On the latest episode of Recode Media with Peter Kafka, AT&T CEO Randall Stephenson joined Peter onstage at the NBA All-Star Tech Summit to talk about sports gambling, why 5G internet will one day replace home broadband, and AT&T’s $85 billion acquisition of Time Warner last year.
“My objective from day one was to run this acquisition different than we’ve run any other acquisition,” Stephenson said. “In a typical acquisition, we come in, we have processes, we have everything from travel/entertainment expenditure guidelines to cultural aspects. We literally just forklift that onto the target and boom, start running execution and off we go. Bam! ... This one, we said, ‘That’s not the play we’re going to run here.’”
Unlike those other acquisitions that more closely align with AT&T’s telecommunications history, Stephenson said Time Warner will be run more “independently.”
“You don’t want this one polluted also by a lot of the stuff going over here,” he said. “Those are very independent and necessary cultures. This one over here is a talent-based culture.”
Below, we’ve shared a lightly edited full transcript of Peter’s conversation with Randall.
Peter Kafka: Randall.
Randall Stephenson: Hey, Peter.
Nice to see you. I’ve got to say, it was very exciting to get introduced by Ahmad Rashad.
I’ve got to go back in time and tell my 8-year-old Vikings-fan self that that was going to happen one day.
I want to talk about the future. Why don’t we start there. We just saw a cool 5G demo. And every time you or anyone else from the telco business comes on a stage like this you talk about the importance of 5G. As far as I can tell, 5G means faster data. What does that mean for a consumer? Because our phones and our internet connections are pretty fast right now. What’s going to be better for us when 5G shows up?
It’s just more than fast. I mean, fast is a key element to it. I tell people it’s like connecting a fiber optic cable to your phone, but it goes beyond that. The technology of 5G puts you in a world of no latency and what that means is just instantaneous. And it’s a real-time network, and think about the applications that require instantaneous connectivity. And the first one we all go to is autonomous cars. Right? You do not want to be in a car that’s relying on network connectivity if there’s any latency.
You don’t want buffering when you’re trying to figure out if you’re going to pass that truck or not.
Exactly. Or if something ... a child comes out in front of a car, you don’t want buffering if a child runs out in front of a car. And so this no-latency, zero-latency thing is a really, really big deal. It’s the game changer. And as you saw in Adam’s video, some of that looked terribly futurist but it’s really not because when you get to a world of high-speed no-latency, then all of the stuff that’s in that smartphone that you’re holding right there, the storage no longer needs to be there. The storage can be back in the network. The compute capacity no longer needs to be there. It can be back in the network, and why is that important?
When you start taking all of that and the power requirements out of that, now you get to a place where you don’t need this big form factor. And you can actually begin to conceive of a world without screens. And that’s what happens. You lose the screen. And because suddenly you have a form factor that may look more like this. You don’t have to have power, you don’t have to have compute, you don’t have to have storage in here, it’s back in the network. And now you can begin to use really thin form factor capability and move to a world with no screens.
So how does the NBA conceive and think about a world of no screens? You saw some examples of it over there. Virtual and augmented reality become truly possible in this kind of world.
Is this a world where you and Verizon and your remaining competitors all need to build out individual 5G networks and as a consumer I need to decide which network I’m going to be in? And/or does this require some sort of public infrastructure commitment from the US or someone else to say, “Look, we’re going to need to build, we’re going to need to add capacity,” and that’s going to require government intervention or support or subsidy.
It’s headed down a path where it will be a competitive environment and I obviously, being of a capitalist mindset, I think that’s the right way. That’s what will drive the fastest deployment of this. It ought to be a competitive race. Who gets there first? Who gets there with the best quality? Who gets there with the best services on top of it? So it will be each company developing their own 5G infrastructure. There are standards around it so that equipment manufacturers can develop to the same standards and you have interchangeability and interoperability. But it will be a competitive pursuit.
And will that be evenly distributed or am I going to ... is my best chance of getting a 5G if I’m in New York or Atlanta or Charlotte as opposed to rural Montana?
Well, your best chance to for getting it will be is if you’re, first of all, on AT&T.
Here’s your softball.
Once we get past that easy hurdle, then it’s ... look, it’s no surprise that you will build out metropolitan areas first. This is a whole different kind of technology deployment. You know, you’re accustomed to seeing mobile services deployed where you put up big cell site antennas that are on top of buildings. You see them everywhere you go, right? And there’s really large ones with big antennas that are probably as tall as you and I, this is going to be rather than tens of thousands of big antennas is going be hundreds of thousands of small antennas. They’re going to be on light posts. They’re going to be on the sides of buildings. It’s going to look more like a wifi router than a wireless antenna we’re accustomed to seeing.
