AT&T sued for massaging DirecTV figures

If there is a headache in the shape of activist investor Elliott Management already, AT&T executives will be reaching for the aspirin once again as investors sue over suspect figures.

Filed in the US District Court for Southern New York, Melvin Gross is the man leading a coalition of investors to sue AT&T, suggesting the management team misled investors over the performance of its DirecTV video products. The massaged figures might be viewed as an attempt to save face (as well as jobs), though the lawsuit also suggests executives were attempting to justify the incredibly expensive acquisition of Time Warner through nefarious means.

“Moreover, several of the Executive Defendants had strong personal interests in promoting the success of DirecTV Now in order to persuade the market of the logic behind the Time Warner Acquisition,” the filing states.

“The failure of DirecTV Now, prior to the closing of the Acquisition, could have jeopardized the transaction, a result that would have been disastrous for the Defendants.”

Through a combination of fake email addresses and additional charges for customers without consent, practises which were allegedly encouraged by managers, AT&T is effectively accused of fraud. Investors are also suggesting the executive team presented misleading numbers down the omission of promotional numbers. 500,000 net adds disappeared once a three month for $10 deal disappeared, though this risk was apparently not appropriately communicated.

By hyping the performance of DirecTV Now, investors might be encouraged to double-down on momentum in the content unit, funding another monstrous acquisition. However, as the lawsuit states, investors might not be buoyed to spend $108.7 billion (including debt) should the 2014, $67.1 billion DirecTV purchase be viewed as a failure.

This is somewhat of a conspiracy theory, though the DirecTV Now numbers were not anywhere near as attractive during the financial earnings call once AT&T was committed to the Time Warner transaction. As you can see from the table below, the timing is a bit suspicious:

Period Net adds (loss in brackets)
Q2 2019 (168,000)
Q1 2019 (83,000)
Q4 2018 (267,000)
Q3 2018 49,000
Q2 2018 342,000
Q1 2018 312,000
Q4 2017 368,000
Q3 2017 296,000

The Time Warner acquisition was first announced in October 2016 and closed in June 2018. In the financial earnings call following the closure of the transaction (Q3 2018), the DirecTV gains started to crumble away.

With the aggressive expansion and success the AT&T executive team was suggesting up-to Q2 2018, investors will of course have been enthusiastic about adding to the momentum. On the other side, you can see why some are reasonably irked by the reality of the situation. It does appear the fact many of these gains were either irresponsibly attributed or unlikely to be anything more than short-term gain.

Although DirecTV is the focal point of the lawsuit, the Time Warner acquisition is the central cog which the saga flows around.

The content strategy from AT&T is relatively simple. The DirecTV acquisition offered a mobile-friendly content delivery model, and the Time Warner purchase offered a horde of content allowing the telco to compound gains. Both, theoretically, work independently, but the combination is more attractive if you have a bank account big enough to fund the expansion.

However, as the lawsuit suggests, investors might be a bit sheepish in giving the greenlight to a $108 billion acquisition if the ROI from the $67 billion purchase are not living up to the original promise. The AT&T theory and business model is theoretically sound, though if the lawsuit is successful, heads may roll due to the route the management team took to get to the finish line.

The content bet from AT&T is already looking suspect, and this lawsuit will not help the situation.

Alongside this filing, the management team is also under attack from Elliott Management, the vulture fund which specialises in restructuring businesses, promoting a shift towards a utilitised business model and realising short/mid-term gains through increased dividends and share price increases.

The activist investor has taken a $3.2 billion stake in AT&T and has recently sent a letter to shareholders attacking the AT&T strategy and competency of the management team. The content business has come under-fire, with Elliott Management pushing for divestments and a more stringent focus on traditional connectivity products. It’s a strategy which could force the telco down the utilitisation path, something which is unlikely to benefit the business in the long-term.

The emergence of this lawsuit certainly aids the Elliott Management case, however we think the timing is more coincidental. Some might suggest the vulture fund is behind the lawsuit, but we think it is more a case of pleasant timing.

For the AT&T management team, this is a potential disaster. Not only do these executives have an aggressive activist investor calling for their heads, they have now been named in the lawsuit, with the complainants suggesting they encouraged under-handed tactics to directly mislead the market. This is turning into a very uncomfortable month for the AT&T management team.

IBC 2019: Are the nuances of the content world being understood by telcos?

