There are at least four major strategic goals in AT&T’s proposed acquisition of Time Warner: consolidate content and distribution within one company, dramatically improve the multiscreen experience (partly by removing rights barriers), create a more compelling mobile-first proposition for consumers who want premium video, and smash down barriers to advanced advertising like addressable advertising. Beyond this there are some corporate wins for AT&T including a more diversified revenue mix and a better mix of capital-intensive (distribution) and less capital-intensive (content creation) units within its business.
The advertising angle is intriguing, with the company implying that the ownership of Time Warner content – rather than just the licensing of it – will have a notable impact on its ability to innovate in this area. In its press release, AT&T (which already owns DIRECTV – one of the pioneers in household-addressable TV advertising) declared that customer insights across TV, mobile and broadband will allow the [proposed] new company to offer more relevant and valuable addressable advertising.
Notably, AT&T is aiming for “more innovation with ad-supported models that shift more of the cost of content creation from customers to advertisers”. The company then emphasises: “Owning content will help AT&T innovate on new advertising options which, combined with subscriptions, will help pay for content creation. This two-sided business model — advertising and subscription-based — gives customers the largest amount of premium content at the best value.”
This is an important statement; it seems to acknowledge that the importance of advertising could increase as a funding source for content that appears on the Pay TV platform.
There are big multiscreen and mobile drivers behind the deal – and even what appears to be a bias towards mobile as the future consumption model. AT&T actually claims: “The future of video is mobile and the future of mobile is video.” [Editor’s comment: By mobile, AT&T means all portable viewing (tablets, laptops, smartphones, etc.) but even if you assume the future to mean millennials and the generations that follow them, this statement still seems exaggerated].
Randall Stephenson, Chairman and CEO at AT&T, says: “Premium content always wins. It has been true on the big screen, the TV screen and now it is proving true on the mobile screen. We will have the world’s best premium content with the networks to deliver it to every screen.” He adds that a big customer pain point is paying for content once but not being able to access it on any device, anywhere. “Our goal is to solve that.”
The joint press statement highlighted a combined figure of 100 million for TV, mobile and broadband service subscribers. Jeff Bewkes, Chairman and CEO of Time Warner says: “Combining with AT&T dramatically accelerates our ability to deliver our great brands and premium content to consumers on a multiplatform basis and to capitalize on the tremendous opportunities created by the growing demand for video content. Joining forces with AT&T will allow us to innovate even more quickly.”
The explanation for the proposed deal (which has been approved unanimously by both company boards) also majors on mobile. It says: “With a mobile network that covers more than 315 million people in the United States, the combined company will strive to become the first U.S. mobile provider to compete nationwide with cable companies in the provision of bundled mobile broadband and video.
“It will disrupt the traditional entertainment model and push the boundaries on mobile content availability for the benefit of customers. And it will deliver more innovation with new forms of original content built for mobile and social, which builds on Time Warner’s HBO Now and the upcoming launch of AT&T’s OTT offering DIRECTV NOW.”
Seth Wallis-Jones, Senior Analyst at IHS Technology (the research/analysis firm), has pointed to DIRECTV NOW as one of the places where the deal could have an almost immediate impact. He says: “AT&T is set to launch a pair of new online subscription TV offerings – DIRECTV NOW and DIRECTV Mobile – before the end of 2016.
“The former is shaping up to be a virtual Pay TV offering comparable to a typical cable or satellite subscription, the latter a mobile-led ‘skinny bundle’ offering. A licence to package content sourced from Time Warner networks’ HBO, TNT and Cartoon Network, as well as the Warner Bros. studio, would give AT&T the opportunity to make both services highly compelling.”
Wallis-Jones believes that future growth in what he calls the saturated and declining traditional TV market is likely to come from online services. “AT&T has shown that it is not immune to the cord-cutting that has eaten into the cable sector, losing a combined 132,000 subscribers across its DIRECTV (satellite) and U-verse (IPTV) platforms in the 12 month to end-Q3 2016,” he points out.
