With AT&T shares hitting a 30-year low and Verizon shares hitting a 15-year low last week in the aftermath of the Wall Street Journal’s revelations on lead cables, telecommunications experts and industry analysts have been unraveling what the overhang from lead cables may mean for the telecom industry. But it is impossible to understand the telecoms’ nightmarish week without contextualizing the high-level tectonic shifts that have played out in the telecoms industry over the last decade, as well as the strategic challenges and leadership opportunities moving forward.
How we got to this point is largely a tale of three companies–since over the last decade, the market capitalization of AT&T and Verizon stock have both diminished by tens of billions while T-Mobile shares have grown by 10 times, with the latest plunges in AT&T and Verizon exacerbating the massive transfer of shareholder value, market share, and customers to T-Mobile. The divergent paths of these three largest telecoms giants are a reminder of the power of investing in infrastructure and quality of customer experience.
For whom the bell tolled: The roots of chronic underinvestment
Let’s start with AT&T. For historical clarity, it is important to appreciate that the AT&T of today is not the company that Theodore Vail founded in 1878 as the general manager of the Bell Telephone Company that commercialized Alexander Graham Bell’s invention. By the time he retired 45 years later, Vail had built it into the world’s largest corporation. With assistance from the government, the Bell Telephone Company became a monopoly, vanquishing most of its hundreds of rivals.
“In the long run … the public as a whole has never benefited by destructive competition. All costs of aggressive, uncontrolled competition are eventually borne, directly or indirectly, by the public,” even Vail’s own annual AT&T reports warned.
With the 1982 antitrust breakup up of the AT&T monopoly, AT&T was divested into seven regional Bell operating companies, in addition to the parent company’s technology and longlines business.
With the collapse of AT&T under David Dorman in 2005, Southwestern Bell (SBC), one of the regional Bell companies, took over the name and assets of the former parent company, reassembling half of the old Bell system. Ironically, the conduct of the former SBC, led both pre and after the break-up by CEO Zane Barnes, with charges of bribery, employee abuse, and monopolistic denial of systems access had heavily contributed to the breakup agreement of the original AT&T 20 years earlier.
Sadly, AT&T’s underinvestment in infrastructure is chronic–dating back to the days of Southwest Bell. Former AT&T CEO Edward Whitacre intentionally resisted spending on infrastructure improvements, instead choosing to appeal to the government and content companies for subsidies, largely unsuccessfully.
This was ironic as Whitacre, who was dubbed by some “the whiner” of the telecom industry for his solicitation of government resources to build out infrastructure while Verizon and T-Mobile raced ahead on this front, in a later role resented government involvement. Whitacre later engineered his post-retirement mission by leaving the GM board to seize the CEO job, having undermined humble internal GM incumbent Fritz Henderson, who led them out of bankruptcy. Three years after the U.S. government’s TARP program invested $50 billion to bail out GM from bankruptcy, Whitacre chafed at the 26.5% the U.S. owned: “So long as TARP money is wrapped up in GM, the company will never shake its "Government Motors" image. That label, as competitors and GM employees are keenly aware, was code for one thing: "GM is a failure."
Costly distractions: Holding the phone on 5G
In lieu of genuine infrastructure improvements, AT&T fell back on marketing: labeling 4G as 5G (for which it was explicitly sanctioned) while mocking other (successful) technological leaps, such as extending fiber optic cables to communities. Verizon happily stepped into this void under its legendary former CEO Ivan Seidenberg–and its Verizon FiOS fiber-optic became the industry gold standard for years while AT&T languished. Seidenberg built Verizon out of the reassembly of several other regional Bell operating companies–New England Telephone, New York Telephone, and Bell Atlantic with independents GTE and MCI, along with the U.S. business interests of Britain’s Vodaphone.
Furthermore, AT&T's technical infrastructure troubles were exacerbated with the launch of the iPhone. Despite signing a prized 5-year exclusivity agreement with Apple in 2007, AT&T faced constant capacity challenges with widespread complaints from angry users driving customers away.
Instead of investing in much-needed improvements to the underlying cellular network infrastructure, AT&T allocated capital towards failed satellite infrastructure plays such as DirectTV, which lost half its customers and resulted in a $15.5 billion impairment charge, as well as failed bets on content with its infamous $100 billion Time Warner deal, which resulted in a net shareholder loss of $47 billion. In fairness to AT&T, and its very principled then-CEO Randall Stephenson, who idealistically believed in a fair government review, the deal potentially could have worked were it not for Trump Department of Justice appointee Makan Delrahim delaying it for two years to cater to Trump’s vindictive war on CNN, despite Delrahim having previously supported the combination in his academic career.
Back then, diversions from infrastructure were all the rage. In the ’80s and ’90s, legendary Microsoft founder Bill Gates, TCI cable giant John Malone, and Viacom’s Sumner Redstone promoted the mantra of “content is king,” widely saluted by analysts. This culminated in the highly ambitious, quickly failed joint ventures of the regional Bell operating companies, Creative Artists Agencies, and Disney into two rival content production enterprises called Tele-TV (PacTel, Bell Atlantic, Nynex) and Americast in the mid-1990s (SBC, BellSouth, Ameritech, GTE/; SNET; Disney). At one CEO Summit we hosted in 1997, we asked three phone company CEOs in attendance which venture they were in, and two were unsure. Both endeavors failed massively in five years.