The traditional telco business model is being commoditised, this is not new news, but with more telcos seeking to drive value through content, do they understand the nuances of consumer behaviour?

Once again at IBC in Amsterdam, it is an OTT which is grabbing attention. This should come as little surprise considering the disruption which this fraternity is thrusting on the world of telecoms, media and technology, though here it is more than gratuitous. Cécile Frot-Coutaz, the head of YouTube’s EMEA business, outlined why these companies are leading the way; a fundamental and intrinsic understanding of today’s consumer and the consumer-driven market trends.

This is perhaps why the telcos and traditional media companies are struggling to adapt to a world dominated by millennials, generation Z and digital natives. They appreciate society is changing but have perhaps not correctly balanced the formula to fit cohesively and efficiently into the new paradigm.

This conundrum is most relevant in the content world. Telcos need to factor this complex and nuanced segment into the business model, but how, where, why and when is a tricky question. Many telcos want to do something completely new and very drastic, but the simplest ideas are often the best ones; how can connectivity be used to augment and enhance the fast-growing, fascinating, complicated and profitable content space?

From our perspective, telcos need to diversify, but the best way to do that is figure how connectivity can enhance growing businesses and segments. This might sound like an obvious statement, however the evidence is the nuances are being missed.

Take AT&T for example. This is a company which desperately wants to diversify to take advantage of the digital economy. One way in which it feels it can do this is through the acquisition of Time Warner, a $107 billion bet to own content, create a streaming platform and drive another avenue of engagement with the consumer. Sounds sensible enough, but why take such a risk when there are opportunities closer to home.

Another strategy is more evident in Europe where telcos are attempting to create partnerships with the streaming giants to embed the distribution of these services through their own platforms. See Sky’s integration of Netflix or Vodafone’s work with Amazon Prime. Again, it is a perfectly reasonable approach, but does this future-proof the business against the trends of tomorrow?

These are two approaches which will attract plaudits, but we would like to take the strategy closer to home once again.

During her presentation, Frot-Coutaz pointed to several trends which could define the content world of tomorrow, and it is a perfect opportunity for the telcos to add value.

Firstly, let’s have a look at the consumer of today and tomorrow. Millennials and Generation Z have fundamentally changed the way in which the media world operates, and content is consumed. Not only is it increasingly mobile-driven, but there are new channels emerging every single day. Technology is second-nature to these consumers, and this is shaping the world of tomorrow.

Another interesting point from Frot-Coutaz is the fragmentation of content. One of the objectives of YouTube is not only to own content channels, but to empower the increasing number of content creators who are emerging in the digital world. If the content creators make more money, so does YouTube.

Frot-Coutaz claims that the number of YouTube channels which generate more than $100,000 per annum has increased 30% from 2017 to 2018. These trends are highly likely to continue, further fragmenting the content landscape.

This is where owning content or embedding popular streaming services into platforms becomes problematic. Consumer trends suggest the variety of channels through which the user is consuming content is increasing not decreasing. Embedding Netflix into a platform is an attractive move, but it is only attractive to those who have an interest in Netflix. If connectivity solutions can be offered to consumers to simplify and enhance the consumption of content, agnostic of the platform, there is a catch-all opportunity.

Although Netflix and Amazon Prime might be the content platforms on everyone’s lips for the moment, the number of ways in which consumers engage content is gathering significant momentum. There are new challengers in the streaming world (Disney+ or Apple TV), traditional social media (Facebook or Twitter), challenger social media (Tik Tok) AVOD channels (YouTube), traditional conversational websites (Reddit), messaging platforms and who knows what else in the 5G era. What about the VR/AR platforms which could potentially emerge soon enough?

This is a nuance, not a drastic change in thinking, but it is an important one to understand. Do telcos want to be the owner of content, the distributor or the delivery model. Admittedly, the delivery model is not the sexiest in comparison, but it might hold the most value in the long-run.

Another way to think about this taking the example of Killing Eve, the BBC spy thriller. Is there more long-term value in the eyes of the consumer in owning the content, owning the distribution channel or owning the connectivity services which fuel consumption and engagement through all channels?

The best means of differentiation have always been the ones which are closest to home. If you look at the likes of Google, Microsoft and Amazon, these are future-proofed companies because they are taking their current services and creating contextual relevance. There might be examples which undermine this point, but the general claim holds strong.

