Double Down on Connectivity or Diversify?

What tier-one communications service providers should do about revenue growth is a matter of huge disagreement. Some favor a “stick to your knitting” approach. Others believe connectivity growth prospects are so limited that movement into new lines of business, to create new revenue sources, is imperative.

It is not hard to find critics of the Time Warner or DirecTV acquisitions that argue AT&T should have invested in its fiber to home capabilities or its 5G network. Many prefer the “pure play” approach taken by Verizon or T-Mobile US, for example.

That might or might not be strategically wise. Globally, revenue growth in the mobility and fixed network segments is flat or slowing. Significantly,  revenues in developed markets are declining, and have been since perhaps 2011.

Nor has AT&T or Verizon been able to budge market share too much since about 2012. To be sure, where AT&T had 17 percent share in 2000, it had 31 percent share in 2012. Where Verizon had 25 percent share in 2000, it had moved up to 35 percent share in 2012, as both service providers made big acquisitions to bulk up.

Verizon’s buys included the portion of Verizon Wireless purchased from Vodafone, but also Cellco and Alltel. AT&T grew by acquiring Cingular and Dobson.

source: Deloitte

Since 2011, AT&T and Verizon market share, as measured by accounts, has been flat. So there are reasons to believe that even alternative investment in 5G would not move the revenue needle very much.

source: Statista

The other argument is that there are very few ways incremental cash flow or revenue from investing in the fixed network (more fiber to home) or investment in faster 5G.

In 2018, U.S. cable companies had 65 percent internet access market share, More importantly, cable companies have been getting virtually all the growth for several years.

source: Fidelity

To be sure, it is rational for any equity analyst to doubt the wisdom of the additional debt AT&T took on to buy DirecTV and Time Warner.

But it is not clear how much revenue upside exists for AT&T in its fixed networks business, especially given cable operator market leadership.