These hugely costly content distractions diverted capital away from the telecoms infrastructure with many analysts estimating that AT&T underinvested in 5G by at least 50% relative to its peers, with the effects to be felt for years as AT&T plays catch-up belatedly.
Meanwhile, Verizon’s loss of market share over the last decade reflected a loss of focus of a different kind. Even though Verizon largely stayed away from far-flung content bets, notwithstanding the mistaken purchases of AOL in 2015 and Yahoo in 2017 which resulted in $5 billion in writedowns, many analysts say Verizon’s biggest miss was a major technical bet gone wrong on transmission, aka “frequency”–which is the backbone of every telecoms company.
Verizon went all in on the highly specialized, esoteric 5G millimeter wave high-band frequency–which limited its 5G geographic coverage to high-density hotspots such as sports stadiums, shopping malls, or convention centers, hardly convenient for most consumers needing 24/7 connectivity. Verizon is now having to belatedly backtrack and play catch-up by pouring billions into an alternative, the easier-to-deploy and broader-coverage c-band frequency, which has tremendous potential.
How T-Mobile beat its ‘dumb and dumber’ competitors
Meanwhile, T-Mobile’s stock has grown exponentially by 10x and its customer base and revenues have quadrupled from $20 billion to $80 billion over the last decade, following a playbook largely charted by its former CEO, the visionary John Legere. He plainly outcompeted AT&T and Verizon, which he playfully referred to as his “dumb and dumber” competition, through serious infrastructure investment and quality customer service.
A transformative moment was T-Mobile’s acquisition of Sprint. The importance of acquiring Sprint’s customers paled in comparison to the acquisition of the all-important radio frequency. T-Mobile was able to obtain all of Sprint’s valuable best-in-class, low and mid-band 5G spectrum. T-Mobile rapidly built on its nascent advantage by cleaning up at additional spectrum auctions held by the government, acquiring the rights to valuable low-band transmission systems on the cheap while AT&T and Verizon were distracted with content and high-band, respectively. As customers flocked to T-Mobile and Verizon, AT&T rather passively accepted the loss of market share without deploying an array of defensive and offensive strategies they could have used to undercut the new competition.
Despite the challenges of the last decade, AT&T CEO John Stankey and Verizon CEO Hans Vestberg are hardly unrealistic when they sound notes of optimism alongside T-Mobile CEO Mike Sievert in their outlooks moving forward, especially when it comes to 5G. In fact, these three main telecom wireless carriers effectively hold a commanding triopoly position over 5G since they are the only U.S. companies who have built 5G networks and infrastructure at scale, even as their individual competitive positions wax and wane. The wireless carriers’ cable competitors are not only several steps behind on 5G, but even more importantly, they are grappling with the potential obsolescence of the linear TV business model, meaning they are unlikely to be able to fund and sustain the capital-intensive investments 5G requires.
Although some are quick to point out that over $100 billion has been spent on 5G with little shareholder return so far if not downright value destruction, 5G is not the overhyped bust that skeptics would have us believe. Not only does 5G provide superior capacity, improved broadband, and decreased latency, which enables greater connectivity across devices and geographies but it also has single-handedly enabled the rise of innovations such as live video streaming and A.I. apps, which would have overwhelmed the bandwidth of earlier cellular networks.
Analysts generally agree that 5G is already easily 10 times better than 4G, but that 5G remains immature. The full benefits of 5G are yet to be felt for two primary reasons: the three carriers are still in the middle of building out 5G network infrastructure with years of continual investment ahead and most U.S. users are still using 4G devices even when they are on 5G signal–a problem which will solve itself with time as consumers upgrade to 5G devices.
A crucial challenge moving forward for the three telecom carriers will be how they can monetize 5G as they reach an inflection point in the investment cycle. All three CEOs have said that by next year, there will be less need for massive investments in building out infrastructure, which turns the focus to driving revenue growth from soon-to-be-mature 5G networks. Some industry experts say that the key to driving profitability will be bundling services with 5G plans *ranging from partnerships with streaming subscriptions to gaming to virtual reality to healthcare to A.I. software) so that customers will be incentivized to use more data and pay for premium speed and service.
Over the last few decades, as large broadband cable companies such as Comcast and Charter expanded into mobile telephony, fortifying partnerships with telecom companies, the domain became far more complex, and that complexity will only exacerbate amidst rapidly evolving business models. Back in 1982, when Stephen Spielberg’s ET pleaded “ET phone home?” his hosts had just one nationwide phone system, no wireless mobile systems, no smartphones, and no 5G. Perhaps if he saw what was coming, he might have stayed with Eliot and his adopted family.
Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Senior Associate Dean at Yale School of Management. He was named “Management Professor of the Year” by Poets & Quants magazine.
Steven Tian is the director of research at the Yale Chief Executive Leadership Institute and a former quantitative investment analyst with the Rockefeller Family Office.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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