One way of gauging the strategic value of various AT&T revenue segments is to examine either revenue or earnings contributions.
The Mobility business unit represents about 50 percent of AT&T’s adjusted cash flow (EBITDA). WarnerMedia represents about 17 percent of the company’s revenue and adjusted EBITDA.
Business Wireline represents about 17 percent of the company’s adjusted EBITDA. Entertainment Group represents about 15 percent of the company’s adjusted EBITDA.
In terms of revenues, mobility represents 40 percent, entertainment group 26 percent and business wireline about 15 percent of total quarterly revenue of $45.7 billion.
So 99 percent of cash flow comes from those four revenue segments. But what might really stand out is the 15 percent contribution from AT&T’s landline voice, video distribution and internet access products (the triple play suite). These days, consumer internet access, voice and entertainment video (recall that AT&T is the largest U.S. subscription video provider), contribute relatively small amounts of cash flow.
Also, keep in mind that DirecTV, for the moment, is delivered primarily by satellite, and likely represents $8.5 billion in revenue. So it is possible that consumer landline services now contribute only about seven percent of AT&T revenue.
That suggests one important strategic implication. Unless you believe AT&T can materially grow its landline voice and internet access revenue by investing heavily in optical access, and thereby taking significant share in the access business, the capital is arguably better spent elsewhere. But there is a caveat.
Some of us would argue that the ultimate fate of the present DirecTV business is its transition from satellite to over-the-top streaming delivery. If so, then AT&T has to ensure that its fixed network access lines can handle the data load of streaming DirecTV.
It is a delicate matter, as many believe total revenue from OTT delivery is going to be less than linear delivery. So investments in next generation networks will be made to support potentially less revenue than presently is earned.
But that is not a new strategic issue. Many fixed network executives have essentially operated on the assumption that such investments essentially must be made so “you keep your business,” and not because revenue upside is so great.
Such challenges often are downplayed by suppliers, service providers, financial analysts, consultants and others with business interests in the industry. These days, it is becoming more common to hear frank discussion, however.
“Operators have a choice,” Phil Twist, Nokia VP said. “Do you want safety and security, or the risk of new growth?” Twist characterized “safety” as a prison; growth as entailing “uncertainty.”
Others characterize the state of the industry as “unraveling” and “desperate.”
To be sure, virtually nobody but AT&T’s key competitors are likely happy about the huge debt load AT&T has taken on to diversify its revenue sources. But it is a rational, if controversial argument, that AT&T is hemmed in--in terms of revenue growth potential--in both its fixed and mobile business segments.
Committed to a financial strategy built on ever-increasing dividend payments, AT&T essentially has no choice but to risk expansion beyond connectivity services, as its opportunities to take significant market share in mobile or fixed network connectivity services in its core markets are slim to none.