Are Telecom-Media Conglomerates a Thing of the Past? - Yahoo Finance

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Telecom-media conglomerates that once took pride in their varied business cycles to mitigate operating risks are fast shifting the focus on their core operations. The concept of ‘bigger is better’ has ceased to gain precedence for these big telecom powerhouses. These firms had earlier considered vertical merger the best way to move forward as a core communications firm cannot rely exclusively on content, nor can a media firm solely depend on wholesale distribution models to sustain in a dynamic environment. However, most of these colossal telecom conglomerates have now shed their baggage to be nimble and concentrate more on their telecommunications businesses.

A paradigm shift to the core telecom operations might also have been triggered by the inherent growth prospects of the sector triggered by the multi-billion infrastructure investment plan by President Biden. The $2 trillion investment plan over an eight-year period includes a $100 billion provision to significantly expand broadband access to Americans, as the administration aims to fortify its technological prowess to thwart the dominance of countries like China.

The plan envisions reaching the underserved areas of the country and prioritizing support for broadband networks affiliated with local governments, nonprofit organizations and cooperatives to encourage strong competition with privately-owned companies. The plan has also earmarked funds for the tribal areas that lack access to high-speed Internet. Furthermore, the U.S. President has allotted $180 billion for R&D and future technologies that are likely to sow the seeds for technology innovation to leapfrog competition against China and South Korea in areas like 5G. As focus beats diversity, we take a closer look at some of the industry stalwarts to gauge the underlying metrics in the art of survival of the fittest.

AT&T Inc. T has inked a definitive agreement with Discovery, Inc. DISCA to spin off its media assets and merge them with the complimentary assets of the latter to form a standalone global entertainment company amid continuous cord-cutting in U.S. households. The transaction will be structured as Reverse Morris Trust that refers to a merger with another company in a tax-free transfer. AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity, while Discovery will own the remainder.

The dramatic turn of events after acquiring the Time Warner media assets in 2018 for about $85 billion is perhaps triggered by high investments required for 5G deployment and expansion of fiber-optics footprint across the country. Notably, AT&T completed the acquisition of Time Warner in June 2018 to form a new business division titled WarnerMedia. With assets like HBO, CNN and TNT, the acquisition of Time Warner created new kinds of online videos and opened up avenues for targeted advertisements.

However, AT&T faced a steady decline in linear TV subscribers and legacy services. Moreover, TV content-cost pressure, high programming costs and new video platform expenses eroded margins. In addition, consumers increasingly cancelled pay TV packages for cheaper streaming options from Netflix, Inc. NFLX, Amazon.com, Inc. AMZN, Hulu and other services. Despite significant investments and healthy traction in HBO Max streaming platform, AT&T still trailed rivals with 63.9 million global subscribers with a higher-than-average price of $15 a month, compared with more than 100 million for Walt Disney Co's Disney+ and 207.6 million for Netflix.

Incidentally, AT&T has been divesting its non-core assets to increase its liquidity and trim debt. The company inked an agreement in first-quarter 2021 with private equity firm TPG to divest its U.S. video business. AT&T is likely to receive $7.6 billion from the transaction, while retaining stake within the newly formed DIRECTV. The cash resources are likely to be utilized to augment its network infrastructure throughout the country. Moreover, a focused entertainment company is likely to be better placed to capitalize on the booming direct-to-consumer streaming services market and unlock value from media assets. AT&T remains focused on business transformation efforts to augment operational efficiency and facilitate optimum utilization of resources to enhance value. The company expects this holistic growth policy to add significant customer value and generate healthy ROI across the business.

Another leading player in this sphere is Verizon Communications Inc. VZ, which recently inked a deal with Apollo Global Management, Inc. APO to sell its media business — Verizon Media — for $5 billion. Verizon Media comprises iconic brands such as Yahoo and AOL, and leading ad tech and media platform businesses. This carve-out will allow Verizon Media to aggressively pursue growth areas. Also, it will benefit advertisers, publishing partners and almost 900 million monthly active users worldwide.

Verizon acquired Yahoo in June 2017 and combined it with AOL assets to form a subsidiary called Oath. Later it wrote off a majority of its media business due to a lower-than-expected performance and Verizon Media replaced the Oath brand as it embarked on a new operating structure closely aligned with the evolving customer needs. However, the company continued to lose Fios Video connections amid pressure from cord-cutting of video bundles as consumers opted for cheaper streaming options.

Earlier, Verizon also divested the social media blogging site Tumblr for an undisclosed amount. The blogging platform was sold to San Francisco-based web developer firm Automattic Inc., which is the parent of publishing site WordPress.com, WooCommerce, Jetpack, Simplenote, Longreads, and more. With the gradual emergence of social media sites like Facebook, Inc. FB, Twitter, Inc., Reddit and Instagram, Tumblr lost its relevance among netizens, leading to mass exodus of users. Consequently, the once-dominating blogging platform that boasted more than 475 million independent blogs was put up for sale as Verizon Media, of which it was part of, aimed to focus on premium original content.

The current Verizon Media sale reaffirms the carrier’s focus on its core wireless business, where it is witnessing solid demand for its services. The telecom giant’s disciplined network strategy for long-term sustainable growth, along with operational execution, is noteworthy. Verizon’s 5G mobility service offers an unparalleled experience that positively impacts industries as diverse as public safety, health care, retail and sports. The company’s 5G network hinges on three fundamental drivers to deliver the full potential of next-generation wireless technology. These include massive spectrum holdings, particularly in the millimeter-wave bands for faster data transfer, end-to-end deep fiber resources and the ability to deploy a large number of small cells.

Conclusion

Most of the restructuring operations of these diversified conglomerates are aimed at better utilization of resources to minimize corporate chaos. Diverse business mix can often lead to diffused energies and resources, which might not be synergistic at all times despite management’s best efforts. In addition, management might be inclined to take unnecessary risks to hold a loss-making business, hoping to pull through with superior performance from a high-performing unit. However, this might prevent the value of higher-valued businesses from being fully realized in the share price and the companies would have been better off had they divested the underperformers. Therefore, in hindsight, the era of telecom-media conglomerates seems to be as good as over as companies are gradually evolving into more focused and nimbler entities.

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Are Telecom-Media Conglomerates a Thing of the Past? - Yahoo Finance
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