At Google, the team diversified their business through the acquisition of Android. This evolution took Google from the PC screen and onto mobile, but it is an extension of the advertising business model in a different context. The same could be said about YouTube. A video platform is drastically different from a search engine, but the underlying business model is the same; identifying the needs of the consumer and serving relevant commercial content.

The telcos are looking to do the same thing, but perhaps there needs to be more of a focus on a proactive evolution of the business rather than reactive. The telcos are playing catch-up on the consumption of video through mobile and a shift to OTT distribution, but the current approach is perhaps too narrowly focused. Focusing on the core business of connectivity delivery is more of a catch-all approach, factoring in future trends and the increasingly fragmented digital society.

This is a very easy statement to make, the complications will be on creating products which encapsulate these trends and offer an opportunity for telcos to grow ARPU. We are sitting very comfortable in the commentary box here as opposed to in the trenches with the product development teams, but the nuances of content are there to be taken advantage of.

IBC 2019: Linear TV isn’t dead just yet

This might sound like a very bold and short-sighted statement, but thanks to the development of IP-based standards, traditional broadcasters might just be able to survive in the digital economy.

This is of course not a statement which suggests business is as usual, there are major restructures and realignments which need to occur to future-proof the business, but linear TV and traditional broadcasters can survive in the cut-throat world of tomorrow.

The change which is being forced onto the world is HbbTV and ATSC 3.0, two new standards for the traditional broadcasters to get behind which offer the opportunity to create the experiences consumers desire and the business model which advertisers demand.

HbbTV, Hybrid Broadcast Broadband TV, and ATSC 3.0 are both standards which aim to take the broadcasting industry into the digital world. Although these standards are not necessarily harmonised, the IP approach effectively forces manufacturers and broadcasters into an era of on-demand content, interactive experiences and hyper-targeted advertising.

Over the last few years, many in the TMT world have been quick to write the obituaries for linear programming, but this is not an area which should be written off so abruptly. There is still a niche for the idea of linear TV, and if executed competently, there will be an audience of Generation Z sitting on the sofa next to the Baby Boomers.

Oliver Botti of the Fincons Group, pointed to two areas where linear TV currently, and will continue to, thrive. Firstly, live sports, and secondly, reality TV programming such as Celebrity Big Brother. With both of these standards, new content, experiences and advertising business models can be enabled to ensure continued relevance.

For sports, additional content can be offered to the consumer alongside the action to offer the viewer more control of their experience. This is something which is becoming increasingly common in the OTT world, though it is yet to genuinely penetrate traditional broadcasting in any meaningful way. The second example Botti highlighted is a very interesting one.

The concept of Celebrity Big Brother is not new to most. Dozens of cameras in a closed environment, following around the lives of prima donnas where at least one will probably make some sort of racist gaff at some point. However, with the new standards, Botti highlighted users can choose which camera is live on their own TV, creating a personalised content experience.

It does sound very creepy, but this is the sort of thing which is likely to appeal to some audiences…

Both of these examples are live content. For some, this experience can not be replicated in an on-demand environment, driving the continued relevance for linear TV. It is a niche, but one which will drive the relevance of traditional broadcasters and the relevance of linear programming for years to come.

Vincent Grivet, Chairman of the HbbTV Association, also highlighted the standards also allow for personalised advertising. This is just as, or perhaps more, important to the survival of traditional broadcasters as without the advertising dollars these businesses will not survive. Advertisers know what they want nowadays mainly because Silicon Valley can offer it. If hyper-targeted advertising is not an option, advertisers will not part with their valuable budgets.

What is worth noting, is that both of these standards rely on the TV manufacturers creating products which allow for success to continue. This is where an issue might arise; currently there is no global harmonisation.

HbbTV has been adopted in Europe, while ATSC 3.0 has been championed in the US and South Korea. China is doing what China does and going down its own separate path, creating a notable amount of fragmentation. This might be a challenge.

Richard Friedel, Executive VP of Technology & Broadcast Strategy of 21st Century Fox, told us that as an engineer he would like to see more harmonisation, but as a pragmatist, he doesn’t see it happening any time soon. All the standards are IP-based, therefore there will be a natural alignment as the industry evolves over the next couple of years, but this does not necessarily mean genuine harmonisation.

This presents a complication for the industry, but let’s not forget that this is a positive step in the right direction. Linear TV might not be attracting the headlines, but if you listen to the right people, it is certainly not dead.