And so literally, for AT&T to deploy this is going to be a couple of hundred thousand of these antennas deployed. You will naturally go to metropolitan areas first.
I get a press release from you guys every couple of weeks saying, “Coming to Minneapolis.” Name your city. How far before this stuff is actually ubiquitous and I have a good chance of getting it in any major metropolitan area?
Ubiquity will be, I mean true ubiquity, I mean across ... Let’s call it the major NBA and NFL cities. You’re probably going to be a couple to three years, two to three years before you have ubiquity in those cities. Now you’re going to have pockets of this that begin to emerge and then so this is where you ask what are the real use cases early on. The real use cases early on are not going to be what you saw on Adam’s video. That will be three years from now, truly technology you’re capable of deploying.
Early on is going to be business applications. And so we’re standing up the world’s first 5G hospital. And it becomes for a corporation environment, think about getting rid of all wifi services, wifi routers, short wifi routers, because in a world of 5G you no longer need that. You will see in Dallas the first 5G sports venue. It will happen to be named AT&T Stadium. But if I were an NBA owner, this would be something I’ve been very interested in because you can deploy 5G in your arena.
Do you want me to ask him?
What me to ask Mark if he’s interested in this?
I already have.
But you deploy 5G in an arena. Now I begin to think about the services you saw up here. Once you put ... you don’t have to deploy a whole city to deploy an arena. We will be deploying AT&T this year.
And is this a practical substitution/competitor for fixed broadband that I’m getting my ... that I’m streaming my Netflix on at home in Brooklyn? Is this a practical competitive solution for that or is this going to augment that?
Ultimately, it will be a substitute. When I say it’s a substitute for wifi arrangements in a corporation office, you don’t have to think very hard to say, “Oh wow, that could be a wifi replacement or fixed-line broadband replacement for the home.” It’s going to be a while before we have the technology so pervasively deployed that you can begin to think ubiquitously — using your term — of a replacement for fixed broadband. But it ultimately be that.
Throughout my career, everybody has said, “Look, wireless will never replace” — pick the service you think. “Wireless will never replace landline telephone service.” In my early days of my career, I did an analysis and showed that by the year 2006, 25 percent of the home phones will be gone and replaced by wireless. Everybody just said, “That’s crazy. There’s not enough capacity.”
Well, we blew through that. We said in 2007, wireless will become the media by which people access the internet, the medium. “No way, there’s not enough capacity.” Well, along comes a guy with a black t-shirt and a touchscreen phone that we contract with him on, and that becomes the medium by which people access the Internet. Will this replace broadband to the home? Absolutely it will.
How far out?
Oh, I think within three to five years.
Three to five years. And that’s a big shift. Because most Americans have either one choice, maybe two choices of broadband providers. And you’re saying we’re going show up and we’re gonna offer you a chance to do everything that you’re getting broadband from now but we’re going to deliver it to you wirelessly. And that’s a real thing.
Oh yeah. That’s a real thing.
Three to five years.
We’re talking gigs speeds are potential in a world of 5G. One gig speeds.
Good. In that video, Adam also mentioned gambling is here. It’s coming. You are now a media business owner. What does professional sports gambling mean for Warner Media as an opportunity? Is that something you want to dive into? Is that something you want to touch around the edges or maybe steer clear of altogether?
Well, we don’t want to be running books. That’s not our gig.
I think somebody might. I think one of your peers might end up actually being in that business at some ...
And it’s quite possible. I don’t see that being something that we would want to do.
For moral reasons or business reasons?
Just business reasons. It’s like I wouldn’t want to be a bank either. Right? Just not the kind of thing that we’re good at and we should do. However, I am a believer that gaming, gambling is really critical to the business we’re in, in that gambling just deepens the engagement of the fans and the experience. There’s nothing that changes the fan engagement more than having something on the line on a game. And so broad pervasive gambling is a huge driver of fan engagement.
And do you think the opportunity there is converting people who are already gambling maybe not legally, and getting them to do it legally through a bunch of different options? Or do your think it’s getting a casual fan who maybe is in a Super Bowl pool once a year and getting him to spend a little bit more throughout the year?
