AT&T CEO John Stankey is still looking to wring costs out of the business, and the company’s rural landline customers are next to take the cut.

At this morning’s J.P. Morgan Technology, Media and Communications Conference for investors, Stankey said AT&T is considering mothballing landline facilities in rural parts of its service area and offer wireless service instead.

“We have a voice replacement service now, so that allows us to look at our options around the footprint […] and begin the work of starting to shed some of that footprint and reduce the number of square miles that have that fixed infrastructure in place [where] you’re never going to have an incentive to ultimately upgrade to fiber,” Stankey told investors, quickly correcting himself over use the word ‘never’ in favor of “the next several years.”

“The best way to serve them is with robust wireless infrastructure and stepped up investment in that case and we will do that,” he added.

AT&T has been testing fixed wireless replacement phone service in parts of the southern United States for several years, to very mixed reviews. In these trials, AT&T rural landline customers receive a wireless modem that connects with existing home phone lines. Internet service is provided over AT&T’s 4G LTE network.

Stankey

AT&T ceased marketing its DSL service last October, although some Stop the Cap! readers claim they still occasionally receive targeted invitations for DSL service in some areas. The company has allowed its current rural DSL customers to keep their service, but many don’t. The company lost almost 39,000 DSL customers in the first three months of this year, with so signs of stopping. Across AT&T’s landline footprint, which extends from the Great Lakes region to the South as far west as Texas and east to Florida, there are only about a half-million AT&T DSL customers remaining. Most of those customers keep the service because they have no other options.

If AT&T wins FCC approval to decommission its wired network in rural areas where it has no plans to provide fiber to the home service, customers will lose traditional landline phone service and DSL.

Stankey said any serious effort in that direction is unlikely to begin until 2023, largely because AT&T will not make the investments to bolster its rural wireless infrastructure until then.

The CEO also foreshadowed no immediate plans to follow Verizon into the 5G wireless home internet business. In fact, Stankey admitted AT&T’s network is likely inadequate to support the data demands of home broadband customers.

That leaves rural customers in AT&T’s service areas with no hope of high-speed upgrades unless a community broadband provider launches or a cable operator agrees to wire rural areas. There are still questions about the capacity next generation satellite internet service will have in rural areas and whether service will be adequate to meet today’s data demands.

AT&T’s customers in urban and major suburban areas have a brighter future, however. Stankey told investors AT&T will expand its fiber to the home service to another three million households in 2021 and at least four million more in 2022. Overall, AT&T plans to provide fiber service to around 30 million homes and businesses in its wireline service area. If adequate returns on investment can be realized, along with reduced upgrade costs to reach each home, Stankey suggested another 10 million customer locations could one day see fiber service as well.

Stankey

AT&T’s incoming CEO John Stankey has a message for America: If you are unwilling to pay $15 a month for AT&T’s HBO Max, you have a low IQ.

Stankey made that declaration pitching the new service, set to debut in May. The fact the video platform is late to a market already crowded by Netflix, Hulu, and Disney is just part of the challenge. That $15 price point is a bigger one.

If there is any company in the telecom business that can prove consumers are sensitive to price hikes and bill shock, it is AT&T. Its frequent rate hikes for its DirecTV satellite service and various streaming TV platforms have caused a customer exodus. More than a quarter of DirecTV customers have left and, even more stunning, well over half of AT&T’s streaming TV customers have dropped the service. In late 2018, DirecTV Now (today AT&T TV Now) — AT&T’s cord cutting TV alternative, had 1.8 million customers. As of last month, that number is down to 788,000 and still falling.

AT&T has repeatedly claimed it wants to focus on “high value” customers, which may explain why it remains confident its $15/mo HBO Max service will do well, despite being the most costly streaming service in the market.

Stankey’s predecessor, Randall Stephenson, will exit as AT&T’s CEO in July. He leaves a much larger conglomerate than what he started with. AT&T has diversified from its telephone and wireless portfolio with several major acquisitions, including DirecTV — the satellite TV service, and Time Warner (Entertainment), a Hollywood studio and entertainment giant. The result is a company loaded with debt and a revolt by activist investors that question the wisdom of creating the 2010s version of AOL-Time Warner.

Elliott Management Corp., the activist investment firm that has proved itself a nuisance to the expensive dreams of several rich and powerful CEOs, does not see a viable marriage between AT&T’s profitable telecommunications business and a media and entertainment company. It took its concerns public in 2019, calling on AT&T management to get back to the basics.

Stankey’s approach seems to be a willingness to embrace the newest members of the AT&T family, for now, while also reassuring investors the shopping spree of mergers and acquisitions is over. Bloomberg News reports his views seem to have won Elliott Management over. At the same time, Stankey has to convince investors and the public he is competent at running a media company. The jury is still out on that:

Bloomberg:

At a town hall with HBO employees last year, Stankey said the network had to dramatically increase its programming output, comparing the work ahead to childbirth. Once, when a Time Warner veteran criticized an idea during a meeting, Stankey replied, “I know more about television than anybody.”