Apple and Disney belatedly sever corporate ties

Disney CEO Bob Iger has been on the Apple board for eight years but, with the two companies now competing directly in the SVOD market, he has resigned.

Last week Apple officially launched its Apple TV+ subscription video on demand service last week, thus placing it in direct competition with Disney, which is also set to get into the SVOD game with, you guessed it, Disney+. For some reason the two companies left it until the very last minute for Iger to clear off, despite the two competing service having been in development for months.

“On September 10, 2019, Bob Iger resigned from the Board of Directors of Apple Inc,” said the abrupt, unsentimental Apple SEC filing. The Hollywood Reporter got a bit more comment on the matter, with Iger saying how great Apple is and Apple returning the compliment, which is nice. Whether relations will remain so cordial when they’re trying to steal SVOD market share from each other remains to be seen. For some reason Iger is still isted as a board member on the Apple site.

While Iger has been on the Apple board, links between the two companies go a lot further back than that. Apple founder Steve jobs was also the founder of Pixar Animation and thus become one of the largest Disney shareholder when it bought Pixar in 2006. Jobs also joined the Disney board at that time and stayed until his death in 2011.

As companies Apple and Disney have a lot in common. They both position themselves as premium consumer brands and invest heavily in their brand image. They also have a reputation for wanting to control everything around their product offering and image, so it’s not at all surprising that they would want to have their own SVOD services offering only their own stuff rather than rely on third parties for distribution or content.

One other big thing they have in common is a desire to be viewed as wholesome, family companies, which creates the possibility that they will end up producing fairly similar content. Right now Disney is mainly about feature-length movies while Apple seems to be focusing more in TV-style stuff. But that distinction could easily change over the years and, if it does, these two American icons will be fighting for the same wholesome dollar.

IBC 2019: European Broadcasting Union joins FANG regulatory choir

The European Broadcasting Union (EBU) is the latest organization to start singing the praises of greater regulation, transparency and accessibility for the internet giants.

It is starting to become a tune to which we are all accustomed to, and it should come as little surprise the victims of aggressive disruption are calling for greater control, but the EBU has joined the regulatory choir at IBC 2019. Speaking during the conference, Noel Curran, Director General of the EBU, fired the shots across the Atlantic at Silicon Valley.

“Why is there no regulation in terms of data?” Curran stated. “Right now, we have an unregulated social media sector, being dominated by four or five big companies that have unprecedented amount of control.”

Again, this is a familiar story. Momentum has continued to gather behind the technology giants of Silicon Valley, compounding an already incredibly influential position. The broadcasters have been left behind, the telcos are attempting to drive relevance and the politicians are no-longer the most influential people in a country.

To add some context to the situation, one of the reasons ‘traditional’ broadcasters are in such a precarious position right now is a lack of evolution. This is an industry which progressed very little prior to the introduction of the streaming giants. Content might have changed, as has the technology to deliver said content, but the business models and engagement of consumers was stagnant.

The door was open for disruption, and if an industry doesn’t disrupt itself, troublemakers from the outside will do it.

Aside from the technology, the talent and the budgets, the FANG companies can harness the power of insight. As Curran points out above, these companies have a treasure trove of information the ‘traditional’ broadcasters can only dream of accessing. It not only allows the disruptors to create innovative business models through hyper-targeted advertising but enables them to make smarter decisions. FANG companies know their customers intrinsically, and it is fuelling growth.

This is another gripe from the ‘traditional’ broadcasting industry; the likes of Netflix and Amazon are not enthusiastic about sharing the wealth of insight. All3Media CEO Jane Turton confirmed what many of us already knew this week; the FANGs haven’t ever voluntarily or knowingly shared this valuable insight, and this is not changing.

This is the competitive edge Silicon Valley has. Sharing this data might encourage more of the ‘traditional’ broadcasting industry to sympathise with the FANGs, however why would they want to erode their advantage? It isn’t a level-playing field right now, though this is only because the FANGs are more forward-thinking and resourceful when it comes to the digital economy.

Perhaps this is something the ‘traditional’ broadcasting lobby will be pushing for in the future. Access to the data and regulation which forces FANG to play nice. The technology giants will of course resist, and we have already seen how powerful its own lobby can be, but the number of opponents is starting to add-up.

