AT&T Has to Change, Says Elliott Management

Perhaps it never is a good sign when a major institutional investor calls for changes. That virtually always is an indicator that a firm is not performing as well--as an asset--as the market expects. AT&T now is getting such attention from Elliott Management.

It is never difficult to find investor, equity analyst or commentator criticism of AT&T's major acquisitions since the failed effort to acquire T-Mobile US. Others might point to the deals since the DirecTV acquisition. Though execution sometimes is the main complaint, strategic error is the most common charge. By way of comparison, such critics say, Verizon has done better by sticking to its connectivity knitting. 

It is not an easy matter to decipher, at this point. AT&T equity performance has lagged the market, Verizon and T-Mobile US. Concerns about debt taken on to fuel the acquisitions is a frequent concern. 

Granting the concerns, there is another way to view the acquisitions (execution notwithstanding), and that is as a rational strategy. When an industry reaches a key turning point in its lifecycle, “doing more of the same” might well be called a questionable strategy, especially for the leaders in that industry. 

Without much question, core products ranging from voice to messaging to internet access and linear video are past their peak, and getting close to a peak. The huge attention being paid to 5G, edge computing and internet of things can be interpreted as evidence of that maturation. 

With the caveat that some might fault the execution, not the strategy, or the choice or assets, rather than the strategy, AT&T has diversified its position in the internet ecosystem substantially since 2010. Verizon has not done so. One might well make the argument that none of these businesses is a fast grower. But one might also argue that some of these lines of business stand a better chance of holding their own, while providing exposure to multiple roles within the ecosystem, not simply the “connectivity” role. 

Facing natural limits in its core market, any firm might rationally consider a change of business model and product set. Where would Facebook or Google be today had they not pivoted to a “mobile-first” strategy? What if Paypal PayPal had stuck to its original cryptography plan? What if Apple had stuck to PCs? What if YouTube had remained a site for quirky videos?

What if Singtel had remained a “Singapore only” telecom firm? The point is that the connectivity business, traditionally a no-growth or slow-growth business with guaranteed profits now is a no-growth or slow-growth business in a competitive environment. 

In fact, the U.S. Justice Department quashing the AT&T effort to buy T-Mobile US--on market concentration grounds--might validate the ”limited growth in the core business” argument. Justice Department officials made it clear that AT&T would not be allowed to get bigger in the U.S. mobile market. 

Even in failure to get antitrust approval, AT&T was confronted by the absolute need to look for growth elsewhere than in its traditional core businesses. The damage, one might argue, were the terms of the deal breakup fee, which allowed T-Mobile to fund its market attack. 

One can argue with the precise assets acquired, the strategy behind those acquisitions or the execution and integration, without disagreeing that AT&T has to find massive new revenue sources to fuel its growth and pay its dividends. 

By implication, many other tier-one service providers will have to undertake similar diversification moves. The issue is not “conglomerate or not.” It is hard to escape the conclusion that tomorrow’s tier-one connectivity providers will have transformed, much as Comcast has changed from a video distributor into a firm active in many parts of the internet ecosystem (theme parks, movie production, network ownership, business services, wireless and mobile). 

One might argue alternative major assets should have been purchased, though it is hard to see how the free cash flow from DirecTV could have been gotten from any other feasible acquisition. And if content ownership as a building block of tomorrow’s video subscription business is necessary, few assets other than Time Warner were available, providing both segment scale and free cash flow, within the constraints of the debt burden to be imposed. 

The point is that the U.S. connectivity business is growing very slowly, while every major product category is either in the declining phase of its life cycle, or will be, soon. 

Other firms have other options, as often is the case in any market with a few dominant providers and many upstarts and specialists. “Grow by taking share” still makes sense for T-Mobile US and many other smaller connectivity providers. It is not an option for AT&T, for the most part. 

As the largest U.S. connectivity services provider, AT&T has to expect to lose share, even if it executes well. 

None of that will spare AT&T criticism over its equity valuation, strategic choices, acquisitions  or execution. But the move to occupy different roles within the ecosystem (“moving up the stack,” some might say) is hardly foolhardy. It is a rational response to market circumstances and product life cycles.

Are Mobile and Fixed Network Services Public Utilities?

The language generally used by proponents of municipal broadband is that internet access is a necessity or a utility. A survey conducted by Openet suggests many consumers and citizens also believe mobile service is a utility, in the United Kingdom, Colombia, Canada, Indonesia and Singapore.

More than half of all respondents consider mobile service “a utility along the lines of gas, water or electricity.” But only about 21 percent believe mobile operators “always will be” utilities. About 31 percent of those who view mobile service as a utility believe mobile operators can add more value. 

source: Openet

Those findings do not necessarily correspond to the regulatory framework for mobile services in the United States, nor did the survey poll U.S. consumers. Still, the findings do point out some degree of market and regulatory exposure, to the extent that U.S. consumers have similar views. 

“Broadband internet services (both fixed-line and mobile) are increasingly being included within the definition” of public utilities, according to Wikipedia.

