• AT&T - Time Warner: Two Plus Two Only Equals Four, Or Possibly Even Less

    No doubt by now you’ve read all about AT&T’s plan to acquire Time Warner for approximately $85 billion - it was hard to miss the wall-to-wall press coverage over the weekend. As has been observed by a number of others, this deal is mostly about diversification, specifically AT&T’s desire to add another large revenue stream that offsets its declining wireless business.

    Looked at through this lens, the deal represents a kind of “two plus two equals four” motivation; Time Warner brings a totally different set of revenues to AT&T, which makes the company less reliant on its sagging wireless business. If Time Warner can continue to perform at the same level as part of AT&T as it would have on its own, then AT&T wins because it achieved its diversification goal. The key of course is that AT&T didn’t overpay, in turn generating a suboptimal ROI. I’ll leave it to the Wall Street analysts to determine if the deal’s price is appropriate relative to Time Warner’s financial forecast.

    Where the deal gets off track to me is the high falutin statements found in the companies’ press release that promise all kinds of benefits that are no more likely to happen as a result of Time Warner being owned by AT&T, and arguably, could actually be LESS likely to happen as a result of the deal. This is the risk that two plus two may actually LESS than four. This is the all too common outcome of many corporate mergers (with the infamous AOL-Time Warner one right at the top of the list).

    The main reason for a “less than four” outcome is the deal’s failure to grasp the essential truth that in the Internet era of open networks, there is little to no inherent benefit for both distribution and content assets being owned by the same corporate entity (so-called "vertical integration").

    This is a huge difference from the era of closed networks, i.e. when pay-TV operators controlled the only pipe for bringing entertainment into the home. In the pre-Internet 1980s and 1990s, pay-TV operators could invest in and/or own cable TV networks and automatically create value by distributing them, generating both carriage fees and advertising revenues. Owning networks also gave pay-TV operators bargaining chips when negotiating with cable networks that were owned by other operators. No company played this game better than TCI, which ended up creating a whole separate company, Liberty Media, for its vast content holdings.

    Though today’s dynamics are completely different, you can see this old school thinking right at the top of the AT&T-Time Warner press release heralding a “Combination unlike any other - the world’s best premium content with the networks to deliver it to every screen, however consumers want it.”

    But as Netflix, YouTube, Amazon and countless other content providers, not to mention Facebook, Snapchat, Instagram and other social companies have shown, there’s no need to have more than an arm’s length relationship with distributors and network owners to build massive audiences and value. That’s the beauty of the Internet - content flows freely, as demanded by users (and to cement this notion, the FCC passed its Open Internet Order).

    In fact, the “less than four” argument becomes even more likely if AT&T were to do anything to curtail Time Warner’s open networks opportunities (e.g. favor HBO Now on its network, have custom-built Time Warner content properties available solely for AT&T, etc.) or business integrity (e.g. influencing stories on CNN). These kinds of initiatives would limit Time Warner’s potential and divert finite Time Warner resources away from broader opportunities available to it across ALL networks.

    Similarly, AT&T would be disadvantaging itself if it tried to give Time Warner’s content more priority than was warranted. At a time when consumers are just clicks away from choosing exactly which content they want, distracting them with unwanted Time Warner promotions would just increase AT&T subscribers’ likelihood to switch to another mobile carrier.

    Oddly, Time Warner’s CEO Jeff Bewkes seemed to understand all of this when he announced plans to spin off Time Warner Cable 8 1/2 years ago. Re-reading that press release highlights the pragmatic business logic that content and distribution businesses should not be tethered. Even the most widely cited example of distribution and content cross-ownership - Comcast-NBC - has created little incremental value to each company (though both are doing very well independently).

    One other concerning issue here is that, including its 2014 acquisition of DirecTV and now the Time Warner deal, AT&T will have spent approximately $135 billion betting on the legacy pay-TV business model’s continued durability (note even the upcoming DirecTV Now skinny bundle is package of ad-supported linear TV networks, just priced lower). With signs everywhere that the multichannel bundle is losing favor, AT&T is putting a lot of its money on a view that is highly contrarian.

    Admittedly, I tend to be skeptical of these big corporate mergers. The press releases are always filled with corporate-speak gooblygook that sounds impressive, but is virtually unattainable in the real world where bonuses, incentives, turf battles and other corporate realities rule. Somehow execution likelihood always takes a back seat to deal-driven rhetoric.

    AT&T faces a long uphill regulatory climb to get the deal done, and it’s an open question whether it will succeed. But even if it does, the harder part of achieving real, incremental value will still lie ahead.

     
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