Quibi: a short-form streaming service to keep an eye-on

A passing reference at IBC 2019 was the first we had heard of Quibi, but it certainly looks like an interesting proposition which could add further disruption to the content world.

Imagine a cross-over between Netflix and Snapchat and you’ll have something close to Quibi. Although there isn’t a huge amount of information out there about the business, it looks to be a mobile-based, short-form video subscription service designed for millennials. Content will be designed for mobile-format, and only viewable through the app.

This might sound like a bit of a fad but looking at the content it already has lined-up, the first-step towards success has been made.

Firstly, you have a yet to be named thriller starring Oscar winner Christoph Waltz alongside Liam Hemsworth, where a terminally-ill man is hunted by contestants, as he attempts to provide long-term for his wife. Secondly, you have a Stephen King horror series which can only be watched at night. Another title is “Action Scene” which stars Kevin Hart.

These are only a few of the titles which Quibi has floated through the press. Despite there not being a huge publicity push for the service, Hollywood stars seem to be convinced by the concept.

Although it was only a passing comment on-stage at IBC 2019, All3Media CEO Jane Turton and UK MD of Production for BBC Studios Lisa Opie also suggested they had both been commissioned for content on the platform. Turton also said her parent company Liberty Global was an investor in the business.

Interesting enough, the Quibi business seems to have attracted interest from some of the worlds’ most recognisable technology businesses without making a significant splash in the publicity pond. Walt Disney Company, 21st Century Fox, NBCUniversal, Sony Pictures Entertainment, WarnerMedia, and the Alibaba Group complete the list.

Once again, we are relying on third-party sources, but it does seem to be priced reasonably fairly. For $5 a month, or $8 for an ad-free service, the platform might well gain some traction should the content live-up to the expectation.

Another interesting aspect of this business is the leadership team. Jeffrey Katzenberg, a vastly experienced executive in the firm industry with tenures at Paramount and DreamWorks, has been brought on-board to work alongside CEO Meg Whitman. If Whitman sounds like a familiar name, she was previously CEO of Hewlett Packard, leading the business through the restructuring period which created HP Inc and Hewlett Packard Enterprise.

While Whitman’s tenure at HP was not exactly the most successful, her background in the technology industry married to Katzenberg’s experience in the content world dovetails quite well. It’s technology pragmatism alongside content creativity; both barrels will have to be firing if the Quibi business is going to be a success.

This is the other side of the business which the team is yet to discuss; technology. Digital natives are not very tolerable of poor service, so Quibi will have to be on-form if it is going to be a long-term success. Creating a new, disruptive service is difficult, just look at YouTube’s experience last year.

As Paolo Pescatore of PP Foresight pointed out to us, streaming the Champions League Final on YouTube was not the greatest of successes. It was an interesting move, setting the scene for potentially a new field for YouTube, but the team did not necessarily nail the experience.

“YouTube had decoding issues dealing with the huge demand from the live streaming event. There were no problems with the stream to the BT Sport app,” said Pescatore.

“Key to the success of Quibi will be distribution as it has a strong growing slate of content. It should strong consider forging tie ups with telcos who are crying out for great content to drive connections and usage on fibre broadband and 5G networks.”

We like the idea. It is a novel-concept which could potentially form a completely new kind of content delivery model. The audience is likely to be curious as well.

If the last few years have shown us anything, it’s that the millennials and generation Z are open to new ideas. And they are willing to pay for it. $5 a month is a price point which many will tolerate as an experiment.

Assuming the content lives up to the blockbuster names it is attracting, the technology fulfils the experience which digital natives demand, and the marketing team is clever enough to cut through the noise in a very crowded space, this could well be a success.

Quibi isn’t exactly shouting about itself at the moment, but it is an idea which we really like the look of.

AT&T signs content mega-deal with Bad Robot Productions

US telecoms and media giant AT&T has doubled-down on its Time Warner acquisition by committing to spend hundreds of millions of dollars more.

The deal is with Bad Robot Productions, which is run by Hollywood figure JJ Abrams and his wife Katie McGrath. The total value of the deal hasn’t been revealed, but media speculation ranges between $250-$500 million. Bad Robot gets involved in movies, TV, games and digital platforms and it looks like it will devote itself entirely to AT&T subsidiary Warner Media for the duration of the deal.

