AT&T Bets on Entertainment to Keep Its Network Busy

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There has been a fair amount of confusion over AT&T’s strategy to extend its network both to outer space (with the purchase of DirecTV) and south of the border (with the acquisition of two Mexican wireless services) last year.

Neither play was as simple as adding more paying customers, although that didn’t hurt. Instead, the additions were also intended to bring greater scale and leverage to some of the telecom giant’s ongoing efforts, and to find new sources of revenue growth at a time when its mainstay—the U.S. wireless market—appears to be slowing.

The addition of DirecTV and its 20 million satellite video subscribers, for example, immediately gave AT&T much greater scale to negotiate better deals with cable channel owners, Hollywood studios, and other content creators that the company could not previously achieve with its meager 6 million traditional cable customers.

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In turn, the greater sway with content providers could let AT&T (T) create more appealing and lower cost Internet video services that companies like Apple (AAPL), Sony (SNE), and Verizon (VZ) have struggled to pull off. AT&T has already announced three different Internet-delivered video services arriving by year end, supported with both subscription fees and advertising. If the company succeeds, video subscription revenue will grow, profit margins will expand, and advertising revenue—currently around $1 billion—will multiply exponentially.

The Mexican play requires building a faster wireless network and more fiber connections on the ground. AT&T has already committed to spending $3 billion. Once the bigger, faster network comes online, AT&T wants to leverage its investments to expand both its video entertainment and enterprise services for businesses south of the U.S. border.

Ultimately, the goal is to create maximum demand for AT&T’s wired and wireless networks. “From the dawn of time, what we have made our money on and what we’re good at is moving a bit around,” John Stankey explained in a talk at a cable industry conference in Boston on Tuesday. Stankey runs AT&T’s video efforts, but used to oversee the company’s telecom services.

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Asked about some of the company’s investments in content companies, Stankey was frank about the goal. “We do entertainment because it drives bits on our network, not necessarily because we’re great at entertainment,” he said.

But while both the DirecTV and Mexican moves can be justified, there is a faint whiff of the kind of empire-building that got AT&T into trouble in the 1990s, when then-CEO Michael Armstrong first built—then dismantled—a $100 billion consumer cable and Internet infrastructure. Facing the popping of the Internet bubble, the fraud engulfing competitor WorldCom, and the collapse of the telecom capital markets simultaneously, Armstrong had to sell off his cable empire for half what he paid just to keep AT&T solvent.

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Stankey and his boss, AT&T CEO Randall Stephenson, are betting that they can capture significant chunks of the growing market for Internet delivered video and digital advertising, particularly from millennials. But they also run the risk that the markets change in ways that work against them rather than for them, if mobile revenues started shrinking quickly or cord cutting accelerated, for example.

Hopefully for Stankey and Stephenson—and their investors—things will work out better than they did for Armstrong.

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