Worst of All Worlds: Telecom Now is a Regulated Non-Monopoly

If being an unregulated monopoly is the best of all possible worlds for an industry, then being a regulated non-monopoly arguably is among the worst of situations. And that might be where the legacy providers in the global telecom industry find themselves.

Considered carriers of last resort, many legacy service providers are compelled to sell wholesale capabilities to competitors, meaning the underlying carriers cannot reap all the rewards of investments in their networks. 

In other cases, the legacy carriers also have service obligations none of the other competitors face. 

Always a slow-growth business, telecom at least had the luxury of guaranteed rates of return and a bar on lawful competition. Today, telecom increasingly is becoming a slow-growth business without legal barriers to entry by competitors. 

STL Partners forecasts less than 1% CAGR in telecoms revenues

source: STL Partners

There are many potential business implications of slow or negative growth. Unchecked, the enterprise simply becomes unprofitable and then shrinks, before being acquired by a stronger and larger firm, or simply going out of business. Revenue growth rates of one percent are troubling especially if general rates of inflation are higher than one percent. 

The answer many connectivity providers pursue, aside from mergers and acquisitions to boost gross revenue and cut costs, is to diversify into other lines of business that can more than replace any losses in the legacy business. 

FastWeb, Wind Tre Sign Extensive 5G Network Sharing Agreement

Fastweb (Swisscom) and Wind Tre (Hutchison) have signed a 5G network sharing agreement including spectrum, radios and backhaul in Italy. The deal will allow both firms to reach 90 percent of the population by about 2026, while also lowering capital investment costs and speeding market entry, as attacker Iliad enters the Italian mobile market. 

source: Point Topic

Also, the deal gives Fastweb, a fixed network services supplier, a mobility capability, while Wind Tre gets to sell fixed network services (fiber-to-home and fiber-to-curb) to businesses and consumers. 

The shared network will be managed by Wind Tre and use Fastweb’s fixed network backhaul facilities to connect small cells and towers across Italy.

The big trade-off with wholesale network sharing is that the partners are unable to differentiate on coverage or speed dimensions, the two major potential differentiators for a mobile network. On the other hand, this deal also allows each partner to create a converged services business with mobile and fixed network services, at a fraction of the cost and time to market of each firm moving alone. 

Fastweb also becomes a nationwide mobile provider while Wind Tre immediately becomes a supplier of faster fixed network internet access services. Wind Tre has been under pressure recently, losing accounts as Iliad has entered the market.

Dunbar's Number and the Size of Mobile and Social Networks

One issue for designers of social network apps and mobile networks is the effective number of people any particular user interacts with, can interact with, and at what degree of intensity (time or emotional commitment). And it might be fair to say that face-to-face human relationships are one thing, while online social networks are another. 

LinkedIn might be a social network, but mostly of people one never sees, do not really know or spend time with in any way other than occasional online messages. One analogy is that most of us on LinkedIn could not consistently match faces and names of our own connections. 

Simply put, there are clear and sharp limits to emotional closeness and the number of meaningful relationships any person can have, in a face-to-face, real-world  context. 

The absolute limit of people any single person can even put a name and face together with numbers about 1500, according to Robin Dunbar, who developed a theory on the size of human groups now called Dunbar’s number. 

source: Wikimedia

Few consider that an effective social or communication network, one simply recognizes a person. 

The Dunbar number suggests there are clear limits to the size of any single person’s face-to-face social network. Casual friends—the people you’d invite to a large party--might number only about 150. 

Dunbar discovered that the number grows and decreases according to a precise formula, roughly a “rule of three,” where each group of more intimate friends is about a third the size of the larger group. 

The number of people you might call close friends—perhaps the people you’d invite to a group dinner--number a maximum of 50. You see them often, but not so much that you consider them to be true intimates. 

There’s a smaller circle of fifteen, who are the friends that you can turn to for sympathy when you need it, the ones you can confide in about most things. 

The most intimate Dunbar number, five, is your close support group. These are your best friends (and often family members). 

Looking at mobile network communications, some researchers have found that whether any user has a large or small network of contacts, the amount of time spent communicating was about the same. 

Dunbar and a research team found, after analyzing some six billion calls made by 35 million people in an unnamed European country throughout 2007, that the rule holds for mobile communications. 

The team assumes that the frequency of calls between two individuals is a measure of the strength of their relationship. To screen out business calls and casual calls, the researchers included only individuals who make reciprocated calls and focus on individuals who call at least 100 other people. 

The team found some 27,000 people who call on average 130 other people. 

“Compared to those with smaller networks, those with large networks did not devote proportionally more time to communication and had on average weaker ties (as measured by time spent communicating),” say researchers Giovanna Miritelloab, Esteban Morobcd, Rubén Laraa, Rocío Martínez-Lópeza, John Belchambera, Sam G.B.Roberts and Robin Dunbar. 

Mobile users tend to distribute their time very unevenly across their network, with a large proportion of calls going to a small number of individuals, they note. “These results suggest that there are time constraints which limit tie strength in large personal networks.” 

