AT&T (NYSE:T) is now officially challenging the likes of Netflix (NASDAQ:NFLX) with an internet-based streaming service. The company is set to offer streaming services by the end of this year. As odd as it might sound, AT&T now has more control over its streaming content than a long-standing player like Netflix due to DIRECTV's strong 30-year operating history and relationship with content owners.
This move to stream online adds to the "ecosystem" argument we used in our recent article on AT&T. It also echoes with the recent trend among "cord-cutters" as noted in this Quartz article. Keeping in mind that AT&T already has 6 million cable customers through U-verse, this online streaming could attract people who don't have cable service or have cut their cords recently. Also, video streaming accounts for more than 64% of the traffic during peak hours, and so far AT&T has not really competed for a share of this pie with players such as Netflix and YouTube (NASDAQ:GOOG) (NASDAQ:GOOGL). This is about to change soon.
The sketch below shows the updated ecosystem we believe AT&T is striving for, with the streaming announcement and other recent moves like GigaPower expansion. AT&T's interest in Yahoo (YHOO) is speculative at this point, but the rest of the pieces are in place already. Notice how "Video Content" is slotted right in the middle, while the company's tried and tested phone service is at the very end with no real connections to the rest of the services. This sketch, in our view, conveys the transformation of AT&T from being a phone company to an ecosystem on its own by enhancing each of its platforms.
The market is reacting favorably to all the recent moves from AT&T as the stock is up nearly 11% YTD, including one dividend payment of 48 cents. Analysts are noticing the moves as well as the EPS estimates for 2016 and 2017 have gone up. In a very nice article, SA contributor Dana Blankenhorn pointed that AT&T's "problem" is that it impedes progress and also stifles out competition by all means. On the contrary, we see that "problem" as the "solution." This is exactly the type of investment we look for. Companies that find a niche and milk it over and over for decades on. Think of stocks like Altria (NYSE:MO) and Coca-Cola (NYSE:KO) in this context.
Competition and buying options are good for the consumers, but not investors. We aren't looking for innovators, but stocks that make enough dough to pay us consistently. But at the same time, we monitor the business moves of the company as well. The recent moves by AT&T follow the same "problem" Dana explained in his piece: Find an opportunity (in this case DIRECTV), exploit it (streaming services, packaging) and make money by keeping things as simple as possible.
The two quarters after the DIRECTV merger have already shown us the dividends look safe based on free cash flow, and there is some room for bigger dividend increases in the future. Taking the liberty of rephrasing Dana's conclusion, if you like dividends, it's a great stock to own. If you like innovation, AT&T has never been the stock to own. If you like to make money slow and steady, AT&T has very few peers.
We are witnessing the emergence of the integrated telecom player.
Disclosure: I am/we are long T, KO, MO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.