Sat. Dec 4th, 2021

An AT&T store in San Rafael, Calif., May 17.



Photo:

Justin Sullivan/Getty Images

AT&T

is unloading its Warner Media properties but why did it buy Time Warner in the first place? For the same reason Time Warner (Cable) bought AOL, and Verizon bought Yahoo, and

Vivendi

bought Universal. Call it margin envy.

Since the birth of the commercial internet in the 1990s, the big network operators have complained that while they carry all the traffic, someone else always seems to reap the rewards. As you read this, AT&T’s market capitalization ($210 billion) is only a smidgen lower than

Netflix’s

($221 billion). And don’t even mention the market caps (or margins) of the web giants—you might send a telecom executive into apoplexy.

Richard Parsons,

the Time Warner CEO who helped negotiate the AOL deal, liked to say that his cable company couldn’t afford to be a “dumb pipe.” To this day, the network operators—wireless, fiber, cable—fear being dumb pipes because the other guys seem to make all the money. They’re not wrong about that. The error is in thinking that because you own the pipes, you can improve your pipe business by owning the content too.

A glance at postmerger AT&T illustrates the problem. AT&T buys Time Warner, and now it owns “Game of Thrones” and all the rest of it. It can differentiate itself from its competitors by giving content away to its wireless and wireline subscribers—but that undercuts the margins of the entertainment business. And for the consumer, it’s a marginal benefit. They probably pay for Netflix, too, and

T-Mobile

subsidizes Netflix subscriptions for its customers (without, you’ll notice, having to own Netflix). So, do you want a “free” HBO Max subscription with AT&T, or a Netflix subscription with T-Mobile, or Disney+ with Verizon? Pick your poison.

AT&T hasn’t improved its position by owning Time Warner. It has simply exported its eroding margins to the entertainment business from the network business.

The irony in all this is that the public, and official Washington, has treated network operators as the villains of the internet world, even as the streamers, web giants and social networks eat their lunch. From the perspective of the network owners, the whole net-neutrality controversy looks almost surreal. If internet service providers had the power to control what people saw on the internet, they’d surely be making more money than they do. But somehow companies with 10-digit market caps get to play the victim while the network operators spend trillions to keep the dumb pipes flowing.

The thing about pipes is, they’re not dumb. They’re brilliant—at being pipes. Maybe instead of trying to own what flows through the pipes, network operators like AT&T need to become better ones.

Take

Amazon

—one of the biggest beneficiaries of the network operators’ pipes. Amazon built tons of computing capacity to handle peak loads on its website and a massive logistics operation to fulfill orders, even at peak times. And then it turned all that excess capacity into a business—or rather two. Amazon Web Services monetizes Amazon’s extra computing power, and Amazon Marketplace lets other retailers use Amazon’s website.

The carriers could do the same with all the unused capacity on their networks. It can hardly be worse than repeatedly overpaying for content companies only to unload them a few years later.

Mr. Ganley is chairman and CEO of Rivada Networks.

Main Street: Unlike Hollywood’s woke, at least its Communists could make good movies. Images: Everett Collection/A.M.P.A.S. via Getty Images Composite: Mark Kelly

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Appeared in the June 3, 2021, print edition.

By rahul