“WarnerMedia and AT&T are delighted to launch a long-term collaboration with our world-class partners and colleagues JJ Abrams and Katie McGrath,” said AT&T COO and CEO of WanrerMedia John Stankey. “We are extremely excited about the potential to deliver remarkable and memorable stories and characters across multiple platforms to audiences around the world.

“JJ, Katie and all of Bad Robot bring extraordinary vision, exquisite filmmaking, and exemplary industry leadership to this endeavour and our company. Across all forms of content, we are uniquely positioned to offer our creative partners a multitude of platforms to realize their artistic goals and ambitions, and to ensure that their stories have the best possible opportunity to connect with the right audience.”

“It is a thrill for Katie, Brian (Weinstein) and me and the rest of our team at Bad Robot to call WarnerMedia our company’s new home,” said Abrams. “John Stankey has a powerful vision for the future of WarnerMedia and is committed to storytelling that connects people around the world. We are excited and gratified to be a part of this new chapter under his and Ann Sarnoff’s thoughtful leadership.

“I could go on for hours, and probably will, about the extraordinary Peter Roth and the entire Warner’s television group, with whom we’ve worked for over a decade, and I’ve wanted to collaborate with Toby Emmerich and his team for as long as I can remember. I am grateful for the chance to write, produce and direct work for this incredible company, and to help create films and series with a diverse and vast collection of inspiring storytellers. We can’t wait to get started.”

With the launch of Apple + and Disney + in addition to the deep pockets of Netflix and Amazon the content world has never been more competitive. There’s an arms race underway regarding investment in premium content so AT&T needs to at least keep up if hopes to make its massive Time Warner acquisition a success.

Apple finally gets the memo on sacrificing margin for market share

By making its entry-level new phone cheaper than last year’s one and only charging a fiver for its new video service, Apple is further compromising its premium image.

The roman numerals experiment is over, which means no more X in the iPhone nomenclature. Now we have the entry-level iPhone 11, the iPhone 11 Pro that has additional wide-angle and telephoto cameras on top of the regular one, and the iPhone 11 Pro Max, which is the same as the Pro but bigger. The most significant change, however, is the pricing of the 11, which is $50 less than the XR was last year at $699, which is also $100 less than the Google Pixel 3. The price of the other two phone remains the same.

On top of that the pricing of the new Apple TV+ SVOD service, which will launch on 1 November, has been announced at $5 per month, a lot cheaper than the standard Netflix package that costs $13 per month. The latter is a sensible acknowledgement that Apple TV+, which will only have original content, won’t have a fraction of the amount of stuff you can get from Netflix, while the phone pricing must surely be in response to increasing competitive pressure from the sub-premium market.

“With the tight integration between hardware, software and services, the advancements in iPhone 11 bring an unparalleled user experience at an affordable price to even more customers,” said Apple marketing boss Phil Schiller. “Apple TV+ is an unprecedented global video service with an all-original slate,” said Jamie Erlicht, Apple’s head of Worldwide Video. “We look forward to giving audiences everywhere the opportunity to enjoy these compelling stories within a rich, personalised experience on all the screens they love.”

The pricing angle has caught the attention of the commentariat. Bloomberg notes that not only is the iPhone 11 price cut significant, but the XR has had $150 knocked off it. “We view this as an admission that Apple stretched too far with the price points at last year’s launch,” Chris Caso, an Analyst at Raymond James & Associates, is quoted as saying in the Bloomberg piece.

On top of the aggressive price point for Apple TV+, anyone who buys a new iPhone, iPad, Apple TV, Mac or iPod gets a year’s subscription for free, which is not just a great way for Apple to seed TV+ into its existing customer base, but provide a strong incentive for new sales too, so this is a smart move. Having said that it’s further evidence of Apple’s sudden willingness to sacrifice margin at the altar of market share.

We spoke to Ed Barton of analyst firm Ovum to get his take on the TV+ move. “The price point and a free year of access for new Apple device buyers are aggressive moves which will help drive early growth and usage,” said Barton. “But it’s still, by volume of content, a very limited video service with no catalogue content wholly reliant on new, untested intellectual properties.

“The strength of the Apple hardware and services ecosystem means that it practically can’t fail and a lot depends on how effectively and frequently Apple drops new shows to maintain viewers’ interest levels. Apple’s $6 billion production investment and its ability to surface and promote Apple Video content to a global audience of hundreds of millions throughout its tightly integrated hardware and software ecosystem give the service huge potential.”