It’s all of the above. And what our opportunity is — and you’re going to hear David Levy talk about this more, he’s doing some great work on this — but incorporating the gaming experience into the content that we deliver. So if anybody watched the match, the Phil Mickelson, Tiger Woods match the day after Thanksgiving, you saw the first evidence of what this would look like. We had ... not odds, I don’t think we were allowed to put the odds on the screen on each shot, but we were able to put percentage chance of being closest to the hole or winning the hole given where they were at a particular point in time, on the screen, while you’re watching the match. Now you don’t have to be a visionary to think about how do you go from there to actually initiating a gaming, initiating ... making a bet on each shot.
Right, and this is what you do in Europe today.
In-game betting in soccer matches.
And so it drives further engagement, drives new business models for us. And oh, by the way, this is an area just like if you’re trading in the stock market, latency is really important. You don’t want to be the guy with the slow latency making an investment in particular stock when things are moving. It’s the same with gaming. Why is that important? 5G. Having 5G connectivity, no-latency connectivity, in a world of gaming where your bet is not being delayed behind 12 other bets. You want it real time. So all of this comes together in terms of driving greater engagement, having the high-speed, no-latency networks integrating it into your content. We think this is all just part of the whole ...
So you guys are there, there’s no moral issues here. You’re going to be involved in gaming. I think Bleacher Report already said they’re doing a deal with Caesar’s, that’s a Turner property. You guys are there.
Yeah, absolutely. In terms of moral issues, we’re not condoning or saying we shouldn’t be doing it, it’s happening. People are gaming and so making it legalized and putting rules around it is probably good in general for society.
Let’s talk about how you view the business of sports, TV rights in general, you guys have a big commitment with the NBA, goes through 2023, 2024, right now you’ve got a big deal with Sunday Ticket. I think that is going to come up for an option in the near future?
They have an option coming up.
Right. And you talked in the past about obviously sports are a huge driver in costs. It’s a big issue as people are cutting the cord, as someone who’s now fully in the media business and thinking about whether ... how much and whether you’re going to spend on rights, what are you thinking going a couple of years into this? Is this ... do you want to keep making the same level of commitment into buying sports rights, if fewer people are going to paying for sports individually, maybe do you cut back your spend? How are you balancing all that out?
Sports is critical to everything we’re trying to do. If you think about AT&T today, we now have a media business which owns great content and lots of rights to sports and so forth. And then we have what you used to think of as AT&T being a distribution company, wireless and broadband and TV distribution. And sports is really an important variable in each of those. In fact, when you think of live content, live media, that’s always going to be very, very relevant. And live media, obviously over here on the distribution side, is really critical. We want live content, that’s time sensitive. Sports and news are it. And so we’re always going to want to have a premium position in sports and news.
And so as we think about what type of sports do we want to be invested in, I have a real bias here and that is that I like those sports and then particularly, those leaders in sports who are trying to figure out how do we drive the best fan experience? There are some sports folks — and this goes from college through several professionals in soccer — whose primary objective is to slice up the rights really, really thin and maximize the revenue over a three-, five-year time horizon by how you slice up the rights.
Be the NFL.
There’s several that have taken this approach.
NFL is really good at it.
The byproduct of that, though, is it creates, pardon my language, just a crappy fan experience. The fan doesn’t know what I can get, where I can get it, and what device I can get. In fact, depending on ... what device I’m carrying may dictate what content I can get.
Right, “this works on a phone but not an iPad.”
Exactly. And that’s a frustrating experience for a fan and for our customers. I will tell you — and I’m not just sucking up because I’m here and we have a 35-year relationship with the NBA — I think the NBA does one of the best jobs of stepping back and saying, “Put yourself in the seat of the fan. How do we create an experience that is the best experience for the fan and they don’t have to sit here and be thinking about what device and so forth.” I think they’ve done a terrific job.
And so you know, those are areas that we really like to invest in. I want to invest in and be part of that and to the extent that other sports — and no, I’m not just talking about NFL, there’s several sports that we invest in — to the extent that we invest in those sports and we’re working together to create a great fan experience, we will invest in those too. Sports is important to us.
But what about the idea of saying, “Look, if you’re going to buy content from AT&T Warner Media, you are going to get sports as part of that bundle,” versus saying, “Sports is an optional thing. You can pay for it or you can’t pay for it. It’s up to you.”
