For a couple of years, AT&T (T 1.58%) was ripping entire chapters from the Netflix (NFLX +0.13%) playbook. The telecom giant's grand digital media experiment has largely run its course, highlighting some fundamental differences between the two companies. But which stock is the better investment idea today?
Let's have a look.
They raised the phone bill again. Image source: Getty Images.
What Ma Bell is doing wrong
AT&T paid $49 billion for DirecTV in 2015 and $110 billion for Time Warner in 2018. The telecom giant was hoping to kick-start a media empire on a backbone of digital data networks, adding some higher-margin business with serious growth prospects to its more stagnant and less profitable network services operations.
"We're going to bring a fresh approach to how the media and entertainment industry works for consumers, content creators, distributors, and advertisers," AT&T CEO Randall Stephenson said when his company completed the Time Warner buyout.
It didn't quite work out that way. Ma Bell struggled to make the telecom-plus-media combination greater than the sum of its parts. AT&T's collection of premium TV services had 22.4 million subscribers in the spring of 2019. In the latest earnings report, the subscriber count had dwindled to 15.9 million accounts. That was not a good look when Netflix and other media-streaming specialists reported massive subscriber growth over the same period.
So AT&T is throwing in the towel. The company is in the process of spinning off both DirecTV and the content-producing side of Time Warner. The satellite broadcasting business is becoming a stand-alone business again, bundled with AT&T's fiber-optic U-Verse services. In addition, WarnerMedia is joining forces with documentaries specialist Discovery (DISCA +0.00%) (NASDAQ: DISCK) as another separate company. AT&T will pocket approximately $50 billion when the two spin-offs are complete -- not a great return on an original investment of nearly $160 billion.
Giving up on media operations is a major strategy shift. AT&T will double down on the more traditional telecom business of selling services on wired and wireless networks. In other words, it's the end of AT&T's profitable growth dreams and a return to the slow grind of selling commodity services. Analysts expect Ma Bell's bottom-line earnings to grow by an annual average of just 1.4% over the next five years. That's not my cup of tea at all.
Bull's-eye again! Image source: Getty Images.
What Netflix is doing right
Meanwhile, Netflix has been showing the world how to succeed in show business.
We're talking about the most significant player in the global media-streaming market, which should continue to experience explosive growth for several years to come. Netflix is also a leading maker of high-quality content these days, routinely dominating awards shows such as the Emmys, Golden Globes, and Oscars in recent years.
That's the secret sauce behind Netflix's impressive subscriber growth. The company has spent years building and polishing a digital media delivery platform without distracting advertisements or close links to Hollywood's traditional studio system. Build an excellent service and offer it to consumers at a reasonable price, and success will follow.
If Randall Stephenson really wanted to see a "fresh approach to how the media and entertainment industry works," he should have started with a glance at Netflix. Instead, AT&T resorted to its old bag of tricks when presented with a changing business environment. When U-Verse and DirecTV started losing subscribers, AT&T protected its bottom line by raising prices. If anything, that move probably accelerated the exodus of video-service customers. The number of video subscribers fell 29% over the last two years, while average revenue per user (ARPU) increased by 17%.
Netflix is not content with following the time-honored business practices of bygone eras. Instead, this company keeps throwing curveball after curveball at the established media industry.
The choice is clear.
You can invest in a fast-growing streaming media specialist with a unique focus on product quality, or you could bet on a member of the old guard with stagnant growth prospects. Netflix is leading the charge into a new era while AT&T is trying way too hard to protect outdated business ideas.
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