A study of Facebook and Twitter networks likewise found that contact frequency matched “real world” communications closely. The absolute sizes of these layers and the mean frequencies of contact with alters within each layer match very closely the observed values from offline networks, say R.I.M.Dunbar, Valerio Arnaboldia, Marco Conti and Andrea Passarella. 

“Our analyses indicate that online communities have very similar structural characteristics to offline face-to-face networks,” they say. 

A study by Pew Research Center found that the median number of Facebook friends is 200. How that compares to “real world” human networks is debatable. One study of LinkedIn first-level contacts found that  27 percent of LinkedIn users had between 500 and 999 first degree connections. 

 source: Pew Research Center

As with Facebook, “friends” and LinkedIn first level connections are not the equivalent of friends one knows on a face-to-face basis. In many cases, far from it. If you use LinkedIn, and think about it, nearly all the connections are business or commerce related, and almost never involve on-going relationships with people you eat with, for example. 

And even some who doubt the general premise Dunbar limit do note that any bucket of people (group with tags) on a very-large contact list tend to number less than 150. 

Dunbar's Number suggests no human can maintain more than 150 stable social relationships. Operationally, you would not feel uncomfortable joining that person for a drink at a bar. Most of us do not reach the "Dunbar limit."

The Dunbar number is actually a series of maximum limits. Some people might be able to know 500 acquaintances or 1500 people for whom you actually know a name. 

At the upper limit, 100 to 200 is who you’d ever be able to personally invite to a large party. Perhaps 50 is the limit of those who can be close friends. 

About 15 is the number of people you rely on for sympathy and confide in about most things. Five is your close support group (typically best friends and family). 

Social networks online arguably are different from other human networks. Most people might have social sets online that resemble their real world interactions. But a few power users on social media also exist. The issue is that such social networks are not the same as human face-to-face networks. 

Cable Networks are Changing

U.S. Cable TV operators historically have preferred operating on owned facilities. But changes in their markets and services now require a wider range of infrastructure platforms. Sky, owned by Comcast, has relied on wholesale agreements to supply fixed network internet access in the United Kingdom. 

But reports indicate Sky is considering investing in Virgin Media’s fiber to home network. Two elements of the plan are historically unusual, by cable precedents. First, the idea that Virgin Media might allow a direct rival to own part of its infrastructure is unusual. Second, the idea that Sky might consider becoming such an investor--again in a rival network--is new. 

But cable operators now find themselves in a mix of situations. By definition, their traditional fixed networks do not support mobile service, so mobile virtual network operator agreements are necessary, at least for the moment. 

In the United Kingdom, Comcast owns a satellite distribution network, but no terrestrial network, a historically anomalous state. Also, both Virgin and Comcast now face market demand for a switch from hybrid fiber coax to all-fiber distribution networks. Since the advent of fiber to home, cable executives and their suppliers have worked tirelessly to prove that hybrid fiber coax has the ability to support bandwidth growth far into the future. 

The switch to FTTH, perhaps partly for reasons other than cost and capability, is a switch. 

So many changes are coming. Where operators have used a coaxial cable platform exclusively, then migrated to hybrid fiber coax, business requirements require addition of MVNO operation on leased facilities, leased fixed network access, joint ownership of facilities and perhaps a switch from HFC to FTTH as well, in some cases. 

Those are big changes in approach.

Auto Technology User Expereince Matters

User experience matters with car technology, just as much as any other. Some alerts on Advanced Driver Assistance Systems are so annoying or bothersome that many drivers disable the systems and may try to avoid them on future vehicle purchases, according to J.D. Power. 

Also, as so often happens, big brand names seem to be succeeding over in-house or proprietary brands. 

Fully 69 percent of respondents say they have Apple CarPlay and/or Android Auto in their vehicle. That has implications for automatker factory-installed navigation systems. 

About 68 percent of owners with Apple CarPlay and/or Android Auto want factory-installed navigation on their next vehicle, compared with 72 percent of those without Apple CarPlay or Android Auto.

Built-in apps not meeting users’ expectations, J.D. Power research suggests. The attribute for “ease of using built-in apps” is the lowest-performing attribute in the entertainment and connectivity category (7.63 on a 10-point scale). 

Among the 29 percent of owners who have discontinued the use of built-in apps, 46 percent say they “do not need it” and 18 percent say they “have another device that performs the function better.” 

Lane-keeping and centering systems appear to be key irritants.. On average, 23 percent of customers with these systems complain that the alerts are annoying or bothersome. 

For these owners, 61 percent say they  sometimes disable the system, compared with just 21 percent of those that don’t consider the alerts annoying or bothersome. 

Owners wanting the feature on their next vehicle ranges from 63 percent for those that consider the alerts annoying or bothersome to 91 percent for those who do not, J.D. Power notes. 

That noted, Collision protection has the highest score (813) among the six categories measured in the study. Smartphone mirroring (789) is second, followed by comfort and convenience (787); entertainment and connectivity (782); driving assistance (768); and navigation (744), J.D. Powers says.