Please ensure Javascript is enabled for purposes of website accessibility

Can AT&T’s New CEO Solve Its 3 Biggest Problems?

By Leo Sun - Apr 28, 2020 at 12:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

John Stankey needs to unite AT&T’s fragmented streaming media ecosystem, fix its dying pay TV business, and tame its massive debt.

AT&T (T 0.47%) recently announced that CEO Randall Stephenson, who led the company for 13 years, will retire on July 1. Stephenson had previously pledged to lead AT&T until the end of 2020, so the announcement likely surprised investors.

President and COO John Stankey, who joined AT&T in 1985 and was groomed as Stephenson's successor, will become AT&T's next CEO. Stankey previously led three business units -- AT&T Communications, Xandr, and WarnerMedia -- but recently stepped away from WarnerMedia and handed the reins to Hulu co-founder Jason Kilar.

Elliott Management, the activist fund that pushed AT&T for an executive shakeup last year, previously expressed doubts about Stankey's ability to lead the company. However, the firm recently stated that it "supports" Stankey as its next CEO.

Stankey is taking over at a challenging time for the telecom and media giant. Let's examine the three main challenges that will require his immediate attention.

A man points at three light bulbs composed of puzzle pieces.

Image source: Getty Images.

1. Growing AT&T's media business

Under Stephenson, AT&T bought DirecTV for $48.5 billion and Time Warner for $85 billion. Those acquisitions were aimed at forming the foundation of a streaming video ecosystem that could challenge Netflix (NFLX 1.30%) and counter cord cutters, but those efforts have been messy and fragmented.

AT&T currently offers AT&T TV, AT&T TV Now (formerly DirecTV Now), WatchTV, HBO Now, and DC Universe as separate streaming services, and it plans to launch HBO Max (which adds additional WarnerMedia content to HBO Now) in May.

At a Goldman Sachs conference last year, Stephenson blamed the fragmentation on Time Warner's business "silos" (HBO, Warner Bros, and Turner cable networks), and declared Stankey was breaking "down the silos fairly quickly, which is not easy to do, and getting the business reoriented toward HBO Max."

But unless Stankey quickly eliminates the redundant services, promotes cheap media bundles for AT&T's wireless and wireline subscribers, and matches Netflix and Disney's monthly rates, its streaming efforts could still flop, despite its massive investments in securing hit comedies like Friends and The Big Bang Theory.

2. Keeping its pay-TV subscribers

AT&T initially bought DirecTV to strengthen its pay-TV business, but it continually lost pay-TV subscribers to OTT streaming platforms over the past few years. It lost 897,000 pay-TV subscribers -- mainly at DirecTV -- in the first quarter alone.

A young woman watches a video on her laptop while eating popcorn.

Image source: Getty Images.

AT&T's confusing branding strategies -- which previously included its U-verse wireline TV services, DirecTV satellite services, and DirecTV Now streaming services -- further hampered its marketing efforts. Its recent attempts to unite those brands under the AT&T and HBO banners arguably exacerbated that confusion.

AT&T is counting heavily on HBO Max and AT&T TV Now (which includes content from WarnerMedia, other media networks, and HBO at a higher "Plus" tier) to stop the bleeding. However, it could be tough to sell these new services to current subscribers of Netflix, Disney+, Hulu, Amazon Prime Video, or Apple TV.

3. Taming its massive debt load

AT&T shouldered nearly $152 billion in total debt at the end of 2019, due to its purchases of DirecTV, Time Warner, and AWS-3 spectrum licenses. Elliot Management harshly criticized those massive purchases -- which were far more aggressive than Verizon's (VZ 0.21%) media expansion efforts -- when it took its $3.2 billion stake in AT&T last year.

AT&T recently suspended its buyback plans to protect its dividend and debt payments, but it only reduced its total debt by less than 8% last year. As the COVID-19 pandemic shuts down Time Warner's movie business and postpones releases of new smartphones, AT&T could struggle to dent its mountain of debt.

AT&T recently sold some assets -- including its towers, data centers, and its stakes in the Game Show Network and Hulu -- to reduce its debt. AT&T is reportedly interested in selling DirecTV, which no longer fits with its streaming ambitions, but it could be tough to find a buyer in this crisis-stricken market.

The key takeaways

AT&T's stock barely budged after the announcement of Stephenson's early retirement. Stankey's promotion wasn't surprising, and it probably won't change the status quo at the telecom and media giant.

I personally believe AT&T needed to hire an outsider with experience in the streaming media market to shake things up. Instead, AT&T is sticking with an insider who hasn't inspired much confidence in the past, and who could struggle to solve the company's most pressing issues in a timely manner.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Amazon, Apple, AT&T, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$18.12 (0.47%) $0.09
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$44.88 (0.21%) $0.10
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$245.86 (1.30%) $3.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.