Recent quarterly earnings reports shined a bright light on both AT&T (T) and Verizon (VZ). It shows growth and transformation at both companies. However, now they both seem to be on different growth paths. We used to be able to assume they were both on the same page. Both going up or down together. No longer.
I’ve been talking about this over the last few years. It is now happening. In the past, both AT&T and Verizon were on the same growth path. They both grew on the same basis because they did the same things in the world of wireless and telecom. However, in recent years they are taking different paths.
Watching industry experts on CNBC and Fox Business talk about the wireless and telecom space is often confusing. Some look backwards and others look forward. Depending on your point of view, you either understand the changes that are reshaping the business or you don’t. If you are a historian, you look backwards. If you are an investor, you look forwards.
AT&T and Verizon Investors Should Look Forward
Having the right point of view, looking forward, is the direction that every investor should focus. This tells whether the company is growing or not today, and gives us the chance to see the direction they are heading in, for better or for worse.
Looking forward, we see both AT&T and Verizon are now on new and very different growth paths. That means they will no longer perform the same. The traditional wireless and telecom world are not the only game in town.
Ten to fifteen years ago, wireless and telecom companies were still all on the same page. There were loads of smaller companies competing in different segments. That’s when the industry began its radical reinvention. Ten to fifteen years ago, AT&T was a smaller and dying long distance giant of the past. Ten to fifteen years ago, Cingular, AT&T, Bellsouth and SBC were much smaller companies. Then they merged into one company.
The industry continued to merge. Today, there are fewer and larger competitors, operating in all the separate segments like wireless, telephone, internet, television and so on. Ten years ago, the Apple (AAPL) iPhone and Google (GOOG) Android were introduced and they changed the entire wireless industry.
Now after a decade of wild growth, the major players in this space must find new areas for growth to keep investors happy. This is where AT&T and Verizon seem to be on completely different tracks. So we can no longer measure them against each other.
This is not just happening with AT&T and Verizon. The same kind of change and transformation is occurring at Comcast (CMCSA) and Charter (CHTR) in the cable television industry. So, let’s take a closer look at the new paths of AT&T and Verizon.
AT&T and AT&T Mobility New Growth Path
AT&T is on a solid growth track. Their new growth path started several years ago. Remember when AT&T tried to acquire T-Mobile (TMUS)? That was denied because at that time it was more important to regulators to have four wireless players. At that time, T-Mobile was dying on the vine. Then, a year-and-a-half ago, AT&T acquired DirecTV. AT&T and DirecTV are in two different industries. This was a very good move.
AT&T is showing innovation with the DirecTV acquisition. They are transforming the television industry and creating growth. First, they created wireless TV or mobile TV. This lets customers watch TV on their wireless devices like smartphones or tablet’s, on the AT&T Mobility network, nationwide. That changes everything. That is sending Comcast and Charter back to the drawing board. Now they are working to try and come up with a competitive answer.
AT&T Innovation Created Mobile TV, Wireless TV and Low Cost TV
In addition, AT&T DirecTV just started offering low cost options to users who have been asking for it for many years. This unbundling lets users pay something like $35 per month for the channels they want, rather than well over $100 per month on competitors. Customers have been asking for A la carte services for years. Finally, they are getting what they have been asking for. And this is just the beginning.
Now AT&T wants to acquire Time Warner Cable (TWC), a move that will no doubt continue to change the television industry by combining it with wireless and telecom. Area after area shows real opportunities for growth at AT&T as they continue down this path. And that makes investors happy.
Plus, they are growing in quite a few other directions. Example, their AT&T Gigapower, ultra-fast Internet service is rapidly growing and very popular. Home automation is another. Plus, they are a player in the smart home, smart city phenomenon which is just beginning.
At a recent analyst briefing I attended, AT&T talked about all sorts of new businesses they are actively growing in. Areas like AI, IoT, the Cloud, M2M and many more areas. They talked about smart homes and smart cities. This shows a strong growth curve ahead of them for years to come and we are just in the very early days of this new expansion.
Verizon and Verizon Wireless New Growth Path
Now, I want to talk as positively about Verizon, but I simply don’t understand the path they are taking. To date, they are not doing as good a job convincing the marketplace of their growth potential. Their new path does not seem as exciting or on target.
It seems Verizon wants to become a marketing oriented company using their wireless and wire line assets. They acquired AOL. They now want to acquire Yahoo! (YHOO). Plus, there have been several different, smaller and less consequential acquisitions on their path to reinventing the company. My understanding is they want these companies for their customer base.
While there is nothing wrong with this plan, I think Verizon’s success is more speculative than the more certain path they have been on. Plus, the acquisitions they are making don’t seem to be particularly strong. This means their growth track does not seem as strong. Let me explain…
Companies Ride a Growth Wave Up Until It Crests then Falls
Companies are always on a growth wave. They are either growing, cresting or on the downside of the growth wave. Verizon does not seem to be on a growth wave. The companies Verizon is merging with are not on a growth wave either. So, even though Verizon is acquiring company after company, it’s hard to get excited… unless we are missing something.
I wish Verizon would better explain their growth plans to me. Several months ago, I recall an interview on CNBC with CEO Lowell McAdam. He was talking about taking the next few years to reinvent the company, and how we should not expect to see the same kind of growth during this time. That was a big, loud sign of things to come. This is what I have been writing about over the last year or two.
Not Everyone Understands New Direction at Verizon
Not everyone seems to have grasped what he was getting at. Going forward, it seems Verizon wants to use its wireless and wire line assets to fuel growth in advertising and marketing. Creating a universe of viewers and users and marketing themselves as a way for other businesses to reach this group through things like ads.
If successful, this will transform Verizon into a different kind of company going forward. It will still be a communications company, but it will also be a marketing company. While this is creative, it is also an unknown and that can make investors wary. That may be part of the problem. The marketplace simply does not know what to expect from Verizon going forward.
Bottom Line, Growth at AT&T and Verizon Will Be Very Different
So, while ten years ago both AT&T and Verizon were in the same business and on the same growth wave, things have changed. No longer are these two companies on the same page. They are no longer growing in smartphones since everyone already has one. We are just in the replacement mode. Going forward, their plans for tomorrow look very different.
That means investors cannot make the same kind of assumptions they made until a few short years ago. So, going forward, things are different. We must judge AT&T and Verizon separately and differently. We’ll have to watch and see which grows and for what reasons. For better or worse, these are becoming two different companies. Understanding that is one of the keys to success as an investor, customer and worker going forward.
Jeff Kagan is an Equities.com columnist. Kagan is a Wireless Analyst, Telecom Analyst, Industry Analyst, speaker and consultant. He follows wireless, wire line, telecom, Internet, cable TV, IPTV, Cloud, Mobile Pay, FinTech and communications technology. Email him at [email protected]. His web site is www.jeffKAGAN.com. Follow him on Twitter @jeffkagan