AT&T May Use Media Content As Leverage To Sustain Its Wireless And Broadband Services

| About: AT&T Inc. (T)
This article is now exclusive for PRO subscribers.


AT&T and other wireless carriers and broadband providers, including Verizon, are seeing their markets with increasingly less growth.

While Verizon is trying to boost its online presence for an online ad business, AT&T is looking to use content as leverage to sustain its wireless and broadband services.

Owning media content should be a means rather than the goal for AT&T, which both fits better with sustaining its underlying business and offers needed financial flexibility.

AT&T Inc. (NYSE:T), as well as all other wireless carriers and Internet service providers, noticeably Verizon Communications Inc. (NYSE:VZ) among them, eventually has to worry about the maturing businesses in their increasingly saturated communications markets as wireless and broadband services are left with fewer consumers to reach.

Verizon seems having decided to leverage its existing mobile and Web technologies, including those obtained from its AOL acquisition, to boost its online presence. The move aims at making Verizon a powerful marketing channel for advertisers in the lucrative online ad market, which may help compensate for any lack of growth in its wireless and broadband services.

AT&T, on the other hand, has taken a different direction by looking to use media content as a leverage to help sustain its existing business and potentially out-compete others with growth in its wireless and broadband markets flattening out. Owing content may be more of a means than a goal for AT&T, despite speculation about its wanting to become a media and entertainment company.

AT&T's strategic intention was already made evident in its $48.5 billion acquisition of DirecTV, a pay-TV provider with a questionable future as a standalone company because of the ongoing challenge from online content distributions. The idea was to bundle DirecTV's content distribution with AT&T's wireless and broadband services.

The expensive deal was not to make a premium investment in the future of likely declining pay-TV distributions, but rather using the DirecTV platform as a springboard for the cross-selling of AT&T's wireless and broadband subscriptions. The deal may work in the long run too if pay-TV can remain as one of the content distribution choices in the future even amid pervasive mobile and Web content streaming.

However, the jury is still out on whether the separate business strategies from AT&T and Verizon are effective to support continued sales growth. Since the third quarter of 2015 when AT&T and Verizon carried out their respective DirecTV and AOL acquisitions, quarterly revenue for both companies saw only a small bump in the quarter immediately followed but has since experienced continued quarterly revenue declines.

AT&T and Verizon themselves are convinced about their particular chosen strategies as both appear to be doubling down with additional moves in their planned directions. Verizon is in the process of acquiring Yahoo (NASDAQ:YHOO) to further strengthen its mobile and Web technologies after buying AOL earlier. Meanwhile, AT&T is reportedly looking to buy media companies with the likely intention of attracting more users to subscribe to its wireless and broadband services.

As a media company in the future, AT&T could offer content to its wireless and broadband customers for exclusive streaming without violating certain anti-competitive rules. These provisions may include not discriminating against unaffiliated content carried on its pay-TV distribution system and willing to sell programming to both traditional and online rivals, namely other pay-TV providers and online streaming outlets such as Netflix Inc. (NASDAQ:NFLX).

Such rules would not preclude AT&T from offering free or discounted streaming services of the content it owns to its wireless and broadband customers. By not giving content access to other wireless carriers and broadband providers that are not pay-TV operators or don't have a business of online streaming, AT&T could gain a measurable competitive advantage in wireless and broadband markets. Its content would essentially become a leverage in signing up more users for its wireless and broadband services.

If owning content is more about the means than the goal, AT&T could have greater financial flexibility when looking for its media and entertainment targets, considering its limited cash holdings and a mountain of debt, $7.2 billion and $126.8 billion as of June 30, 2016, respectively.

A smaller content play would be much less expensive and more achievable, given AT&T's current, constrained financial resources, while still satisfying its desire of using content to bolster its underlying wireless and broadband services.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.