By Drew FitzGerald and Sarah Krouse
A maturing wireless industry has drawn sharply different
responses from industry leaders AT&T Inc. and Verizon
Communications Inc., two companies that used to move in tandem.
AT&T is diving headfirst into entertainment and advertising,
spending tens of billions of dollars to control in-demand
programming like HBO's "Game of Thrones" and live National
Basketball Association games on TNT that it can distribute
throughout its wireless, satellite and fiber-optic networks.
Verizon, meanwhile, is doubling down on wireless-network
upgrades to enable the commercial use of 5G technology, counting on
industrial and consumer uses beyond smartphones to deliver a fresh
wave of revenue. The media assets it owns sit in a small unit that
includes advertising technology and an eclectic group of websites
like HuffPost and Yahoo Sports.
AT&T and Verizon are the two largest wireless carriers in
the U.S. by total subscribers. But they're under pressure to find
new sources of revenue beyond wireless services, where there is
limited room for growth. Software and media companies have captured
most of the earnings from a mobile economy built atop wireless
networks, a fact not lost on either company.
"Both of them have suffered from Google envy almost from the
beginning," says Roger Entner, chief of wireless-industry research
firm Recon Analytics Inc. "They are looking at the same facts and
came up with vastly different decisions."
The different game plans have driven a divergence of stocks that
used to move in the same direction. AT&T shares have slid 10%
over the past year as investors worry about its debt burden.
Verizon shares have gained 30% over the past 12 months after five
years stuck in neutral.
Lesson learned
AT&T started down its media-heavy path in 2015 by spending
$49 billion on satellite-TV broadcaster DirecTV, followed three
years later by an $81 billion takeover of Time Warner Inc., home of
cable channels like HBO, TNT and CNN and the Warner Bros. film
studio.
AT&T's hard tack toward media stemmed partly from its
experience over the past decade serving the smartphone economy.
Chief Executive Randall Stephenson noted that while the carrier
reaped the benefits of aggressive investments in its wireless
network, tech companies like Apple Inc. took a much bigger share of
the spoils.
"Congratulations: You invested a fortune, and Apple becomes the
most profitable company in the free world," Mr. Stephenson recalled
in a recent interview. "This is why, two years ago, I said, 'I
don't want to run that same play again.' "
Media assets will keep growing more valuable, he said, as
companies like his find ways to distribute them to wider audiences.
He pointed to the recent bidding war over assets belonging to 21st
Century Fox Inc. as proof of the trend. The media assets AT&T
owns currently account for about 20% of overall revenue.
Some investors say AT&T is in a strong position because it
has a mix of assets that span cable service, media content and
wireless service -- though its success, they say, will depend on
its ability to keep its base of traditional TV watchers profitable
as they flock to online video.
"They're going to have to experiment a little. If they get it
right, then I would imagine you'll see some copycatting from the
Verizons, the Comcasts and the Charters of the world," says John
Carr, senior research analyst at money manager Neuberger Berman
Group LLC.
Banking on 5G
Verizon's biggest transaction to date was the $130 billion
purchase of full control of Verizon Wireless in 2013. Executives
have stressed to analysts and investors in recent months that they
are focused primarily on building out the carrier's 5G network --
which they say will generate additional revenue by powering new
technology used in factories, hospitals and cities.
Verizon explored, but didn't ultimately pursue, acquisitions of
companies such as CBS Corp., and this year told investors it isn't
interested in buying a content creator. Instead of acquiring
content, it is offering its first 5G customers live channels,
movies and shows through streaming partnerships with Apple TV and
Google's YouTube TV.
The carrier is in discussions with Apple and Google about
partnerships that could extend the video services to a broader
group of its cable and wireless subscribers and include some
content from Verizon's Oath digital-media unit, according to people
familiar with those discussions. Those plans could be announced as
soon as this month, the people said.
Sajod Moradi, a senior credit analyst at Macquarie Investment
Management, says Verizon's partnerships will allow it to benefit
from expanded content offerings without creating the pressure to
generate excess cash flow to pay down debt.
Verizon acknowledged last month that Oath was unlikely to meet
longer-term revenue targets, and is now pulling the business closer
to its parent company. It is also rebranding it as Verizon Media
Group as part of a restructuring of the carrier's business lines by
CEO Hans Vestberg.
The business houses a collection of online news, finance and
video brands as well as digital advertising technology.
Mr. Vestberg said in a recent interview the carrier was
exploring ways to apply 5G technology to the media,
augmented-reality and virtual-reality brands within the unit.
Mr. FitzGerald is a Wall Street Journal reporter in Washington.
Ms. Krouse is a Wall Street Journal reporter in New York. They can
be reached at andrew.fitzgerald@wsj.comand
sarah.krouse@wsj.com.
(END) Dow Jones Newswires
November 12, 2018 00:20 ET (05:20 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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