One often hears it said that “AT&T blundered badly” in buying DirecTV and Time Warner. Of course, one might also have said that AT&T bet poorly when it became the biggest cable TV operator in the U.S. market, or when it purchased NCR to enter the computing business.
In almost the same breath, one hears that telcos are “not good at innovation.” That is arguably more correct.
What such comments overlook is the mature revenue trend of the global communications industry and the toughness of increasing customer spend in the existing categories.
It is all well and good to urge connectivity providers to “stick to their core business” instead of risking the distractions of new lines of business. But the numbers suggest that is a path to a “no growth” future for many suppliers.
Though some product lines and regions still see revenue growth in the five percent range, there is flat revenue growth globally, and has been, for some time. Mobility and broadband have driven results over the last couple of decades. But what happens when those two markets saturate?
Some would note the important role the move into video entertainment has been, globally, for fixed network service providers. Yes, internet access and mobile service are the other big stories. But the move into entertainment services has become a hugely important part of the fixed network service provider revenue stream.
source: Bureau of Labor Statistics
So did AT&T blunder badly? The firm took on lots of debt, as telcos often do when expanding either geographically or to enter new lines of business. The linear subscription TV business did erode faster than expected. But those businesses generated more immediate free cash flow than AT&T could have generated by expanding its fiber to home footprint, for example.
Even now, after the DirecTV and Warner Media properties have been spun off, AT&T continues to have a 70-percent stake in the profits and cash flows of both businesses. So AT&T has not actually “exited” those lines of business.
On a broader level, the risk of entering new lines of business, at scale, will remain. The reason is simple: there are limits to how much any business or household is going to spend on connectivity services and products.
In 2007, U.S. households spent about three percent of income on communications and information products and services, according to the Bureau of Labor Statistics. That includes devices, software and connectivity. A reasonable assumption is that communications accounts for 66 percent or so of that total, or perhaps two percent of information and communications spending by households.
That does not change much from year to year. U.S. household spending on all forms of communication, for example, is in the 1.5 percent to two percent range of total income.
In 2018, households in European Union countries generally spent more than did U.S. households on communications. Generally, spending per household was more than two percent.
In 2020, U.S. households spent about half of one percent of income on internet access, and about one percent of income on other communications, according to the Federal Reserve Bank.
Canadian households spent about three percent of income on communications services in 2019, according to the CRTC.
On most U.S. government surveys, communications and information spending is small enough that such expenditures always are found in the “other” category.
The point is that to grow connectivity revenues, service providers must provide value that is beyond the present, if the share of household revenue devoted to communications is to grow.
Some argue consumers might substitute communications for travel, for example. And though it might seem intuitive that household spending climbed in 2020 because of the pandemic, that might not be true. According to the Brookings Institution, household communications spending actually fell.
That noted, there is some evidence that household communications spending in the Organization for Economic Cooperation and Development countries rose between 1995 and 2005, according to the International Telecommunications Union.
Basically, to entice consumers to spend more on communications, they will have to increase value enough that consumers will reduce spending in other areas to increase communications spending. That could come from travel, entertainment or recreation categories, for example.
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