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The combination of a huge distributor of TV with a leading content producer is
bold, but that does not mean it will work
Oct 23rd 2016
A DEAL worth $85.4bn is by any standards a blockbuster. The agreement by
wireless and pay-television giant AT&T to buy Time Warner, owner of Warner
Bros, HBO and a trove of hit films and TV shows, is the biggest bet yet that
the future of media will be dictated by massive companies that best marry
distribution with content.
The merger, announced by the two companies in the evening on October 22nd, does
not ensure that AT&T, a traditional telecommunications company, will end up as
one of those winners. But Randall Stephenson, who as AT&T s chief executive
will steer the combined company, is assembling the pieces he believes he needs
to get there.
AT&T just last year completed the $48.5bn purchase of DirecTV, a satellite
provider, making the company the largest pay-TV distributor in America with 25m
subscribers. AT&T is also the country s second-largest wireless carrier, behind
Verizon Communications. The company now is set to add one of Hollywood s most
storied studios in the form of Warner Bros, a prestigious cable network in HBO,
valuable cable channels like TNT, TBS and CNN, and a rich library of film and
television shows from the Harry Potter movies to Game of Thrones . In future
HBO Now, a nascent streaming platform of the eponymous cable channel, could
become the foundation for a global rival to Netflix, Amazon and other
streaming-video services, an important option as young consumers turn away from
expensive pay-TV bundles.
Time Warner was unique among its peers, such as Disney, in that it was
available for sale. The company s board had rejected a $75bn offer from 21st
Century Fox two years ago, but chief executive Jeff Bewkes has been open to
other suitors. Apple reportedly took an interest earlier this year. Now Mr
Bewkes is set to depart under the AT&T deal, having got a better price for
shareholders than Fox offered, at $107.50 a share.
The stock-and-cash acquisition would be the largest media merger in years, and
would face significant challenges if approved by shareholders. One will be
intense scrutiny from federal regulators worried about increasing market
concentration in the media business. Regulators have indicated some regrets
about their approval five years ago of a similar combination: Comcast s $30bn
purchase of NBCUniversal. At the least they may seek tough concessions to limit
the market power of the combined company.
If the deal goes ahead, the biggest challenge for AT&T would be figuring out
how best to use Time Warner s portfolio in ways that helps the group sell more
of their wireless, broadband and pay-TV services. Some analysts are sceptical.
AT&T wants to be able to offer its customers more than just the dumb pipes
that deliver video. But it is unclear at least for the foreseeable future how
much more value it can offer to its own customers that will not also be
available through other distributors. Mr Stephenson said in announcing the deal
that he sees Time Warner content still being available to all distributors. AT&
T could offer some extras, as it does now with free data charges to wireless
customers for streaming DirecTV. It may be able to offer bonus content
exclusively on its services, but such opportunities may be limited, especially
if regulators impose constraints on competition grounds. Time Warner also does
not control all the rights to some of its own best franchises, having sold
them. Comcast s NBCUniversal, for example, recently bought the cable and
broadcast rights to the eight Harry Potter films and the upcoming Fantastic
Beasts movies; multiple competitors, including CBS, Fox and NBCUniversal, own
TV rights to Time Warner s other key piece of intellectual property, DC
Entertainment.
Transforming HBO Now into a major global service is an appealing long-term
prospect. But it would take time and, more important, the willingness to
disrupt other parts of the company that are lucrative as they exist now,
including the traditional pay-TV business. This raises one of the fundamental
questions underpinning the deal. Mr Stephenson presents AT&T as an innovator
that is now best-positioned for a future where everyone is watching video on
their smartphones. But he would preside over a company that makes much of its
money from a traditional business model, the bundle of pay-TV channels, that is
under serious threat from technological innovation. AT&T s strategic bet is
that whatever the future of media is, it involves video content. Verizon
Communications, the largest wireless carrier in America, has instead chosen
thus far to make smaller investments in digital properties, agreeing in July to
buy Yahoo for $4.8bn (though the revelation of a massive security breach at
Yahoo has cast some doubt on that deal).
Time Warner has been here before. In 2000 its merger with AOL was the largest
in American history. It was meant to be the dawn of a new era dominated by
internet giants. That deal was a disaster that cost thousands of jobs and
destroyed hundreds of billions of dollars in combined market value for the two
firms (AOL spun off in 2009 and was acquired by Verizon last year for $4.4bn).
Now Time Warner becomes part of a megadeal in another business with an
interesting but uncertain future.