Why AT&T and Verizon’s infrastructure problems run so much deeper than lead cable

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With AT&T stock hitting a 30-year low and Verizon stock hitting a 15-year low last week in the wake of the Wall Street Journal’s revelations about backbone cable, telecoms experts and industry analysts have worked to unravel what the backbone cable burden might mean for the telecom industry. But it is impossible to understand the nightmare week for telecom without contextualizing the high-level tectonic shifts that have occurred in the telecom industry over the past decade, as well as the strategic challenges and leadership opportunities moving forward.

How we got to this point is largely a story of three companies — since the past decade, the market capitalization of AT&T and Verizon stock has dwindled by tens of billions while T-Mobile stock has grown by 10 times, with the recent declines in AT&T and Verizon exacerbating the massive transfer of shareholder value, market share and customers to T-Mobile. The divergent paths of the three largest telecom giants are a reminder of the power of investment in infrastructure and quality of customer experience.

For Whom the Bell Tolled: The Roots of Chronic Underinvestment

Let’s start with AT&T. For the sake of historical clarity, it’s important to realize that today’s AT&T is not the company Theodore Vail founded in 1878 as general manager of the Bell Telephone Company that commercialized Alexander Graham Bell’s invention. By the time he retired 45 years later, Phil had built it into the largest corporation in the world. With help from the government, the Bell Telephone Company became a monopoly, defeating most of its hundreds of competitors.

“In the long run…the public as a whole has not benefited from destructive competition. All costs of uncontrolled, fierce competition are ultimately borne by the public, directly or indirectly,” even Vail’s AT&T annual reports warned.

With the 1982 antitrust breakup of the AT&T monopoly, AT&T was divided into Bell’s seven regional operating companies, in addition to the parent company’s technology and long-line business.

With the collapse of AT&T under David Dorman in 2005, Southwestern Bell (SBC), a regional Bell company led by CEO Edward Whitacre, took over the name and assets of the former parent company, reassembling half of the old Bell system. Ironically, the behavior that contributed most to the original AT&T’s breakup agreement 20 years ago continued at the former Southwestern Bell, with charges of bribery, employee abuse, and monopolistic denial of access to systems under Whitacre’s predecessor, Zane Barnes.

Sadly, the lack of investment in AT&T’s infrastructure is chronic — dating back to the days of Bell’s Southwest. Whitacre has also deliberately resisted spending on infrastructure improvements, instead opting to appeal to the government and content companies for subsidies, largely to no avail.

This was ironic as Whitacre, dubbed a “whiner” in the telecoms industry by some for asking government resources to build infrastructure while Verizon and T-Mobile scrambled on that front, in a later role resented government involvement. Whitaker later engineered his post-retirement mission by leaving the GM board to take the CEO job, after undercutting humble incumbent Fritz Henderson, who had led them out of bankruptcy. Three years after the US government’s TARP program invested $50 billion to save General Motors from bankruptcy, Whitaker raged at the 26.5% US ownership he held: “As long as TARP money winds up in GM, the company will not shake its ‘Government Motors’ image.” That label, as competitors and GM employees understood it, was code for one thing: “GM is a failure.”

Expensive Distractions: Carrying the phone on the 5G network

Instead of real infrastructure improvements, AT&T has backed away from marketing: branding 4G as 5G (which it is explicitly approved of) while mocking others’ (successful) technological leaps, such as extending fiber-optic cables to communities. Verizon happily entered that void under its legendary former CEO Ivan Seidenberg — and Verizon FiOS fiber became the industry gold standard for years while AT&T slumped. Seidenberg created Verizon by repackaging several other Bell regional operators – New England Telephone, New York Telephone and Bell Atlantic with independent GTE and MCI, along with the American business interests of British Vodaphone.

Moreover, AT&T’s technical infrastructure problems worsened with the launch of the iPhone. Despite signing a 5-year exclusivity agreement with Apple in 2007, AT&T has faced persistent capacity challenges with widespread complaints of angry users pushing customers away.

Instead of investing in much-needed improvements to its core cellular network infrastructure, AT&T committed capital towards failing satellite infrastructure runs like DirectTV, which lost half of its customers and led to $15.5 billion in value, as well as failed content bets with the infamous $100 billion Time Warner deal, which resulted in a net loss for shareholders of $47 billion. In fairness to AT&T, and its then-principal CEO Randall Stephenson, who ideally believed in fair government review, the deal would have likely worked had it not been for the US Department of Justice delaying McCann Delrahim for two years to meet Trump’s war of retaliation on CNN, even though Delrahim had previously supported this group in his academic career.

At the time, transfers from infrastructure were common. In the 1980s and 1990s, legendary Microsoft founder Bill Gates, TCI cable giant John Malone, and Viacom’s Sumner Redstone promoted the slogan “content is king”, which was widely saluted by analysts. This culminated in the highly ambitious and rapidly failing joint ventures of Bell’s regional companies, creative artist agencies, and Disney into two competing content production companies called Tele-TV (PacTel, Bell Atlantic, Nynex) and Americast in the mid-1990s (SBC, BellSouth, Ameritech, GTE/;SNET; Disney). At a CEO summit we hosted in 1997, we asked three phone company CEOs who attended what project they were in, and two were unsure. Both assistants have failed dramatically in five years.

