Big media distributors such as AT&T, which owns DirecTV and delivers movies and TV shows to 100 million subscribers of its wireless, internet, and video services, have argued for years over which can best withstand the disruption brought about by online services like Netflix: Content providers? Or cable and satellite operators? With his surprise $85 billion takeover bid for Time Warner, Randall Stephenson, AT&T’s chief executive officer, is betting that the companies that will thrive in a world of streaming and smartphones must be both. “The future of mobile is video, and the future of video is mobile,” Stephenson said on Oct. 22 after announcing the deal.
AT&T wants to offer programming wherever consumers wish—streamed to mobile phones or broadcast on TV. That’s why Stephenson is so hungry to own HBO, CNN, and other Time Warner content. Time Warner, which has a vast library of movies such as the Harry Potter films and TV series like Game of Thrones, is among Hollywood’s most prolific producers, with annual revenue of $28 billion.
There’s more at play than a pay-TV operator hedging its bets. If Time Warner didn’t see a future for itself as a standalone content creator, analysts say, that’s a troubling sign for its fellow cable channel owners. AT&T’s move “is likely to force a number of other management teams to act, even if they do not recognize the need to do so yet,” says Barclays analyst Kannan Venkateshwar.
Both companies are aggressively promoting the megadeal by touting its supposed benefits to others: Consumers will be able to get TV everywhere on all their mobile devices, they say, and producers and advertisers will have more data from online viewing to deliver relevant shows and targeted commercials. But AT&T also needs this deal to help itself. The number of U.S. consumers getting cable or satellite service peaked in 2012 and has declined since, so sticking with the industry’s business-as-usual is a risky option.
Already, AT&T and Time Warner have separately been working to make it easier for consumers to watch more movies and TV shows online. On Oct. 25, AT&T set a price of $35 a month for a web-streaming TV service, DirecTV Now, that will include more than 100 channels when it debuts in November. Time Warner’s HBO last year rolled out an online version of its service for people who don’t pay for cable.
It’s all part of an industry push to bulk up. Pay-TV distributors have been merging to increase their negotiating leverage over the price increases media companies have been charging for their content. Earlier this year, Charter Communications bought Time Warner Cable for $55 billion. Last year, AT&T bought DirecTV for $48 billion, creating the biggest U.S. pay-TV service.
The AT&T-Time Warner takeover, if approved by the Federal Communications Commission and the Department of Justice, could trigger a rush of consolidation as media companies jockey for position in the new order. CBS and Viacom, both controlled by billionaire Sumner Redstone and his daughter, Shari, are considering recombining after more than a decade as separate companies. Walt Disney briefly considered buying Twitter, as Disney seeks fresh ways to distribute its channels like ESPN directly to consumers online. And smaller media companies such as AMC Networks, Discovery Communications, and Scripps Networks Interactive could look for partners so they can get bigger and maintain their ability to command higher fees for their channels from distributors.
Some analysts are skeptical of AT&T’s rationale, pointing to Time Warner’s disastrous merger with America Online in 2000. Others argue that Comcast’s purchase of NBCUniversal in 2011 has demonstrated few clear synergies between the businesses. While Comcast’s Universal film studio just had its best year ever, its cable business has lost subscribers, and some of NBC’s networks have seen audience ratings fall. The doubters also see a potential culture clash between a massive phone company and one with a flashy Hollywood studio background.
“It’s easy to say that this is the beginning of an M&A wave, but when you poke at it, the strategy here is pretty thin,” Craig Moffett, an analyst at MoffettNathanson, says of the AT&T-Time Warner plan. “Ultimately, it’s more about diversification than about creating competitive advantage. It’s hard to see why this would trigger any follow-on deals.”
Already, politicians, other media companies, and consumer groups are lining up in opposition. Last year federal regulators blocked Comcast’s purchase of Time Warner Cable (spun off from Time Warner in 2009), arguing it would have concentrated too much power in a massive internet gatekeeper at a time when online video is trying to flourish. And in 2011 they blocked AT&T’s bid to buy wireless rival T-Mobile. Netflix, whose opinion carries weight with industry regulators who want to protect the burgeoning online video business, says it won’t oppose the takeover if AT&T treats all content equally and doesn’t give preference to Time Warner’s HBO.
AT&T argues its acquisition isn’t monopolistic because it’s buying a supplier, not a competitor—akin to Comcast’s purchase of NBCUniversal, which gave it control of the NBC broadcast network and cable channels including USA Network. The government approved that deal, but forced Comcast to agree to certain conditions to protect the online video market. At the least, many expect similar restraints on an AT&T-Time Warner deal.
While Wall Street remains skeptical the takeover will be approved, AT&T is making promises the regulators want to hear: It won’t get exclusive access to Time Warner’s content, it won’t interfere with CNN’s independent journalism, and it will boost competition in the cable and online advertising markets. “The markets are too pessimistic,” Stephenson said at a conference on Oct. 25. “I feel pretty good about this deal.” If he’s right, the argument over who’s king—those who make shows or those who distribute them—may no longer matter.
The bottom line: AT&T’s $85 billion buyout of Time Warner will give it a huge content factory to supply traditional TV operators or new online services.
To contact the author of this story: Gerry Smith in New York at gsmith233@bloomberg.net.
To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net.
©2016 Bloomberg L.P.
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