EUR 850.00 For Business Accounts Only

Morningstar | With Solid Cash Flow, AT&T Balance Sheet Is Moving in the Right Direction

We doubt that AT&T’s transformation into a diversified media and telecom company will deliver significant strategic benefits, as we don’t believe these industries complement each other well, despite their close association. The Time Warner acquisition was the latest in a string of AT&T ill-advised capital allocation decisions, in our view. Still, we believe AT&T’s most important segments (wireless and media) are still solid businesses on their own, and we suspect AT&T has now largely placed its bets, as efforts to reduce leverage will likely preclude additional major strategic moves in the future. Our view on the Time Warner deal is based on our belief that media firms need to reach as wide an audience as possible to maintain relationships with content creators and fend off rivals. In AT&T’s case, we expect this need will limit opportunities to create unique experiences for its telecom customers. In addition, other wireless carriers have already responded to AT&T’s strategy, partnering with Netflix, Hulu, and others to bundle content with telecom services. Finally, while we agree that AT&T can improve the advertising business, using data to better target consumers, we believe the changing nature of television viewing limits the size of this opportunity. In short, we don’t see major strategic benefits in linking content with telecom services. AT&T’s scale in wireless still gives it an advantage over smaller rivals Sprint and T-Mobile, enabling it to generate far stronger profitability while charging similar prices. While the proposed merger of those two smaller firms would narrow this scale advantage, it would also greatly improve the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains.WarnerMedia remains a media powerhouse with a deep content library and the ability to reach audiences across a wide variety of platforms. While we have some concerns around the firm’s direct-to-consumer plans, this position should enable its studios and networks to remain a destination of choice for the best content creators well into the future.