUniversal, and was part of the logic behind AOL's 2001 merger with Time Warner. AT&T will have both satellite and mobile subscribers to serve up Time Warner's roster of movies and popular television programs.

Verizon, meanwhile, is building up an online advertising business based on its 2015 acquisition of AOL. It has said it wants to rival Facebook Inc. and Alphabet Inc.'s Google in web advertisements and considers its Yahoo deal as a part of that platform.

It has also invested in lesser known media companies that have tens of millions of young followers, such as Complex Media and AwesomenessTV. That content, which Verizon hopes will one day help disrupt legacy media businesses, is being distributed via its mobile video app, called go90.

"We're skating to where the puck is going," Verizon CEO Lowell McAdam said at an industry conference last year.

Both strategies face challenges. For AT&T, DirecTV has been losing subscribers, and cord-cutting upsets the business model Time Warner has long relied on. Nor will it be easy for Verizon to repair a weakened Yahoo and convince young people its video app is worth watching.

The pressure facing the companies is intensifying. In Verizon's third-quarter earnings, the carrier had its second straight quarter of declining revenue after six years of growth, and suffered a net loss of 36,000 of monthly phone subscribers. Even more monthly wireless customers have left AT&T.

Verizon Finance Chief Fran Shammo said the amount of money consumers are willing to pay for phone, internet and TV services has been flat for nearly two decades, "so we have to think about a different way to monetize our network."

Videos make up the bulk of the traffic on smartphones, but no wireless carrier has found an effective way to make money off it. Mobile apps like Facebook, Apple Inc.'s FaceTime and WhatsApp destroyed carrier revenue from voice minutes and text messages, but charging for increased data usage is hard because of intense price competition between the four national carriers.

The carriers also face new competition from cable companies. Comcast and Charter Communications Inc. say they plan to offer mobile phone service, though for now that will largely be done by reselling Verizon's connection.

Jonathan Chaplin, an analyst at New Street Research, says AT&T and Verizon's underlying strategies are similarly seeking to create value from their network infrastructure by adding content.

If AT&T succeeds in acquiring Time Warner, "they will have dramatically reduced their exposure to U.S. wireless in the space of just a couple of years," Mr. Chaplin said. "Verizon has been more tentative, with small acquisitions that won't hurt too much if they turn out poorly."

Mr. Shammo said Thursday that the carrier doesn't feel the need to do a large deal.

Last year, AT&T's Mr. Stephenson asked a group of interns at the company's Dallas headquarters whether they paid for a monthly TV subscription. Only one said yes and many said they used their parents' login credentials to watch TV over the web. Mr. Stephenson felt that showed young people wanted traditional television packages, just delivered in a different way.

Verizon executives, finding similar trends, drew a different conclusion.

"Millennials don't want linear TV content," said Mr. Shammo, on a call last year with analysts. "They're disconnecting their cable for just internet content and mobile content."

Write to Ryan Knutson at ryan.knutson@wsj.com

(END) Dow Jones Newswires

October 24, 2016 02:48 ET (06:48 GMT)

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