These costly diversions of content have diverted capital away from telecoms infrastructure, with many analysts estimating that AT&T has invested in 5G at least 50% more than its peers, with the effects playing out for years as AT&T plays catch-up of late.

Meanwhile, Verizon’s loss of market share over the past decade reflected a loss of focus of a different kind. Although Verizon has largely shied away from outlying content bets, despite misguided purchases of AOL in 2015 and Yahoo in 2017 that resulted in $5 billion writedowns, many analysts say Verizon’s biggest loss was a technology bet wrong in transmission, aka “frequency” — the backbone of every carrier.

Verizon got into the niche high-frequency band characteristic of 5G millimeter wave—which limited its 5G geographic coverage to high-density hotspots like sports stadiums, malls, or convention centers, barely adequate for most consumers who need 24/7 connectivity. Verizon now has to step back and play catch-up by pouring billions into an easier-to-deploy, broader-coverage alternative C-band, which has huge potential.

How T-Mobile beat its ‘dumb and dumb’ competitors

Meanwhile, T-Mobile stock has grown exponentially 10x and its customer base and revenue has quadrupled from $20 billion to $80 billion over the past decade, following evidence drawn largely by its former CEO, John Legere. It apparently outsold AT&T and Verizon, which it playfully referred to as its “dumb, dumb” competition, by investing seriously in infrastructure and quality customer service.

The transformational moment was T-Mobile’s acquisition of Sprint. The importance of acquiring Sprint customers pales in comparison to the all-important radio frequency acquisition. T-Mobile has managed to get all of its best-in-class low- and mid-range 5G spectrum from Sprint. T-Mobile quickly built on its emerging advantage by cleaning up additional spectrum auctions held by the government, acquiring the rights to low-value band transmitter systems on the cheap while AT&T and Verizon were distracted by content and high-band, respectively. As customers flocked to T-Mobile and Verizon, AT&T passively accepted losing 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 past decade, AT&T CEO John Stankey and Verizon CEO Hans Vestberg are hardly unrealistic when they make notes of optimism alongside T-Mobile CEO Mike Seifert in their prospects going forward, especially when it comes to 5G networks. In fact, these three major wireless carriers hold a strong monopoly on 5G because they are the only US companies that have built 5G networks and infrastructure at scale, even as their individual competitive positions have diminished. Not only are competitors to wireless cable companies several steps behind in 5G, but more importantly they are grappling with the potential obsolescence of the linear TV business model, which means they are unlikely to be able to fund and sustain the capital-intensive investments that 5G requires.

Although some are quick to point out that more than $100 billion has been spent on 5G with little return from shareholders so far if not outright value destruction, 5G is not the over-the-top meltdown that skeptics would have us believe. Not only does 5G provide superior capacity, improved bandwidth, and lower latency, enabling greater connectivity across devices and geographies, but it has also single-handedly enabled innovations such as live video streaming and AI applications, which would have swamped the bandwidth of previous cellular networks.

Analysts generally agree that 5G is already 10 times better than 4G, but 5G is still immature. The full benefits of 5G haven’t been felt for two main reasons: The three carriers are still in the middle of building 5G infrastructure with years of continued investment in the future and most US users are still using 4G devices even when they’re on a 5G signal — an issue that will resolve itself over time as consumers upgrade to 5G devices.

A critical challenge going forward for the three telcos will be how they can monetize 5G when they reach an inflection point in the investment cycle. All three CEOs said that by next year, there will be less need for massive investments in building infrastructure, shifting the focus to driving revenue growth from soon-to-be-mature 5G networks. The key to increasing profitability, some industry experts say, is bundling services with 5G plans* (ranging from partnerships with streaming subscriptions to gaming and virtual reality to healthcare to AI software) so that customers are incentivized to use more data and pay for speed and premium service.

Over the past few decades, as large broadband cable companies like Comcast and Charter expand into mobile phones, and strengthen partnerships with carriers, the field has become much more complex, and that complexity will only be exacerbated amid rapidly evolving business models. Back in 1982, when ET asked Steven Spielberg to “ET phone home?” Its hosts had only one nationwide phone system, no wireless mobile systems, no smartphones, no 5G. Perhaps if he saw what was going to happen, he might have stayed with Elliott and his adoptive family.

Jeffrey Sonnenfeld is the Leicester Crown Professor of Management Practice and Senior Associate Dean at the Yale School of Management. He was named “Management Professor of the Year” by Poets & Quants magazine.

Stephen Tian is director of research at the Yale Institute for Executive Leadership and a former quantitative investment analyst in the Rockefeller family office.

The opinions expressed in Fortune.com articles. Comments are solely those of the authors and do not necessarily reflect the opinions or beliefs luck.

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