The EconomistNovember 21st 2020 Business 61J
ohn stankeyis an American chief executive from central cast-
ing. The 58-year-old has a square jaw, a lanky frame and, as one
friend put it, “the world’s deepest voice”. During his 35 years as a
telecoms executive, he has been a voracious dealmaker. He helped
set Southwestern Bell Corp, one of the Baby Bells spawned by the
break-up in 1984 of American Telephone & Telegraph (at&t), on an
m&ablitzkrieg that eventually consumed the original Ma Bell her-
self. He then helped orchestrate its $176bn push into entertain-
ment, buying Directv, America’s largest cable provider, in 2015,
and Time Warner, a media colossus, three years later. In July he
took over as at&t’s boss. A self-confessed “Bell-head”, he doesn’t
flinch when confronting media moguls. Yet before one constitu-
ency he practically cowers: widows, orphans and other investors
that depend on at&tas the world’s second-biggest dividend-payer
after Microsoft.
That is a problem not because at&tcannot afford this year’s an-
ticipated $15bn payout. Despite the travails of covid-19, it easily
can. The rub is that it has become a treadmill. This year is the 36th
since at&twas broken up in which it has increased the dividend.
Such a legacy may not be strange for a stolid telecoms firm. But
with a flighty media business on the side, it is a foolish promise.
Moreover, at&t’s acquisition spree has saddled it with almost
$150bn of net debt, even as its two core businesses, mobile tele-
coms and entertainment, are in the throes of upheaval that re-
quires immense financial flexibility. Instead of revitalising each of
them, at&thas so far done what many “dividend aristocrats” do—
try to sell the family silver to make ends meet.
Yet there are indications that Mr Stankey may be prepared to
challenge the old ways of thinking. He ought to—even for the sake
of those widows and orphans.
He started the job with the odds stacked against him. Not only
has the covid-19 pandemic clobbered WarnerMedia, the renamed
Time Warner, by disrupting film releases, accelerating the decline
of cable tvand reducing advertising spending. He also had to over-
come doubts about his leadership abilities first aired last year by
Elliott Management, an activist hedge fund, when it took a stake in
at&t. When his former boss, Randall Stephenson, announced his
retirement in the midst of the pandemic, it was hard to imagine
that an outsider could run a company with a market value of
$200bn and a phone book’s worth of problems by Zoom. So Mr
Stankey won the contest, despite his role as Mr Stephenson’s lieu-
tenant during years of value destruction. Since then, he has
soothed some nerves, taking further acquisitions off the table,
promising to repair the balance-sheet and lengthening debt matu-
rities. Yet the share price languishes, as investors wonder if he can
sustain the dividend while competing against two fierce rivals,
t-Mobile in telecoms and Disney in entertainment.
One big test of his mettle will be an auction next month of wire-
less spectrum. Mobile, after all, is at&t’s mainstay, generating as
much core earnings, or ebitda, in a week in the third quarter as
WarnerMedia did in a month. Yet t-Mobile, once a distant third in
wireless subscriptions, is now running neck-and-neck with at&t
and has its sights on Verizon, the leader. After its merger with
Sprint, t-Mobile has also surged ahead of both rivals in the cover-
age and speed of its fifth-generation (5g) network, adding to its ap-
peal. In order to catch up, at&tand Verizon will take part in an auc-
tion of mid-band 5gspectrum starting on December 8th. Verizon’s
balance-sheet is robust enough to bid what some expect to be at
least $15bn. at&tmay feel more constrained. Yet those who keep a
careful eye on its credit rating think it should splurge, both on
spectrum and the fibre networks it lays across America. Davis He-
bert of CreditSights, a research firm, calls them the “core tenets” of
its business. (How quickly it can sell long-in-the-tooth assets like
Directvto ease the financial strain is another matter.)
On November 18th Mr Stankey may have shown promising
signs of audacity, though, when WarnerMedia announced an un-
expected move in support of hboMax, at&t’s streaming platform
that competes with Disney+, not to mention Netflix. It said it
would release “Wonder Woman 1984”, a potential Christmas block-
buster, simultaneously on hboMax and in American cinemas on
December 25th (it will hit cinemas in other countries earlier). That
will break a long tradition of releasing films in theatres first to re-
coup production costs at the box-office, and to support the cinema
business. It shows the company may be prepared to cannibalise
revenues in one part of the firm—Warner Bros, the film studio—for
the greater goal of driving subscribers to its streaming service,
which is potentially a bigger long-term source of value. If going
all-in on streaming attracts hordes of subscribers, it could reward
Mr Stankey’s dogged faith in the marriage of phone and film.From Wonder Woman to Superman
It is time for more of such hard choices. Yet the risk is that Mr Stan-
key feels he has time on his side. He now appears to enjoy Elliott’s
support (reports that the asset manager had sold its equity stake do
not mean it has thrown in the towel; it may still have a large deriv-
atives position). The rating agencies are patient. Neil Begley of
Moody’s says that because of coronavirus and other reasons, it has
put big investment-grade firms like at&ton a “longer leash”. Many
remain convinced the dividend is a sacred cow.
That breeds complacency, however. The payout saps at&t’s fi-
nancial flexibility just when it needs all the leeway it can find. It
encourages defensiveness, when t-Mobile and Disney are, as Rog-
er Entner, a telecoms analyst, puts it, “surrounding it like wolves”.
Come what may, one day it will have to cut the dividend—prefer-
ably to be complemented with more flexible share buy-backs. If Mr
Stankey does that to make the company more nimble, he might
emerge a corporate superhero. If it is forced upon him by weak
earnings, it will be kryptonite that could cost him his job. 7Schumpeter Wring out those Bells
Can one of the architects of at&t’s woes turn it round?