Is AT&T’s Hollywood Plot Too Far-Fetched?

By Tara Lachapelle

November 8, 2019, 12:00 PM EST

AT&T CEO Randall Stephenson and COO John Stankey with backdrop of AT&T holdings and media offerings

Ask Randall Stephenson about his career and he’ll remind you that he’s seen it all. The Oklahoma native studied animal husbandry in college before an artificial insemination class, held on a blisteringly hot afternoon, convinced him to become an accounting major. He landed his first job with the old Southwestern Bell Telephone Co. in 1982.

“I got my job the old-fashioned way. My brother got me on. My wife and I were getting married and she said, ‘Yes, I’ll marry you but you have to get a job.’ And my brother said, ‘Come on, I can get you on with the phone company,’” Stephenson recalled during an interview at the Economic Club of Washington in March. “My first job was to hang 19-inch magnetic tapes onto tape drives,” he said. “I would do that for a 12-hour shift... It was pretty much the foundation of everything that I do now.”

Stephenson had other things going for him, too. He proved to be a gifted financial engineer and corporate manager with a grasp of the seismic changes unraveling and reordering his industry. Wireless. The internet. Mobile. He can tell you how, when he was AT&T Inc.’s chief operating officer, “the guy in the black turtleneck” from Apple Inc. persuaded him to form an exclusive partnership in 2007 to distribute and support a newfangled product: the iPhone.

Then came his biggest challenge: running a media conglomerate. Stephenson, who has been AT&T’s chief executive officer for more than 12 years, had a vision of the future and made a bold bet in 2016 to buy Time Warner Inc. for $109 billion. Today, he sits atop a telecommunications and entertainment behemoth that controls a North American wireless operation; TV networks such as HBO, CNN and TBS; the Warner Bros. film studio; a broadcast satellite-service provider, DirecTV; and more. In 2013, nearly all of AT&T’s sales were tied to phones and data services. Now, almost half its revenue comes from elsewhere, such as pay-TV subscriptions, advertising, the box office and soon, streaming. All that is the handiwork of a guy who could easily be mistaken for a garden-variety accountant.

Stephenson knows that critics wonder whether a team of straight-arrow telco managers can steward creative enterprises. At the same time, he’s confident that AT&T’s prospects would have been limited if all it controlled were the pipes channeling data, communications, information and entertainment around the globe. By his estimate, AT&T needed to control a big chunk of that content, too.

“Is it necessarily good for AT&T to own a media company? Yeah, I think it is,” Stephenson said in March. “But I think the more relevant question is: Is a media company being attached to a communications company like us worth more?”

Streaming Wars

Rattle off the names of the leading entertainment companies and you might start with the Walt Disney Co., maybe Netflix Inc., but probably not AT&T. To most, it’s a wireless brand — boring. The reality is something else.

Stephenson and his lieutenant John Stankey, AT&T’s president and chief operating officer, have spent the last five years remaking their 134-year-old company in an audacious corporate reinvention. In the process, two executives who have worked in the phone industry their entire careers — Stephenson is 59 and Stankey is 56 — became media moguls.

Source: Bloomberg
Notes: Data don’t include corporate reconciliations. WarnerMedia is formerly Time Warner. The DirectTV deal closed in July 2015, so 2016 was the first full year that it was included in results.

In the impending battle against Disney, Netflix and others, it’s hard not to notice that the AT&T team comes awkwardly equipped with phone-technology know-how for a fight over creative supremacy.

Can Stephenson and Stankey adapt to a streaming era in which fickle consumers are dumping cable, increasingly watching video on phones instead of TVs, and are presented with an almost limitless range of content choices? Can they do this while most major and minor content providers are atomizing and choosing to compete with one another rather than cooperate?

Apple, with its iPhones in so many pockets, and Disney, with its theme parks, cruises and credit cards, have vast, deep customer ties. AT&T does, too, but until recently those relationships resided largely in its telco network.

Today’s AT&T owns a confusing mix of pay-TV service names — DirecTV, AT&T TV Now (formerly known as DirecTV Now), AT&T Watch TV, HBO Go, HBO Now, and the recently minted HBO Max. By comparison, Disney is entering the streaming wars with a clear strategy, each step part of a meticulous plan.

