Bloomberg Businessweek - USA (2020-04-20)

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68

The telecommunications industry’s

defaultterroris thatit willbecomelit -

tlemorethantheproviderofso-called

dumb pipes to Silicon Valley and

Hollywood: investingheavilyinnet-

works,onlytohavethecompaniesthat

distributecontentandservicesderivethe

mostbenefitfromthem.Thelockdown

promptedbytheCovid-19pandemichas

demonstratedtheextentofourreliance

onthosenetworks—billions of people are

depending on their internet connection

to work, study, and play from home.

In the 13 years since the release of the iPhone, investors

have bemoaned network operators’ lack of creativity. Why

did it take Apple Inc. to catalyze the smartphone market?

How come it was Netflix Inc. that popularized streaming

video subscriptions? AT&T Inc. finally responded in 2016

with its $109 billion deal to buy Time Warner Inc., add-

ing a vast entertainment arm whose content it would dis-

tribute to its more than 100 million customers. Verizon

Communications Inc. has concentrated on improving its net-

works while hoping investors will forget about its ill-fated

acquisitions of AOL and Yahoo Inc. at about the same time.

Since the market rout began in the middle of February,

Verizon’s stock has performed considerably better than

AT&T’s. Because Verizon can count on the predictable

recurring revenue it gets from customers’ monthly bills,

investors think it’s a relatively safe bet. Meanwhile, AT&T’s

shares have lost almost a quarter of their value, under-

performing the S&P  500. That’s partly to do with the

company’s $188 billion debt pile but also

with the reliance of its television sta-

tions on advertising income. In a down-

turn, marketing spending is usually the

first thing a brand cuts; AT&T’s income

is therefore a lot more cyclical.

As we tentatively consider how we

will emerge from the crisis, the ques-

tion is whether there will be a sustained

change in perception from regulators

and customers alike. Operators will of

course suffer a little as their enterprise

customers go under and unemployment

makes it harder for consumers to afford hefty phone and

broadband bills. But given the importance of both mobile

and fixed networks, governments could prioritize ensur-

ing that those networks are resilient enough to cope with

future shocks: by making it easier to build more cell tow-

ers, lay more cables, share network capacity, or perhaps

consolidate, especially outside the U.S. “Current regula-

tions that companies are subject to will require a rethink,”

says Herbert Blum, head of the telecommunications prac-

tice at management consultant Bain & Co. “The resiliency

thinking will start to permeate the public at large.”

There’s a balance to be struck. Too much consolidation

could mean too much pricing power, and telecommunica-

tions executives will just go and buy another film studio. Too

little, and they’ll have scant incentive to invest in networks.

The pipes might be dumb, but we need to be more intelli-

gent about how we invest in them. <BW> �Webb is a columnist

ILLUSTRATION BY GEORGE WYLESOL for Bloomberg Opinion

By Alex Webb

It’s Time to Get Smart

About Dumb Pipes

◼ LAST THING

With Bloomberg Opinion