On top of the phone and telly stuff Apple also unveiled the latest versions of its Watch and iPad in a mega-launch that it would previously have scattered throughout the year. Just as with the phones the new devices are largely spec upgrades, but we were reminded what a relative bargain the iPad is at just $329 (Apple is still charging $130 for a modem, for some reason, and it’s hard to see why anyone would pay that when they can just tether).

One other announcement was Apple Arcade, a gaming subscription service that Apple has been banging on about for a while. Just like TV+ it costs a fiver a month (although there’s no free subscription offer) and offers a smallish selection of exclusive games. People are less impressed with the games service though.

“It’s difficult to get excited about the games subscription, it does include some exclusive, new titles which didn’t appear particularly noteworthy from a gaming perspective,” said Barton. “Most of the games included didn’t sell well on a standalone basis so it’s difficult to see who this will appeal to. Perhaps there is a casual gamer segment which appreciates the simplicity of a subscription for a heavily curated selection of mobile games, but I won’t hold my breath.”

Since smartphone innovation has been stagnant for the best part of a decade, Apple decided to seek revenue and margin growth from flogging services to its installed base. Apple TV+ is a major step further in that direction, but the decision to be more aggressive on pricing is also a sensible strategy when it comes to expanding that installed base and thus the addressable market for its services.

Elliott’s vultures are circling AT&T

Activist investor Elliott Management has set its eyes on AT&T, suggesting the firm is bloated and undervalued, with ambitions to cut staff, clear out the leadership team and sell-off non-core assets.

In a letter sent to AT&T investors, Partner Jesse Cohn and Associate Portfolio Manager Marc Steinberg have attacked the firm and suggested a drastic turnaround strategy which includes divestments, retail location closures, job cuts and a change in mentality. It does appear shareholders are intrigued by the idea, with share price increasing 6% in pre-market trading.

“The purpose of today’s letter is to share our thoughts on how AT&T can improve its business and realize a historic increase in value for its shareholders,” the letter states.

“Elliott believes that through readily achievable initiatives – increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight – AT&T can achieve $60+ per share of value by the end of 2021. This represents 65%+ upside to today’s share price – a rare opportunity for any company, let alone one of the world’s largest.”

For those who aren’t familiar with Elliott Management, this is not necessarily a move which is out of character.

Known as a ‘vulture fund’, the team search for businesses which it deems are undervalued and effectively enter to cause chaos. More often than not, the team suggests a complete overhaul of senior managers and a new strategy. This strategy often involves job cuts and asset stripping. Shareholders are brought on board with the promise of increased dividends and a boost in share price.

There are numerous examples where the team has attempted to muscle in on operations, with Telecom Italia (TIM) being the most relevant in recent history. At TIM, Elliott Management has been battling with Vivendi for control and a new strategy, and it does appear to be winning.

In the case of AT&T, Elliott Management is promising a 65% increase in share price by the end of 2021. This is an attractive promise as share price has barely moved over the last five years, from $34.50 on September 12, 2014 to $36.25 at the close of the markets on Friday (September 6, 2019). During this period, a high of $43.28 was experienced on August 12, 2016, and a low of $28.31 on December 21, 2018.

But how do these numbers compare to the share price of AT&T’s rivals over the last five years?

Telco Today 12 Sept, 2014 High Low
AT&T $36.25 $34.50 $43.28 $28.31
Verizon $59.06 $48.40 $60.30 $42.84
T-Mobile US $79.15 $30.83 $84.25 $25.31
Sprint $6.82 $7.00 $9.30 $2.66

Although AT&T is a dominant force in the US telco industry, it has seemingly not capitalised on the 4G revolution in the same way some of its rivals have, most notably T-Mobile US. To rub salt into the wounds, AT&T failed to acquire T-Mobile US in 2011, had to pay the largest break-up fee to date (at the time), and then provided the firm with a seven-year roaming deal and spectrum. This could perhaps be viewed as the turning point for the struggling T-Mobile US.

Another interesting assertion from the Elliott Management team is inability of the AT&T business to act in a timely fashion. This is another point CEO Randall Stephenson should be worried about, as Elliott Management claims AT&T did not deploy 4G aggressively enough and lost out to Verizon in the battle for first place. With 5G on the horizon, investors might well be worried about a repeat.

