AT&T’s bold bid of $49 billion in cash and stock to acquire DirecTV would lash together the two distribution giants to contend with the mammoth media combo of Comcast and Time Warner Cable, but here’s what it really means for AT&T:
It is time to stage another massive break-up.
AT&T should split itself into two halves: a sexy half—the wireless business, 73 million cell-phone customers and DirecTV’s 20 million U.S. customers for video-by-satellite; and a not-so-sexy half—the land-based U-verse network, delivering video, Internet access and phone service into 11 million homes.
AT&T spent $5 billion to $10 billion sprucing up its old phone network to add piped-in cable-TV service, cutting corners and relying on copper broadband (instead of fiber-optics) for the last mile. For this, it has signed up all of 5.7 million U-verse video customers in almost a decade of trying. The new bid is a tacit admission that TV via satellite is the better bet.
For AT&T to keep both networks—its fiber-and-copper, land-based (“terrestrial”) network, and the over-the-airwaves DirecTV system—would be like wearing both belt and suspenders. You only need one.
Verizon, too, would do well to split itself into two halves. Its highest value clearly lies in the wireless smartphone business, and wireless is the Internet of the future. Verizon should hold on to wireless and cleave off the local-phone biz and the fiber-optic Fios network that now delivers video, phone and Net-access to almost six million homes.
New York-based Verizon spent close to $20 billion to string Fios fiber-optic lines into millions of homes. For that gargantuan spending, it has snagged all of 5.2 million video homes, again in almost a decade. Yet the wireline business typically gobbles up two-thirds of Verizon’s capital . . . to provide just one-third of Verizon cash flow.
Spin it off. Go wireless only.
For the new-old AT&T, a new breakup would be the fifth in its long-lived history. And each one has unlocked billions of dollars in value. In 1984 the federal government broke up the old AT&T monopoly into seven regional Bell companies, tasked only with providing government-regulated, monopoly local phone service; AT&T was left with long-distance and cellular and the new right to expand into the computer business.
That government-ordered split unlocked untold billions of dollars in shareholder wealth and innovation and competition. Then Breakup #2 came at the behest of AT&T itself in 1996, as it spun off the NCR computer business and the Lucent network-equipment business and stuck with long-distance and wireless.
Lucent created enormous shareholder value for a long run before itself collapsing as its proprietary router technology was undercut by off-the-shelf Intel chips fueled by Moore’s Law.
In 1999 AT&T bought John Malone’s Tele-Communications Inc., then the nation’s largest cable-system operator, for $54 billion. In 2001 it spun off wireless as a separate company in 2001 (Breakup #3), and a year later AT&T sold off the cable systems to Comcast (Breakup #4).
What was left of AT&T got bought itself in 2005 by one of its Baby Bell offspring, Ed Whitacre’s SBC (originally Southwestern Bell). As I wrote in a December 2006 cover story in Forbes, SBC was “the unaccountably proud runt of the seven Baby Bells spun off from the old AT&T monopoly that the government busted up in 1984.”
It’s still a pretty good piece, and it predicts that AT&T might someday buy DirecTV. You can read it here: http://bit.ly/1n80t1x
Whitacre had been CEO since 1990, and before he handed the job to current CEO Randall Stephenson in 2007, Whitacre had built the world’s largest telco by putting together 13 deals with a combined price tag of $285 billion, including assumed debt. That entailed recombining four of the seven Baby Bells, plus AT&T long-distance and AT&T Wireless.
But what Whitacre and his longtime dealmaker, James Kahan, have put together, let the next generation of bankers render asunder. The future is wireless for all delivery of all kinds of content, rather than land-based tentacles that must reach into every home. Breaking up AT&T into two giant halves—wireless and wired—would be the smartest way to respond to this new reality.