Monday, June 11, 2018

Growth by Acquisition or Organic Means: What Options, What Impact?

If approved, the AT&T acquisition of Time Warner might generate $31 billion in incremental revenue for AT&T. If Verizon is successful using its 5G network to attack a fixed wireless opportunity worth about $7.5 billion, and then add internet of things connectivity revenues of about $5.4 billion, that implies something like $13 billion annually.

Though debt levels are an issue, one might argue AT&T’s decision makes sense, despite the debt load issue, compared to a rival decision by Verizon to focus on 5G connectivity services.

That is, of course, assuming Verizon does not have other plans in mind, and even if AT&T cannot produce additional revenue, cost savings, reduced churn or other advantages from Time Warner assets.

And one wonders. If the AT&T acquisition of Time Warner is not approved, what other assets or investments could AT&T make to generate $31 billion in incremental revenue, immediately. Perhaps somebody else has an idea. My cursory check at other assets and revenue streams suggests it would not be easy to boost revenue $31 billion any other way, at any price AT&T could afford to pay.

The apparent strategic choices being made--or attempted--by AT&T and Verizon might be positioned as practical, near-term choices, even if there are strategic implications.

Still dealing with the debt load from acquiring all of its mobility business, where it comes to Verizon, additional acquisitions arguably are necessary, eventually. The reason is simply that both Verizon and AT&T have gotten most of their revenue growth from acquisitions, not internal and organic growth.

Since 2013, AT&T has dramatically changed its revenue profile by acquiring DirecTV, immediately becoming the largest U.S provider of linear video.  International acquisitions, though smallish, also indicate where AT&T could go next, beyond content.

Verizon’s biggest deal since 2013 was acquiring Vodafone's stake in Verizon's mobile business for about $130 billion in 2014. But debt load from that deal also limit Verizon’s ability to make other big asset purchases.

The appointment of Hans Vestberg as the new CEO of Verizon has been interpreted as a focus by Verizon on “5G,” as opposed to some other strategy, such as getting into content ownership in a bigger way, beyond the Oath brands.

That might not necessarily mean Verizon has in mind a strategy something like “doubling down” on connectivity services as a driver of growth, which is one way the strategy might be interpreted.

To be sure, Verizon does have a bigger opportunity than AT&T, for example, in using 5G-based fixed wireless to attack other carriers in the consumer internet access business. Verizon believes it can address about 30 percent of  U.S. homes, mostly out of territory, that way.

If there are some 130 million U.S. homes, that implies access to about 39 million potential new accounts, a significant new opportunity if one assumes each new account could generate $80 a month in recurring revenue.

Were Verizon to get 20 percent of potential customers as new accounts, 5G-based fixed wireless could generate $960 per account, per year, on a base of 7.8 million locations, it could realize $7.5 billion a year in additional annual revenue.

That is about 5.5 percent incremental revenue lift for Verizon. That is interesting, but not transformational in any way.

So some might argue that something else must be at work. And that likely is a move into other parts of the value chain built on 5G, including internet of things apps, as the amount of new connectivity revenue from IoT likewise will be interesting, but not transformational. Indeed, GSMA has predicted that connectivity revenue will be about five percent of the total IoT revenue opportunity.

That might work out to as much as $50 billion in annual global revenue. Verizon’s opportunity is a fraction of that. If U.S. revenues are a third of total, that implies $16.5 billion in connectivity revenue. If Verizon gets a third of that, it might realize $5.4 billion in annual incremental revenues.

Again, that is nice, but hardly transformational. Verizon might believe it will do much better than that, longer term.

Still, the nagging question has to be asked. If Verizon cannot do much more than add those incremental revenues, is it a sustainable strategy to focus on “5G” connectivity services? I doubt that is what Verizon has in mind, frankly.

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