Well, we’re headed down a path of, some call it a la carte, but think about what Levy and the team have done with Bleacher Report. It is the epitome of a la carte. So the NBA ... and here’s another example of what is in the best interest of the fan experience. You can now on Bleacher Report buy a game for I think $6.99 or you can buy the fourth quarter of a game. I think it’s a $1.99. I’m not sure exactly what the price is. I think that’s right.
But think about that. That is ultimate serving the interest of the fan. And that’s just a great business model. I think we’re looking at this for European football and so forth as well. But that is a la carte at the extreme, right? That’s a hard decision to make. And you got to be thinking about the fan first to go down those paths.
How long do you think until the leagues themselves become direct distributors of their sports and cut you guys out or work together with you but also offer an option where you can buy a pacakge or a game directly through the leagues?
Well, they do it today, right? You’re seeing this happen today, several leagues are going directly to the consumer. And I ... it’s not just sports. I mean, look, if you’re in the media business, if you have premium content, you better be trying to figure out how you go directly to the consumer. That’s where the business model is going.
This is why the Time Warner acquisition was so important to us because this idea, that if you own premium content, and you think you’re just going to generate returns by going wholesale through cable companies, satellite companies, and so forth, that’s not going to do it in today’s day and age. You’re going to have to figure out how to get directly to the consumer. That’s why in Warner Media, it’s now what we call Time Warner, we’re standing up a direct to consumer platform that is called an SVOD, video on demand service to go directly to the consumer. You’re going to have to.
So let’s talk about that world. So you guys have said, “We’re coming out with this” — late this year but I think actually it’s really going to launch next year — “the full service.” Going up against, Apple, Amazon, Netflix.
Little company Netflix, yeah.
Disney, Fox. They’re either all in the market or they’re spending billions and billions and billions of dollars on content, how much capacity do you have to sort of compete with them dollar for dollar? You’ve already taken on a ton of debt just to do this Warner Media deal. How much flexibility do you have to sort of keep up with them if they’re going after a deal that you want at the same time?
The debt situation, we’ll have the lion’s share of that debt paid off by end of year this year. So I wasn’t sitting here thinking the debt somehow is an inhibitor to what we need to do. Warner Media, think about Warner Bros. Studios, I don’t think people appreciate just how deep and broad their IP library is, intellectual property library. I mean, just try to conceive of what sits within Warner Bros. In fact, I think the best example of this that people don’t think about is Netflix licenses a lot of Warner Bros content.
And so last year, the contract for Friends, the rerun Friends, came up for renewal with Warner Bros. We own that intellectual property. And when it appeared that Netflix might lose Friends, their customers, there was an outcry, it was ... surprising outcry from their customers. Netflix wanted to relicense just Friends. Well, Friends is just one little piece of content sitting within Warner Bros. They have a library of this kind of stuff plus movies plus continued regeneration of new stuff. Now add HBO. There is a library of content here that I believe will rival just about anybody.
And it’s not going to require a ton of new investments. Some. It will require some new investment. We’ve already said we’re going to plow a lot of money, additional money, into HBO to beef up that library. And so what is the objective of this? I’m convinced that as you go three, four years out, every household will have at least one, two, three video on demand subscriptions.
A Netflix, a Hulu, a Disney. Do we think our library and service is so compelling that we will be one of those that’s in virtually every household? We actually do. We’re convinced that we will be one of those video on demand subscriptions that will be in the household.
I also believe that attached to video on demand, if you have the opportunity and the potential to offer live TV as well. Can you offer the NBA through TNT? Can you offer CNN? Can you offer live content around that? We can. And I think you have a really unique offering in the marketplace. This is where we’re headed.
And you got ... you talk about this probably a little bit, right now you’ve got a deal with Netflix, with Friends, where they’re going to have it this year as you guys launch next year, you’re going to have the option of taking it back or making it available on both platforms. And if you come down one way or the other?
Yeah we did a non-exclusive deal with them.
Do you imagine that becomes an exclusive show for Friends that eventually your best stuff is eventually only distributed through Warner?
So I don’t believe there’s going to be a cookie-cutter approach to how you license content. I think Friends is an example where you look at that and you say, “Is that going to drive unique subscriber acquisition capabilities just by having it exclusive?” Probably not. But do you need it in a library, yes. So why would you not license it out on a non-exclusive basis.
You think you can have ... you can sell it to two people, yourself and somebody else?