Ultimately, the biggest criticism is one of poor performance. Despite some very attractive numbers in the 90s and 00s, AT&T hasn’t really pushed on to capitalise on this momentum. In fairness, every telco around the world has suffered over the course of the last decade thanks to the growing influence of the OTTs, but this point has been conveniently ignored in the Cohn and Steinberg letter.

However, it is the acquisition strategy is one of the biggest points made.

“In recent periods, however, AT&T has embarked upon a very different sort of M&A strategy,” the letter states. “Over a series of deals totalling nearly $200 billion, AT&T built a diversified conglomerate by pushing into multiple new markets.

“In each case, the push was as significant as possible. Beginning the decade as a pure-play telecom company with leading wireless and wireline franchises, AT&T has transformed itself into a sprawling collection of businesses battling well-funded competitors, in new markets, with different regulations, and saddled with the financial repercussions of its choices.”

The telco industry has changed in the last decade, and Elliott Management clearly doesn’t agree it is for the better. In the 90s and 00s, acquisitions were connectivity orientated, while recent years have seen an aggressive push into the world of digital services, diversifying products which can be offered to the consumer.

This is one of the critical points the Elliott Management team is levying towards AT&T; its acquisition strategy has not been effective. The failure to merge with T-Mobile US is a critical point, but since that point the team has spend more than $200 billion to create a beast of a business. Some have suggested this was necessary to diversify the business in preparation for the digital economy, however this is not the opinion of Elliott Management.

We do not agree with Elliott Management here. Convergence is a sound business model which moves the telco into the value-add column. A more stringent focus on connectivity will walk the telco down the road of utilitisation, opening the industry up to more aggressive regulations and price controls. This is not the direction many telcos want to head, but Elliott Management does seem to like the profits driven out of a business which focuses on operational efficiencies and little else.

Let’s not forget the Elliott Management business model after all. Identify underperforming shares, disrupt the business model for short-term share price rises and then sell the stock, while collecting meaty dividends along the way. If Elliott Management gets it way, AT&T will be a utilitised business, with fewer assets. It might not be a competitive force in a decade, when other telcos are reaping the benefits of diversification. However, Elliott Management will not care by that point.

Perhaps the three most important points of the plan set forward by Elliott Management are:

  1. A change in strategic direction from acquisition to executive
  2. Clearing out the current management team
  3. Divestment in non-core assets

There are other points made, such as closing redundant retail locations, negotiating more authorised third-party retailers, cutting back on the over-bureaucracy, simplifying the management structure and redundancies. However, we feel the three mentioned above are perhaps the most important for investors.

By shifting from an acquisition mind-set to an execution one, and making the suggestion of divestments, it would appear the AT&T business is one which will be focused more acutely on traditional telecommunications services. The tone of the letter does not suggest Elliott Management believe the content world is one which can bring fortunes, and the way in which the team discuss the success of T-Mobile US also alludes to this new, narrowed focus.

What does this mean for the very expensive content acquisitions? Perhaps nothing, or perhaps everything. We suspect the idea from Elliott Management would be to silo each of the business units, allowing a more lasered focus on core revenues in the siloes. There might well be cross-selling opportunities, but the language used by Cohn and Steinberg suggests digital services and ambitious convergence is not on the agenda.

The proposed strategy to realise the 65% increase in share price is one of simplicity, enhancing what is currently in the armoury and taking a more traditional approach to the business of connectivity.

And while there might be thousands of nervous employees throughout the organization worried of the prospect of job cuts, the senior management team should be much more concerned. After interviewing various former-executives, Elliott Management has come to conclusion that the executive management team does not have the right skillset to tackle the challenges which AT&T is facing today.

Should Elliott Management get its way, heads could roll, and the leadership team could look remarkably different. Elliott Management is also seeking greater influence for the Board of Directors, another common play from the team. The activist investor often looks to secure positions to friendlies at the companies it has in its crosshairs, and it will certainly want to exert more control on the strategy moving forward.

If Elliott Management gains control and influence at AT&T, it could look like a very different business. The investor believes it has identified $10 billion in cost-efficiencies would can be realised through spending $5 billion. This does not account for any divestments which would be made though. AT&T might well have fewer retail locations, a smaller headcount, a new management team, a lessened focus on content and digital services and a more utilised business model in the near future.

This is only the beginning of this saga, Elliott Management will certainly have a wrestle on its hands to gain control, but it does have good form when it comes to forcing through disruption.