If you had a choice, would you rather “be Facebook” or “be AT&T?” In terms of revenue growth, equity value or physical asset intensity, many would choose to be Facebook. In other words, many would rather operate an over-the-top application business than an Internet access business.
Globally, a “telco” might be valued at 4.4 times enterprise value divided by earnings (EBITDA). Content companies might be valued at 11 to 12 times EV/EBITDA. Facebook might be valued at 16 times EV/EBITDA.
Netflix, the over-the-top streaming service, has a price-earnings ratio as high as 398. At the same period of time, cable TV operator Time Warner Cable (a separate firm from Time Warner) had a 28.7 P/E multiple. Comcast had a 17.4 P/E multiple.
You can see the huge disparity. A dollar of revenue earned by Netflix is worth nearly 14 times that of a dollar generated by Time Warner Cable, or 23 times the value of a dollar earned by Comcast.
In other words, a rational person would rather own an asset worth four times that of a telco, when there is a choice.
Telco executives have limited options, unless they want to sell their assets and go out of business as independent entities. But there is one obvious strategy if they wish to stay in current lines of business, and yet reach for higher-valuation revenue streams: they can own more assets of the higher valuation type.
In other words, they can augment lower-multiple access businesses with higher-multiple content or application businesses. That “move up the stack” or “move up the value chain” strategy is simple enough, if execution risk exists.
And that explains why AT&T would want to own Time Warner.
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