The last big element of this deal – and the most obvious, of course – is the unification of content and distribution under one roof. This is what underpins all the other ambitions. According to Wallis-Jones, “This is a major attempt at vertical integration by AT&T that builds on last year’s merger acquisition of DIRECTV to create a fully integrated media giant. AT&T will own the distribution pipes and the content to deliver to subscribers across the U.S. via mobile, fixed line and satellite. While this is not a consolidation as such, but the acquisition of a supplier, this deal creates an entity with significant synergistic scale.”
Putting it into context, he adds: “Across the world, content has become a key tool for network operators seeking to differentiate themselves from their competitors, and an opportunity for growth as operator services subscription growth slows in the face of market saturation. Deals for exclusive access to content have been leveraged to build audiences for digital OTT services. While sport has proved to be a major area of competition for the networks as they enter the content arena, properties such as HBO’s ‘Game of Thrones’ hold a similar ‘must have’ attraction for audiences.”
Joel Espelien, Senior Advisor for TDG (the analyst firm, The Diffusion Group) says the deal represents a massive transformation of AT&T from ‘common carrier’ to full-stack media company. It can be explained, he believes, by the fact that consumer Internet is no longer a growth engine in the U.S. and even the wireless broadband wave has now crested [hit its highest point]. “AT&T, to its credit, obviously got the memo. The DIRECTV acquisition diversified the consumer portfolio and added new growth markets in Latin America. What the DIRECTV deal lacked, however, was content ownership.
“Satellite MVPDs [multichannel video programming distributors] are fundamentally buyers – not sellers – of original content. In the new world this is a big problem, which is why AT&T went shopping for Time Warner.”
Writing in our sister publication, Mediatel Newsline, Raymond Snoddy, media consultant and former media editor for The Times, wonders if this represents the firing pistol in a mega-billion merger race “where two big beasts have hurtled down the track and others will be too frightened not to follow” in the U.S. and possibly in the UK. Given the falling value of the pound he thinks UK media companies may be viewed as bargains. Snoddy is not positive about this kind of deal, however. “While it is possible to make a strategic case for distributors coming together with content creators – leaving aside for the moment the regulatory issue – the reality is that few mergers are a good idea in terms of long-term wealth enhancement.”
He also believes that the very least that regulators will insist on is that Time Warner makes its media products available to everyone – not just its new parent – on a non-discriminatory basis. “Eventually it could all be about very little,” he says of the deal.
Espelien at TDG believes there is little alternative to content/distribution consolidation – going so far as to declare that content distribution is dead. “The content aggregation business model no longer works,” he argues.
What he calls full-stack media companies are the future. He even claims that Netflix is such a company, focusing on developing, owning, and distributing original content on a glass-to-glass basis [the definition does not seem to require ownership of pipes]. “All of the best content companies, from the sports leagues to Disney and HBO, are headed inexorably down the same path. The goal is simple – capture as large a share of the total consumer content dollar as is technically possible.”
Espelian claims that a decade from now, nearly all of the margins in the content business will be captured by full-stack providers and predicts that this grouping will include Apple, Amazon, Facebook, Google and Microsoft as well as Netflix.
You can read more of what TDG believes here.
The proposed $109 billion deal (total transaction value) is still subject to U.S. Department of Justice review as well as Time Warner shareholder approval. Wallis Jones notes: “This is not a done deal and political scrutiny will follow.” The deal covers:
- HBO (which consists of U.S. premium pay television, the U.S. streaming services HBO Now and HBO Go, and international premium and basic pay television and streaming services.
- Warner Bros. Entertainment, which consists of television, feature film, home video and video game production and distribution. Warner Bros. film franchises include Harry Potter & DC Comics.
- Turner, which consists of U.S. and international basic cable networks including TNT, TBS, CNN and Cartoon Network. Turner has the rights to the NBA and MLB, among other things.
- Time Warner’s investments in OTT and digital media properties such as Hulu, Bleacher Report, CNN.com and Fandango.
AT&T says the two companies would represent a combination unlike any other. “It will be the world’s best premium content with the networks to deliver it to every screen, however customers want it. The combined company is positioned to create new customer choices, from content creation and distribution to a mobile-first experience that is personal and social. It will be a stronger competitive alternative to cable and other video providers.”