Stankey, the top candidate to succeed Stephenson, is as confident as his boss about AT&T’s need to reach beyond its comfort zone — and about its ability to juggle a wireless business that’s transitioning to 5G, a DirecTV brand that’s withering and a set of glittering but unwieldy media assets that present them with wildly novel business challenges.

“We need to make this move to compete with companies that are incredibly strong and capable like the Googles, Amazons and Apples of the world — and so we’re playing big,” he said in a recent phone interview. “It’s about taking the combination of AT&T’s distribution and the incredible content from the WarnerMedia brands.”

In other words, it may take a couple of phone guys — AT&T has few women in its C-suite — with plentiful financial resources to remake HBO into something that fortifies AT&T’s wireless customer relationships against the threatening scale of the tech giants.

However, AT&T hasn’t offered much proof it can manage other assets as successfully as its U.S. consumer wireless business. Despite AT&T’s monumental makeover, its stock price is almost exactly where it was when Stephenson took the helm in mid-2007. (Stankey served as his operational point person along much of the way.)

The acid test is HBO Max, AT&T’s newest weapon in the streaming wars. The long-awaited app was unveiled at the end of October during a special pre-launch presentation for investors. To the extent that AT&T’s problems are more about perception than its ability to execute and manage its smorgasbord of recent acquisitions, it helped to finally see the product.

Like other streaming services, HBO Max will be a money pit for the next few years while it splurges on producing original work and builds its subscriber base. At $15 a month, it’s the same price as regular HBO but with much more content — making it something AT&T hopes might be a Netflix killer. HBO Max carries more weight symbolically than financially because it’s not expected to become profitable until 2025, and the product won’t be fully developed until next May. But its reception will determine whether Stephenson and Stankey can give HBO new life inside a once prosaic phone company.

The market has its doubts. The day after Disney pitched its Disney+ streaming service to investors in April its shares rose 12%. After AT&T rolled out HBO Max its shares rose less than 1%.

Lifers

To tell the story of how AT&T got here is to recount the history of the telecommunications industry and, in some ways, broader corporate America: a continuous cycle of breakups followed by gutsy mergers and the near-desperate pursuit of new technologies favored by younger users.

As company lifers, Stephenson and Stankey both began working in the 1980s at predecessors of the modern AT&T. They saw a dismantled monopoly turn into a new industry giant — and helped the landline phone-call connector evolve into the second-biggest U.S. wireless service provider.

Under their leadership, AT&T dared to get even bigger, first trying to acquire wireless competitor T-Mobile before the bid ran aground on antitrust concerns. That led Stephenson to instead go after DirecTV in 2014 for $67 billion including debt, an eye-popping valuation for a business already facing decline. The Time Warner megadeal followed. (Stankey, who was given control of the renamed WarnerMedia division, got a $2 million bonus for helping the deal survive regulatory opposition and a long legal battle, which took 857 days.)[1]

AT&T’s moves stand in especially sharp relief when compared with the strategy of Verizon, its closest competitor, which has all but abandoned its own media aspirations. Between 2015 and 2017, Verizon Communications Inc. spent about $9 billion acquiring AOL and Yahoo, former search engines that were reincarnated as media and digital-advertising businesses. Verizon took those recognizable names and rebranded them as Oath (to much mockery). Eventually, the company retreated, taking a massive writedown, cutting staff and dropping the Oath name. Wall Street praised Verizon for refocusing on its greatest strength: wireless.

The wireless business is still AT&T’s biggest profit driver as well. “We wish we could own it in isolation,” apart from DirecTV, WarnerMedia and the other units, Jonathan Chaplin, an analyst for New Street Research, wrote in an Oct. 31 report.

Stephenson and Stankey are investing in media to fortify AT&T wireless. Their hope is that controlling sought-after content and dangling it before wireless customers will lead to fewer cancellations. All the wireless carriers are nearly neck-and-neck when it comes to network quality, so promoting coverage maps and data speeds alone won’t ensure customer loyalty. By that reckoning, companies like Verizon and T-Mobile US Inc. aren’t even necessarily AT&T’s most formidable rivals.

