US (and Other) Telecoms Moving Away from Vertically Integrating Network and Media

In May 2021, AT&T announced a US$43 billion deal to merge its WarnerMedia holdings with Discovery to form a standalone company to better compete within the direct-to-consumer market. Weeks prior to this announcement, AT&T sold a 30% stake in DirectTV (along with AT&T TV and U-verse) to TPG Capital, and Verizon announced the sale of its Verizon Media business to private equity firm Apollo Global Management for US$5 billion (retaining 10% stake in the company). Verizon Media includes properties acquired from the Yahoo and AOL acquisitions (formerly rebranded as Oath) and the company’s solutions for the advertising and media industries.

While US-based telecoms have generated the most press surrounding these strategic shifts, news also surfaced from the UK where British Telecom is evaluating a potential full or partial sale of its premium sports business, BT Sport—early candidates have included Amazon, Disney, and DAZN. Speaking of Amazon, the company made headlines recently for the opposite reason, after it announced its plan to acquire MGM Studios for US$8.45 billion, marking the company’s largest push into the entertainment industry and its second largest acquisition in its history, trailing only Whole Foods.

Why are telecoms reversing course from these large media acquisitions while Amazon is buying into the market? For AT&T this comes just under three years since it closed its deal for Time Warner, which occurred after spending 18 months fighting with the US Justice Department for the right to consummate the acquisition.   

At first glance, the motivations behind these acquisitions seem to support the desired outcomes. A shift to programmable and targeted advertising, coupled with the growth in digital services and content (mobile in particular), on paper sounds like a perfect marriage between an MNO, with millions of customers, and a complement of in-house content and advertising solutions. However, these weren’t simple content/service buys with the hope of pushing over-the-top (OTT) subscriptions to their customers; rather, these were deeper plays into the media and advertising markets. AT&T acquired AppNexus in 2018, and along with the telecom’s addressable TV advertising unit AdWorks being rebranded as Xandr (now one of AT&T’s four operating segments), which eventually formed the basis for its Xander Invest (DSP) and Xandr Monetize (SSP) platforms, AT&T now covers both the buying and selling sides of the business. Synergies between first party data and a new wealth of advertising real estate appeared to be a tremendous opportunity for AT&T and Xandr.

Verizon similarly brought in advertising expertise via Yahoo and AOL, along with digital content and services and millions of customers, but like AT&T, those potential synergies didn’t generate the expected returns factored into the buying process. Part of the problem stems from inherent differences between mobile and TV/streaming use cases. While the users are one and the same, content consumption and expectations for services differ between devices. In the USA, most OTT streamers do not buy subscriptions to primarily watch content on their mobile devices—the TV is still the most used screen for lean back experiences, which speaks to the strong growth in CTV advertising and continued supported for TV viewing in general. This meant the connection between the streaming services and their wireless customers was not as strong as anticipated, and this was further weakened as more pay TV and fixed broadband operators bundled OTT services.

The strong shift towards privacy first also made it increasingly difficult to realize the full potential of their first party data collected from their vast subscriber bases. While the data pool is certainly rich, unlike a TV household which doesn’t natively track users at the individual level, mobile subscriptions do not offer a similar level of user obfuscation. Increasingly, consumers have become leery of the amount of data being collected about their online habits and how this data is being used, which creates a potential conflict of interest for the MNO (as both a network operator and service provider seeking to protect user information). Reports suggest this was indeed the case at Verizon (separations enforced between wireless customer data and advertising business). For AT&T, while Xandr will not move to the new standalone company, the company was reportedly exploring a sale well in advance of the announced WarnerMedia spinoff, which suggests the telecom also experienced similar limitations with its advertising business. Changes to Apple’s IDFA and impending deprecation of third-party cookies in Google Chrome at some level could also explain the timing of these decisions as these business units may face increased headwinds without the benefit of the first party wireless data.

These media activities were also viewed as growth opportunities for MNOs who were increasingly fighting over the same customers with less room for differentiation. The arrival of 5G, however, engendered a new marketing push to consumers and, more vitally, opened up vast new opportunities for the telecoms in new markets like industrial/manufacturing, IoT, smart city, public venue network upgrades, etc., shifting attention away from the competitive streaming media landscape to areas critical to their core competencies in the network and connectivity. Amazon, on the other hand, is investing in MGM to gain access to the vast content library to boost its standing within the OTT streaming market, providing a more direct connection to the expected returns and value of the acquisition. OTT services are already spending considerable resources on original programming and this rings true with the MGM acquisition.  

The spread and continued development of 5G provides ample opportunities for the telcos to create value outside of their consumer businesses and should be the focus moving forward. It’s no longer a concern to be just a data pipe as the new enabling technologies are giving rise to a wide array of market opportunities and greatly expanding the role of connectivity. Other new trends and market developments present opportunities for the telecoms to actively contribute, such as helping business customers make the transitions to increasingly distributed (regionally) and hybrid (in-office and remote) workforces, and eventually laying the groundwork to build towards a metaverse. The relationships with consumers can also extend to new areas with premium tiers of service, which will become increasingly important as users shift content and service consumption towards cloud services, which inherently requires more robust connections (i.e., higher data rates and lower latencies) and potentially guaranteed levels of quality of service. Telecoms can still extract additional value without vertically integrating down to the services level, which is a much healthier position (for the entire value chain), where resources are directed to the network and technology enablement.