By buying media companies, AT&T CEO Randall Stephenson thinks cable providers can fend off internet rivals (GOOG, GOOGLE, T, CMCSA)

AT&T CEO Randall Stephenson

The pay-TV sector is fraught with danger for traditional cable companies, or at least that's how AT&T CEO Randall Stephenson described the situation at the Code conference on Wednesday.
It's true that YouTube TV, Netflix and other internet players are starting to cut into their market share but is that enough of a reason for the government to okay AT&T's proposed merger with Time Warner?
Some analysts believe that it might be harder for AT&T, Comcast and the other cable guys to compete against the Internet players than they realize.

Poor AT&T.

The way CEO Randall Stephenson describes the competitive environment in the pay-TV sector, one might think his company, the world's largest telecommunications company, is an underdog.

On stage at the Code Conference at Rancho Palos Verdes, Calif. on Wednesday, Stephenson bemoaned the massive forces lined up against his company — as well as against Comcast, and Verizon — as omnipotent internet players move into their turf.

"You're going to have a hard time competing with these guys," Stephenson said, describing the challenge facing companies like AT&T. "The FANG market caps (Facebook, Amazon, Netflix and Google) have gone up $1 trillion dollars. You better figure out how to vertically compete."

Not surprisingly, this is the same argument that AT&T's lawyers have made to regulators who are trying to block AT&T's proposed $85.4 billion acquisition of Time Warner, parent company of CNN and HBO.

AT&T, Comcast and traditional cable providers face more competition from the likes of Google's YouTube and Netflix. They are looking for ways to adapt to the new competitive pressures. The tech guys have cut into their market share by supplying consumers with alternatives to traditional video entertainment.

The cable and telco companies are eyeing film and TV companies as the solution to the problem and almost instinctively moving to acquire these media assets to fight the internet threat. But it's not clear that that's the right answer.

As Peter Kafka, the Recode Senior Editor interviewing Stephenson, pointed out, many of these media conglomerates have seen their revenues decline for quite some time now. Media tycoon Rupert Murdoch is selling a large chunk of his empire, including the Hollywood film studio 21st Century Fox.

At at time when more experienced media players are getting out of the business, why does Stephenson think he can make it work for him?

The Roseanne challenge

Roseanne For starters, Stephenson said that consumption of premium content, like Hollywood films, is going up. He also said that Time Warner is sitting on a pile of valuable ad inventory while AT&T possesses a large cache of customer data. This, he suggested could help with ad sales.

This could benefit consumers too, he said. He cited as an example that AT&T would like to improve the TV-viewing experience and one way the company might do this is to charge advertisers more while requiring viewers to watch fewer ads, making his service more Netflix-esque.

Netflix charges a monthly subscription fee and does not show viewers any ads.

And what about managing creative types and building streaming-video services good enough to compete with services such as YouTube TV?

Kafka asked whether Stephenson would fire actress Roseanne Barr for posting a racist comment to Twitter had she worked for him.

"I can't imagine how you would not," Stephenson said.

Cable and Telco companies aren't tech companies

AT&T U Verse As for building technology on par with the current streaming-TV services, Stephenson suggested that it wouldn't be a problem. Others aren't so sure.

In a report published earlier this month, analyst Toni Sacconaghi Jr.of research firm AllianceBernstein, praised the low price and high quality of YouTube TV.

He wrote that he reduced his cable bill from $250 per month to $135 after cutting the cord and signing up with Google's multi-channel service, YouTube TV.

He wrote that YouTube TV "remains a shockingly good deal. And remember, this is with no yearly contract, and no hidden fees."

Sacconaghi said that while his former cable provider tried to offer him services similar to those provided by YouTube, he noticed something was very different.

"Cable companies are not tech companies," the analyst wrote. "Their apps never work quite right. The user interfaces lag. The streams don't buffer properly. Cloud recordings mysteriously fail to record."

Perhaps Stephenson's underdog self-opinion wasn't so far off of the market after all; AT&T has its work cut out for it.

Join the conversation about this story »

NOW WATCH: Jeff Bezos: Blue Origin is 'the most important work that I'm doing'