This is the logic that led to the Time Warner transaction. It was the biggest bet anyone had made on a media-and-communications merger since the toxic marriage that formed AOL Time Warner two decades ago. Stephenson had observed AT&T customers increasingly using much of their monthly data to stream videos, while subscribers of the company’s DirecTV packages were switching to cheaper digital services. At Time Warner, it seemed clear that even with HBO, a preeminent entertainment programmer, the company lacked the scale to remain a stand-alone media company.

Now AT&T wants to “data-fy” HBO, if you will, much to the horror of some there who see their work better founded on creative intuition. WarnerMedia hopes to use the data it gets directly from its own streaming destinations to study the behavior of its subscribers and then use that information to inform creative or advertising decisions. An ad-supported version of HBO Max will be available in 2021, a harbinger of where the industry may be headed next: back to ad models. Given unsustainably low subscription prices — and the likelihood that consumers won’t pay for more than a few apps at a time — advertising may once again become a more reliable and lucrative source of revenue.

Stankey has also taken part in the industrywide splurge on content. WarnerMedia struck a production deal with director J.J. Abrams to provide it with original work and paid up to take control of the streaming rights to “Friends" and “The Big Bang Theory,” two of the most successful TV franchises. But this arms race for content also has stoked fears that there will be a reduction in quality — which would be most noticeable at HBO.

Stankey has pushed HBO to ramp up its output because a sensation like “Game of Thrones” every 10 years isn’t nearly enough to satisfy monthly subscribers. The network will have 38 new and returning original series next year, in addition to 31 other originals made exclusively for HBO Max for its first year. For anyone who’s had to watch Netflix’s lower-quality fare, or plow through menu after menu of mediocre-to-bad choices on the service, a new HBO premiere used to be a welcome relief. That’s why AT&T needs to be careful about tinkering with HBO’s brand. The push for volume could destroy the network’s longstanding reputation for innovation and quality.

‘Mobilizing Your World’

When Stankey was promoted to COO last month, it prompted speculation that Stephenson was considering retirement and that Stankey was set to succeed him. Once a relatively under-the-radar figure outside of AT&T, Stankey came in for criticism after he was tasked with assimilating Time Warner. The media company had multiple businesses within it that were accustomed to operating autonomously. Stankey changed that, sparking waves of disgruntlement that he doesn’t regret.

“The brands and cultures needed to come together to work as one,” he said. It was the only way for the megamerger to work.

Still, the California native, who first interned at Pacific Bell in 1984, took some flak, mostly of the blind-quote variety, from former WarnerMedia employees, who saw his style as too blunt, impersonal and all-business. In his view, he’s transparent and direct. “I think most people would say I’m pretty easy to read, and I will wholeheartedly engage in a robust debate,” Stankey said.

Even so, some prized talent has fled the company. Among the big names who left WarnerMedia in the wake of AT&T’s purchase were Richard Plepler, head of HBO, and Simon Sutton, the network’s chief revenue officer; David Levy, the head of Turner; Donna Speciale, the president of ad sales for WarnerMedia; and Kevin Tsujihara, the chairman of Warner Bros.[2]

But Stankey has also recruited highly regarded replacements. Bob Greenblatt, a longtime executive at NBCUniversal and before that Showtime, is overseeing entertainment at WarnerMedia and its direct-to-consumer offerings. Ann Sarnoff, who had been running BBC Studios America, is head of Warner Bros., the first woman to lead the studio. These executives and others — including Time Warner veterans — handled HBO Max’s public unveiling, helping to dispel the notion of a talent drain or a company micromanaged by Dallas HQ.

Stankey, who possesses a deep, basso voice, can be an intimidating presence, and he acknowledges he isn’t much of a Hollywood schmoozer. But as he sees it, that’s other people’s jobs, not his. “My job is to make great executives, who are very focused, work better together,” he said. “I want to do what’s right by the company and shareholders, and I’m not going to be working an agenda other than that.” He did go on to say that he and the management team are working to better convey their plans and what they see as the bigger picture.

AT&T was forced to do just that when an activist shareholder came knocking. Just after Stankey’s promotion was made public in September, Elliott Management Corp. announced it had taken a $3.2 billion stake in AT&T. The firm sent a public letter to AT&T’s board of directors highlighting what it considered the company’s shortcomings — too many deals, too many assets, lagging share price — and called for a slew of changes meant to address those problems.

