The conventional wisdom is that AT&T and Verizon should never have ventured into the subscription video business or content ownership in general. Perhaps more to the point, neither firm should have taken on so much debt to acquire content assets.
Similarly, many mobile operators got into financial difficulties in the 3G era by overpaying for spectrum assets.
In other words, the problem is debt load, not the strategy. Lots of telcos and service providers globally are in the subscription video business, and all are profitable. Beyond that, executives believe their bundled video offers help with customer acquisition, reduce churn and boost cash flow and overall profits.
The problem AT&T has had a few times in the past is making acquisitions that required assumption of excessive debt. It was the debt, not necessarily the strategy, that proved to be a mistake. When long-distance providers MCI and AT&T was casting about for a strategy to enter the local access business at scale after deregulation, AT&T decided to acquire and then upgrade cable TV assets.
Given the success cable TV companies have had in the home broadband market, the strategy was rational. The issue was simply that AT&T took on $64 billion in debt to acquire Tele-Communications Inc. in 1998, and then another $54 billion in 1999 to acquire MediaOne.
You might wonder why AT&T did not simply embark on a massive fiber to home building plan. The reason is simple: it did not have time to do so.
If any of us were asked whether AT&T could afford to build a national FTTH network--within 10 years--we would rightly doubt it was possible. Even if it had the money, it did not have the time.
No single firm could afford to spend $300 billion over 10 years to connect even 100 million homes, which is the scale of the problem AT&T faced. And even if it had the money, AT&T did not have the time.
At a high level, growth by acquisition has generally worked for telcos when using their own currency (stock) to purchase similarly-valued telco assets. Generally speaking, many telcos have gotten into trouble when using debt to fuel such acquisitions.
But globally, many tier-one telcos do provide subscription video services and own content assets.
We might debate the revenue or profit margins such efforts produce. But it is hard to escape the conclusion that it is debt burdens, more than anything else, that have proved troublesome for AT&T and Verizon in content-related businesses.
Estimates of revenues and profit margins sometimes have to be inferred, but, generally speaking, video services generate five-percent to 15-percent profit margins for telcos.
Likewise, many telcos own content assets, in addition to selling video subscriptions.
