Phone companies and entertainment don’t mix
Last month, AT&T threw in the towel on its adventures in the media business when it decided to spin out WarnerMedia. Center Director Jeffrey Cole explains how the telco got to this point, and why getting out is a good thing.
By Jeffrey Cole
Phone companies should stay out of the media business!
Everybody would be better off. No good comes of it. Egos are wounded, shareholder value is lost, great companies are weakened, and it does nothing for consumers.
While we are at it, soft drink bottlers, liquor distillers, waste management companies, electronics manufacturers, and most other companies ought to avoid the media business as well.
The simple rule is that everyone except those with vast experience running media companies should stay out of the entertainment industry. And we have several case studies that prove this point.
Certainly, AT&T should have known that entertainment (ego and glamour aside) was not a business for them. By the time they spent $85 billion (40% of its market cap) to buy Time Warner in 2016, AT&T already had a disastrous track record in media and entertainment. How much evidence did the huge phone company need to stay out of the media business?
AT&T’s lucrative past… and future
AT&T has an extraordinary core business. Before the 1982 breakup, “Ma Bell” operated the “greatest telephone system in the world” with long distance and local lines going into almost every home in America. To remain the ultimate “widows and orphans” stock that was the safest investment anywhere, all AT&T had to do was keep the infrastructure up to date and cash the checks of their tens of millions of subscribers every month. Their customers had to pay up or their telephone lifeline would be shut down.
Businesses didn’t get any simpler or more lucrative. And it was a monopoly! As Ernestine the phone operator (Lily Tomlin) used to threaten complaining customers on Laugh-In, “If you don’t like our service, try using two Dixie cups with a string!”
In 1982 the Justice Department took away the long-distance lines and broke the giant AT&T into seven “Baby Bells.” The telecom leader was weakened, and for the first time actually had to face competition!
In retrospect, the Justice Department saved AT&T. Its landline residential and business service (Plain Old Telephone Service or POTS) was declining–so much so that today phone companies petition the government not to have to provide it. In its place came cellular. Rather than one customer per household, cell phones could mean one customer per person. It was more lucrative than hardwired service, required less capital, and was easier to maintain and upgrade.
Like a horror movie where the monster loses a vital body part and it quickly grows back, in the 2000s, about half of the Baby Bells were able to recombine and become whole and bigger than ever. Pacific Telesis, Southwestern Bell, and Bell South ultimately became the new AT&T (with new not in the name). The other half, Bell Atlantic, NYNEX, and the old GTE combined to form Verizon.
The horizon looked brighter than ever as the old telcos began to dominate the massive new mobile phone industry.
Disaster after disaster…
As the old baby bells were on their way to re-claiming their former strength, they were attracted to the entertainment business. Afraid that the emerging Internet might challenge their copper pipes, and that content was the safest bet against competition, they made early forays into the media business.
Michael Ovitz, one of the founders of CAA, had previously led Sony and Matsushita into rocky entertainment investments. Following this precedent and dazzled by Ovitz, Bell-Atlantic, NYNEX, Pacific Telesis, and CAA formed Tele-TV. It was never clear what they would bring to entertainment or what they would do.
Not to be left out, the other Baby Bells, SBC, Bell South, Ameritech, and GTE (with assistance from Disney) formed the rival Americast, which had no clearer plan. The excitement was the alignment of players, not a specific vision.
Both failed miserably. On his first day on the job, one of my former students, an executive at one of the two new companies, called me (and probably everyone else he knew) at 10:30am in the morning confessing, “I have made the biggest mistake of my life. These are phone company guys. They are pole climbers.”
That is about as far as they got. A great team with no real agenda other than to be important in entertainment. Millions of dollars were squandered.
By 2005 SBC (Southwestern Bell) reclaimed the AT&T name and renamed the company. Rather than being chastened by its earlier missteps, it moved again into media. In 2015 AT&T acquired DirecTV (the satellite pioneer) for $67 billion (with debt). DirecTV had been a great asset in 2000.