AT&T’s plush dividend is mostly how shareholders have been rewarded during Stephenson’s tenure. The company pays out billions of dollars each year, including $13.4 billion in 2018. But the stock price has been stagnant. Last fall, shares of AT&T had fallen behind Verizon’s by the most since the early 1990s, an endorsement of Verizon’s less-is-more strategy and a tangible renunciation of Stephenson’s deal-making.

Stephenson himself may not want to leave before he can get the stock price solidly higher. In a sign that he’ll accept help, AT&T and Elliott rapidly reached a truce on Oct. 28, and the company took steps to address almost everything the investor raised in its letter. AT&T also outlined some of its most detailed financial projections yet.

Perhaps even more importantly, Stephenson committed to remain CEO through next year, which will allow AT&T’s board to run a broad search for his successor. While Stankey is still the front-runner, it’s now clear that he’ll have to do more to earn the title of heir apparent.

AT&T deserves credit for these changes, and it’s getting it: The company’s stock is up 14% over the last three months and is priced higher than Verizon’s shares. AT&T’s ratio of enterprise value to Ebitda is now 22% higher than its five-year average, according to data compiled by Bloomberg.

There’s still a static interruption in AT&T’s programming, however: DirecTV. While Stephenson likes to wax poetic about the possibilities of digital video, anyone with a DirecTV subscription knows better. DirecTV is plagued by technological glitches and an antiquated interface that has gone unaddressed, leading to a growing sense that AT&T has given up on a company Stephenson bought for tens of billions of dollars. AT&T insists DirecTV plays a key role in its overall mission of serving video to its customers. And DirecTV accounts for most of the 21.6 million video customers that AT&T has. But that figure has dropped from more than 25 million in 2018 — and it continues to fall.

Even though DirecTV has become the awkward sibling, its customers are attractive to AT&T because it wants to convert them into subscribers of HBO Max and AT&T’s more lucrative wireless service. “Those can be very valuable customers,” Stankey said, before launching into some consultant-speak. “It’s about making sure that pivot completes itself.”

There’s also a chance AT&T ditches the pivot altogether. If wireless carriers T-Mobile and Sprint Corp. are allowed to proceed with their merger, it would set a precedent for direct competitors to merge. That could give the green light for DirecTV to combine with its satellite-TV rival Dish Network Corp. In a phone interview in July, Charlie Ergen, Dish’s billionaire controlling shareholder, said coyly that a transaction like that has “industrial logic.”

In the meantime, between HBO Max and 5G — and getting a handle on one of Hollywood’s biggest businesses — Stephenson and Stankey will be busy. When the Time Warner deal was being challenged, antitrust regulators questioned whether AT&T would be left with too much power. The answer might be, yes, too much for its own good.

And yet — consider the alternative. Companies from all corners of the economy have been criticized for not adapting to the wrenching changes brought on by tech innovators such as Amazon and Google. Stephenson and Stankey have chosen not to sit by idly, and it’s likely that they will win in grand fashion because of that — or lose badly.

Over the years, their company has marketed itself with slogans like “You Will,” “Rethink Possible,” “It’s What You Do With What We Do,” and “Mobilizing Your World.” But all of those pitches evoke a gentler era before the streaming wars began and before Stephenson and Stankey decided AT&T had to go on the offensive. If all goes according to plan, they might be in the market for something more assertive.

“Five years ago, I’d have probably been hard pressed to make an argument for why it made sense in the old world” to move so aggressively into content, Stephenson said at an investor conference in September. “In the new world, we think it makes all the sense in the world.”

[1] Improper government interference was speculated to have played a role, with President Donald Trump seeking to retaliate against his nemesis, Time Warner’s CNN.
[2] Tsujihara departed after it was alleged that he helped an actress, with whom he was having an affair, land film roles.

Graphics by Elaine He
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story: Tara Lachapelle at tlachapelle@bloomberg.net
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

Is AT&T’s Hollywood Plot Too Far-Fetched?

Streaming Wars

Making of a New AT&T

Lifers

Strong Signal

‘Mobilizing Your World’

Dividend Dependency