Oh yeah. Yeah, especially that kind of content, for sure you can. Now there’s other content that will come out and you can ... I’m not saying this is what we’re doing but just as an example of where you might go: Aquaman. Thing just did a billion dollars in the box office. And it comes out of the window and at some point you can put it on your on demand service, is it conceivable that for a period of time it’s exclusive to your on-demand service? Yeah, I think there is. Does it need to be exclusive indefinitely? Probably not. But these are the business model questions we’re going through.
One thing I’m impressed by with the folks in Warner Media, very sophisticated people in terms of how they think about licensing and what you hope for exclusivity bases and so forth. And so it’s going to be an interesting equation to kind of walk through.
Are you guys all synced up on that? Because when that Netflix story, when the Friends story came out, there was some question about, “Well, maybe the guys in Burbank think this but the guys in New York HBO think that.” Are you guys ... are they all synced or this is a discussion that you’re still having with the people who are running your various media units?
If you’re asking does everybody within AT&T always agree with everybody at all times, the answer is unequivocally no. And do we have good healthy debate around issues of this, and then by the way, this is a significant issue. It’s a big-time issue. It’s a business model issue that what you do has lasting implications, so go healthy debate and dialog, darn right we do.
Prior to you guys buying the company, there was this narrative that said, “You know what, you got the telco guys from Dallas, and they’re going to buy this media company with these delicate flowers in New York and Los Angeles and there’s going to be a culture clash.”
Got rid of my white socks, as you see.
There you go. And how have you thought about that integration and how to give people their space but also say, “Look, we are going to go in a different direction. We’re going to ask new things of you.” Your lieutenant, John Stankey, he compared this to childbirth and then regretted saying that. But what he meant was this is going to be difficult. How is that process going? You’re about a year into it, I guess a little less than a year.
I think it’s going as well as we could have expected. My objective from day one was to run this acquisition different than we’ve run any other acquisition. In a typical acquisition, we come in, we have processes, we have everything from travel/entertainment expenditure guidelines to cultural aspects. We literally just forklift that onto the target and boom, start running execution and off we go. Bam! Right? And we get synergies within a year and this thing’s all ... we’re good at that.
This one, we said, “That’s not the play we’re going to run here. This play, this thing is going to be held independent. It’s going to be run very independently.” There are some connective tissues that we have to get in place, to create the value by it being part of the same family, we’re going to be very careful in terms of how we get to that. But we will have to run this thing independently for a number of reasons.
First of all, it’s a very different kind of business. It inherently and necessarily has a very different culture. And by the way, I want to protect that culture but I also need to protect this telco guy culture you talked about over here a minute ago. We’re really good at logistics and driving results and execution.
You don’t want this one polluted also by a lot of the stuff going over here. Those are very independent and necessary cultures. This one over here is a talent-based culture. And every single night, every asset drives home. And so protecting the talent, protecting directors, and protecting producers, and making sure that you maintain an environment where they want to do business with you is critical. And so I think so far, mission accomplished.
Now, can we get the connective tissue pulled together? I’ll let you know come fourth quarter when we launch this video on demand service.
Good. You guys are distributors of sort of conventional TV bundles through DirecTV, DirecTV Now, you’re going to have a service that you’re going to charge me some amount of money for that’s going to have HBO and a bunch of other stuff.
Americans have a limited amount of money. If I have to decide between buying a sort of traditional bundle that’s got ESPN and a bunch of other stuff versus a Warner Media streaming service, which would you prefer I buy?
Which would I prefer you buy?
Yeah, as AT&T, where do you want me to spend my money if I have to choose between one of the two?
Look, I just ... for my standpoint, I better have a product that fits your needs, that I want you to buy a product that fits your needs because you’re going stay with us longer, you’re going to spend more money with us. You’re going to have a longer relationship with me. If you’re asking the question, where do we make more money? In the short run, we make more money on the old legacy stuff. We always do in a business like ours. The highest-margin product we have today is, what would you guess?
A landline telephone.
Now I’m not out pushing you to buy landline telephones, all right? But that is our highest-margin product. That is a product that’s in decline and it will one day, we’ll finally be allowed by the regulators to turn the switch and remove that service, but that’s not where we tell our customers we want them to go. We’re constantly pushing them to the new platforms and new services. This will be the same.
Okay. I’m going to chalk that up as “either.”
I just want you to ... I want you doing what is in your interest, not what’s in my interest.
Awesome. We’re out of time. Thank you, Randall. I appreciate it.
All right. Good seeing you, Peter.
This article originally appeared on Recode.net.