[…] But over the past two years, Stankey has tried to acclimate himself to the glitzy world of entertainment. He started watching HBO’s “Westworld” and “Succession.” He could be seen mingling with HBO talent at glitzy Manhattan premiere parties. At an industry event, he wore a pin featuring a Looney Tunes character — a WarnerMedia property — on his jacket lapel.

This isn’t going to be your parent’s HBO much longer.

In a recent town hall attended by 150 employees, AT&T laid out its new vision for the premium network it recently acquired. one almost similar at times to the business plan of a drug pusher.

“We need hours a day,” said John Stankey, a recent transplant from AT&T’s executive suites now tapped to run WarnerMedia — AT&T’s new name for what used to be Time Warner (Entertainment) and owner of HBO. Stankey was complaining that HBO was out of touch with the times, attracting too few viewers to its multiplex of premium channels only a handful of times a week, if that. In a world shared by Netflix, that was not nearly good enough.

HBO, which began life as Home Box Office in November, 1972 is by far America’s oldest cable television channel. Originally a venue for high profile, unedited, commercial-free movies, along with sports and specials, HBO grew into a well-respected producer of high budget (often millions of dollars per episode), cutting-edge original movies and series, showcased to loyal audiences on Sunday nights for years. Series like The Wire, The Sopranos, Sex in the City, Oz and Game of Thrones are well-known across the country, but fewer than half of Americans subscribe to HBO to watch them. HBO has also been the critics’ choice for original content, showering awards on the network in unprecedented numbers for almost 20 years.

Now that AT&T is in charge, that is all about to change, as executives prepare to shift HBO away from “quality over quantity” towards “quality and quantity.” Stankey also made it clear the changes are first and foremost about making money — a lot of it earned by keeping subscribers on HBO property so their viewing habits can be studied and sold.

Stankey

“It’s going to be a tough year,” Stankey warned. “It’s going to be a lot of work to alter and change direction a little bit.”

“It’s not hours a week, and it’s not hours a month,” Stankey said of how long he expects HBO subscribers to spend time watching the service. “It’s hours a day. You are competing with devices that sit in people’s hands that capture their attention every 15 minutes. I want more hours of engagement. Why are more hours of engagement important? Because you get more data and information about a customer that then allows you to do things like monetize through alternate models of advertising as well as subscriptions, which I think is very important to play in tomorrow’s world.”

That will be a major shift for a network overseen top to bottom since 1992 by Richard Plepler, HBO’s chief executive. Plepler expanded on HBO original movies by launching expensive scripted series in the late 1990s that stood out by escaping broadcast television network censorship. But Plepler was very selective about the number of shows on HBO’s schedule, with some series taking years to develop. Under Stankey’s leadership, HBO will now be expected to dramatically expand original content, much like Netflix has done to keep viewers coming back for more.

“As I step back and think about what’s unique about the brand and where it needs to go, there’s got to be a little more depth to it, there’s got to be more frequent engagement,” Stankey said, adding HBO’s brand has to broaden its appeal to new audiences.

That will require a big boost to HBO’s budget. The pay movie channel is already extremely profitable, making almost $6 billion in profits over the last three years. It invested $2 billion in programming development, much less than the $8 billion Netflix is investing in less costly, but more prolific programming. HBO’s business plan depends heavily on American cable subscribers paying $10-15 a month for the network. It also earns money selling its original shows to television outlets in other countries. Its high monthly cost has always limited subscriber numbers, especially these days with cord-cutting and bill shaving. Premium movie channels are often the first networks to be dropped in return for a lower bill.

Plepler

To monetize its subscriber base, HBO either has to cut the cost of the network, transform it into must-have television, or a combination of both. Stankey is unhappy HBO has wavered around 40 million subscribers (out of 142 million American potential households) for years. He told audiences the network has to find ways to move the network beyond its perpetual 35-40% penetration “to have this become a much more common product.”

There was a clear sense of tension between Plepler, who is part of the New York City entertainment scene, and Stankey, a business-focused Texan with decades of experience in the Bell System — later AT&T. Plepler’s deference to Stankey’s new vision seemed uncomfortable at times, as Stankey made it clear who was now in charge:

Stankey: “We’ve got to make money at the end of the day, right?”
Plepler: “We do that.”
Stankey: “Yes, you do, just not enough.”

Plepler’s clearly defined tenure and vision at HBO had not wavered much since taking over in the early 1990s. But that vision was nervously discarded almost immediately as Stankey looked on.

“I’ve said, ‘More is not better, only better is better,’ because that was the hand we had,” Plepler explained. “I’ve switched that, now that you’re here, to: ‘More isn’t better, only better is better — but we need a lot more to be even better.’”

As a result, HBO, which used to be the darling of critics and well-to-do viewers in big cities on the east and west coast is getting a radical makeover. Onlookers can expect a much more aggressive marketing effort and free samples of the service to attract and hold new customers. It will have to keep its pricing closer to the competition, particularly as many consumers already subscribe to 1-2 different streaming services. Then it will have to give people a reason to subscribe to just one more service.