By 2015, streaming had led to cord cutting followed by a slow (and then not so slow) erosion of cable and satellite’s customer base. AT&T bought DirecTV at exactly the wrong time. It was already a declining technology.
It was a disaster, and more disasters were coming.
Although the 2015 purchase of DirecTV had saddled the company with debt, that didn’t stop them from continuing to move into media.
The Time Warner acquisition
AT&T’s next target was Time Warner. In 2016, for $85 billion, AT&T acquired one of the original major studios, Warner Bros., and two legendary other assets, Turner Broadcasting and HBO. Instantly, the CEO of AT&T became a media mogul. Pretty heady stuff!
I asked one of my friends, who was the CEO of a non-American telco, how much of the AT&T purchase was an ego move for the CEO. Without missing a beat, he replied, “about 90%.”
Michael Ovitz, one of the founders of CAA, had previously led Sony and Matsushita into rocky entertainment investments. Following this precedent and dazzled by Ovitz, Bell-Atlantic, NYNEX, Pacific Telesis, and CAA formed Tele-TV. It was never clear what they would bring to entertainment or what they would do. Not to be left out, the other Baby Bells, SBC, Bell South, Ameritech, and GTE (with assistance from Disney) formed the rival Americast, which had no clearer plan. The excitement was the alignment of players, not a specific vision. Both failed miserably.
AT&T bought a great company. After the bad memories of the biggest media debacle of all time, AOLTime Warner, had finally receded, a recovered Time Warner was well positioned to compete effectively with Disney, Netflix, and even the Internet giants.
That’s how it should have been.
But rather than treating its new assets as crown jewels and leaders in each of their sectors, AT&T’s appointed head of WarnerMedia (the new name) interfered with each of the units and told them life was going to be very different under AT&T. The best executives fled and morale sank to levels not seen since AOL had taken over the company.
Their big move was to beef up HBO to compete against Netflix, Hulu, and Disney+. They transformed HBO by adding a Max to its name, which confused and frustrated customers. HBO subscribers didn’t know what HBO Max was, why they should want it, whether they’d lose their old HBO… and could they just have HBO, please? Few HBO customers converted to Max. Fewer new customers signed up.
Then the pandemic arrived. AT&T needed HBO Max more than ever because people were at home streaming rather than in theaters. In a desperate move, they betrayed the movie theater business by putting 2021 blockbusters on HBO Max the day they were released in theaters.
HBO Max will do just fine. The quality of its content is as good or better than anywhere else in the business. But they bungled the introduction.
Nearing the end of COVID, saddled with $180 billion in debt, AT&T looked for ways out of the media business. The telco needed money to invest in their core business.
Its archrival, Verizon, had a new CEO who came from the infrastructure business (Ericsson). He was selling off the much smaller $9 billion spent on media before his arrival (Yahoo, AOL, HuffPo). Without much debt and a clear vision of 5G, Verizon made massive investments in its core business.
AT&T needed money in order to compete.
First, in February of this year, AT&T spun off DirecTV with two of their other television services, AT&T Now and U-Verse for $16.25 billion.
Then, last month, AT&T threw in the towel, deciding to unburden itself of WarnerMedia.
CEO John Stankey moved WarnerMedia into a new company, formed with Discovery which had just entered streaming. AT&T had about 70% of the new company (yet to be named), but the new CEO came from Discovery.
Stankey hailed the move by talking about the logic of unleashing WarnerMedia’s assets, but it was AT&T who had leashed them only a few years earlier.
With the embarrassing spin-offs of DirecTV and the combination with Discovery, AT&T is now the company it should have been all along. It is ready to invest in the business it knows.
Unfortunately, it threw away about $80 billion to arrive at this epiphany.
AT&T may have finally learned the lesson: phone companies should stay out of the media business.
Jeffrey Cole is the founder and director of The Center for the Digital Future at USC Annenberg.
See all columns from the center.
June 2, 2021