When Michael Armstrong took over as CEO of AT&T in 1997, the telecom giant was dependent on long-distance phone calling service. (Really, kids, that used to be a separate market where you paid more depending on far your call traveled.)
Armstrong could see long distance was drying up. So, he tried to diversify by spending $100 billion buying cable TV services. The idea was to sell consumers on a bundle of phone, TV, and Internet service. But Armstrong was too early and the took on too much debt. Within a few years, he sold the whole cable operation to Comcast for half what he paid.
What was left of AT&T was hoovered up by Baby Bell SBC in 2005. That business then increasingly started to focus on cellular service as its best growth opportunity.
A decade later, in 2015, then-CEO Randall Stephenson worried the wireless surge might be slowing. Seeking to diversify, he spent $67 billion including debt to buy satellite TV service DirecTV. In 2018, he added entertainment giant Time Warner for $109 billion. The idea was to sell people a bundle of wireless and entertainment service.
Tell me if you’ve heard this one before: Turned out Stephenson was too early and took on too much debt. On Monday, AT&T’s new CEO, John Stankey, announced a deal to free itself from managing and financing the entertainment business, following a somewhat similar deal announced in February to get out of the satellite TV business.
In the latest deal, AT&T will spin off its Warner Media unit, which includes the Warner Bros. movie studio, HBO Max streaming service, and cable channels like CNN and TBS. The collection will, at the same time, merge with smaller media company Discovery. AT&T shareholders will receive 71% of the shares of the new, as-yet unnamed company and Discovery shareholders get 29%. AT&T will also get $43 billion in cash, debt, and assumed debt from the new company.
With its debt burden lightened, AT&T will be able to focus on selling connectivity and investing in faster technologies to do so. “AT&T will have better flexibility to spend on 5G and fiber,” CEO Stankey explained in a call with reporters. Last month, AT&T announced its strategy for the next few years but had no time table for covering the country with fast 5G service. Now the carrier says it will have the money to do so by the end of 2023, about matching Verizon and trailing T-Mobile by a year or two. AT&T also said it will expand its fiber optic network to more than 30 million homes passed by 2025, double its current footprint.
The whole build up and unwinding of the Time Warner mess at AT&T sent me back to an interview I had with Stankey before that deal, five years ago, when he was in charge of video. “From the dawn of time, what we have made our money on and what we’re good at is moving a bit around,” he told me. “We do entertainment because it drives bits on our network, not necessarily because we’re great at entertainment.”
That sounds about right. But it’s way too late for AT&T shareholders, who just experienced a five-year stock return of -15%, versus 14% for Verizon and 243% for T-Mobile. And that includes the 3% bounce AT&T stock got on Monday after the deal was announced. Hopefully, shareholders can make up some lost ground by owning AT&T and its entertainment efforts as two separate stocks.
Stankey, for one, says he’ll hold onto his stakes in both stocks. “Your’s truly will be staying along for the ride on my piece of it,” he told analysts on a call on Monday. Here’s hoping there are a few less potholes than the previous ride.
Aaron Pressman
@ampressman
aaron.pressman@fortune.com
NEWSWORTHY
We's be bouncin', flippin', jumpin'. When there are no fundamentals, spin is all you have. Tesla CEO Elon Musk continued to sour on bitcoin over the weekend, tweeting that his company might sell its crypto holdings. Bitcoin dropped below $44,000 on Sunday.
Tangled up in blue. The upcoming Twitter premium subscription service will be called Twitter Blue and will start at $3 per month, according to rumors over the weekend reported by Jane Manchun Wong on Twitter (of course). Apple's music service is also rolling out new features. It will allow subscribers to listen to music in a higher-fidelity "lossless" format starting in June, at no additional cost. The service will also support the Dolby Atmos standard. Not be left out, Amazon also announced that its lossless feature, Amazon Music HD, will drop its $5 per month surcharge and be included with its regular premium service.
Do not pass go. The Indonesian ride-hailing service Gojek is merging with the country's e-commerce giant PT Tokopedia. The combined company, to be called GoTo, will be a local leader in everything from rides and payments to online shopping and delivery. Investors Google and Alibaba Group support the combination, the companies said.
The other shoe drops. News of the Gates' divorce has attracted some of the world's most dogged investigative reporters to dig into Bill Gates behavior during the 27-year union. You can read what the New York Times dug up, focused on how Bill Gates dealt with a harassment complaint against his money manager. The Wall Street Journal says Bill Gates' departure from Microsoft's board last year came amidst an investigation into an inappropriate relationship with an employee. A spokeswoman for Gates said the matter involved an affair that ended amicably 20 years ago. Bloomberg also covered the affair angle.
FOOD FOR THOUGHT
The market for special purpose acquisition companies, or SPACs, seems to have slowed or even collapsed since securities regulators indicated their displeasure with the trend last month. But billionaire tech investor Chamath Palihapitiya, one of the leading SPAC promoters, is stilling making plenty of money, as Bloomberg reporter Zeke Faux reports in a profile published last week. Palihapitiya even profited from Clover Health, the 2020 SPAC merger deal which has lost about half its value since it was targeted by short seller Hindenburg Research in February.
Palihapitiya and his partners did even better. Because they gave themselves 20.7 million shares for putting the deal together, their $171 million investment has almost doubled to $320 million. A week after the Hindenburg report, Palihapitiya said he controlled a $10 billion to $15 billion fortune, triple what he’d told another interviewer 10 months earlier, and compared himself to Warren Buffett.
“A reminder to myself and others: If it were easy everyone would do it. In reality, it’s hard and most people give up,” he tweeted on March 25. “Good luck to all the players in the arena. Be proud of the dust on your face. Back to the grind ...” The next week, Palihapitiya’s jet left on a trip to Milan and then a Caribbean island. When it returned, Bloomberg News reported Palihapitiya was in talks to merge one of the SPACs he’d raised earlier in the year, known as IPOF, with Equinox Holdings Inc., the fancy gym chain.
IN CASE YOU MISSED IT
Bitcoin, Ethereum tank on Elon Musk’s latest tweet storm—stocks open the week mixed By Bernhard Warner
Elon Musk wants Bitcoin, but not its carbon footprint. Can Bitcoin mining go green? By Eamon Barrett
Airbnb has become a proxy index for vaccine rollouts By Lucinda Shen
Gifts for new grads that will help them as they enter the workforce By Chris Morris
The Biden administration just kicked off an era of better cybersecurity in the U.S. By Andrew Rubin
Teaching critical life skills: Corporate America takes on the missing learning layer By Tom Davidson
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BEFORE YOU GO
Google holds its annual I/O conference this week, virtually for the second year in a row. Google typically uses the attention to unveil new phones, the next version of Android, and other random goodies. Rumor has it the Pixel 6 phone will have a strange new camera bump, rectangular and spanning the full width of the back of the phone. Could there also be product surprises from Google's Nest or Fitbit units? Stay tuned.
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