AT&T (NYSE:T) 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.
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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 (NASDAQ:NFLX) 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.
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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 (NYSE:VZ) 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.
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