Why AT&T’s Acquisition of Time Warner is So Important
This is a vertical integration of content with distribution. It gives AT&T tremendous content to distribute through their DIRECTV Now and through mobile. Enterprises will see more ability to get access to data and distribute it through their phones.
Content is King. Long live content! This has been a pop phrase for a long time; and we got a good taste of the value placed on content when Comcast acquired NBCUniversal in 2009. Now, seven years later, another major acquisition of content is taking place with AT&T’s announcement of its plan to acquire Time Warner for a total equity value of $85.4 billion and a total transaction value of $108.7 billion, including Time Warner’s net debt.
AT&T believes that the distribution of Time Warner content through its network will yield increased revenue from both subscriptions and advertising. This will enable it to invest in new content; and believes it will result in more choices for consumers.
AT&T thinks the combination will eliminate (legal, UI and financial) friction and enable it to best deal with increased mobile content delivery. DIRECTV will now help with this wider distribution and provide a higher value to advertisers.
To give you an idea of how big this acquisition is, take a look at the following diagram:
From this diagram, you can see that Time Warner has many well-known service brands from HBO to CNN to Warner Bros. It’s also easy to see that AT&T is now becoming vertically integrated just as Comcast did when it acquired NBCUniversal. It will be able to control both content creation and distribution in one company, which has many benefits to both AT&T and its customers (as presented in the analyst conference call):
- It will be able to create more original content because of the accretive effects of the two companies working together. This will generate more subscriber revenue particularly in TV; and more advertising revenue on content distributed over the top (OTT) via the internet.
- It will be able to invest more in mobile networks… in particular utilizing the over 40 MHz spectrum that is available but so far unused.
- It will gain in cost savings so that the overall company is more efficient than when the two companies operated separately.
- It is well-positioned for the tremendous growth occurring in millennials:
- The DIRECTV Now streaming/OTT service will give customers access to premium content without needing a set-top box, satellite dish at attractive pricing.
- It feels it can get new content into the market in lightning speed due to one set of licensing rights and one deployment action via the OTT platform.
- Jeff Bewkes (Time Warner CEO) feels that all video channels should be video-on-demand (VOD) so that you can access any content at any time on any device.
- It will be able to offer advertisers more demographics for placement and more specific, relevant feedback on all ads, particularly on mobile.
- It feels the time is right as it will have finished ‘digesting’ DIRECTV and implementing the DIRECTV Now platform and advanced advertising platform by the end of next year when the deal is likely to be approved.
- When asked about selling Time Warner Cable (TWC) and now integrating with another cable/TV distribution network, Bewkes commented that TWC was really a regional operator whereas AT&T is a national and international operator. Scale, he felt, makes a huge difference (he also commented that rumors to his departing after the deal is done are completely unfounded).
- It feels the tight integration of content with distribution will be a huge advantage in the marketplace.
- It said multiple times that it will not make content only available through AT&T’s network.
- It believes in network neutrality and the ability for customers to decide where they want to access the TW content.
- It is going to make it attractive technically and financially for customers to choose AT&T.
The different financial metrics of the two companies are shown here with permission by Statista:
From the above, you can see that TW and AT&T Entertainment are about the same size; so through the TW acquisition, it will be about equally split between the two companies.
To be sure, this is one of those mega-mergers that will have resounding effects for years to come. While the FTC and FCC may have points of contention, this is a vertical market integration. They are not combining to reduce competition in the market. Rather, they are doing the merger to add better services for consumers (and enterprises – see below).
From an analyst point-of-view, it seems like we are headed into a future of a number (perhaps just a few) major media and distribution companies that are like Time Warner plus AT&T and Comcast plus NBC Universal + Comcast, where tremendous content is distributed through a non-exclusive nationwide network… and potentially, customers will prefer the vertically integrated approach. This leaves The Walt Disney Company, Netflix and Viacom sitting in a media-only world. It will be interesting to see how content plus distribution firms play out against those that are not.
While this announcement is clearly consumer focused today, I would point out that many deals announced as consumer-centric end up playing out with major impacts affecting the enterprise. When Apple announced the iPhone in 2007 and the App Store in 2008, it was all focused on consumer. But if you look at Apple today, you can see a good part of the company is now focused on supporting enterprises.
Some of the benefits from AT&T’s acquisition of Time Warner that may help enterprises include:
- The management team shared that they believe the DIRECTV Now platform will enable many other players to leverage it for their defined markets. Thus, enterprises may be able to leverage the DIRECTV Now platform for distribution of video to thousands of employees.
- The advertising platform will enable enterprises themselves to utilize this platform for ads to consumers (e.g. banks to their consumer customers) and get much better analytics fed back to them.
- The combination of AT&T’s 4G LTE, 5G and Wi-Fi networks will enable enterprise employees to realize better throughput at a lower cost.
In summary, there will be millions of people who will see substantial benefits from this merger of one of the major media companies with one of the largest network distribution companies. I have pointed out that AT&T still needs to update and make their Guide for TV programming more intuitive and easier to use, especially after the TW merger goes through… as the total content library will span tens of thousands of shows and titles.
Search alone won’t organize it all properly, and the fixed ‘cable style’ guide is cumbersome for some narrow casting shows. It will take some creativity and grid-guide combinations to make it simple for everyone to access the shows they want when they want them on any device they might have.
I believe that AT&T has a good chance of succeeding with the TW acquisition. It will take some time to see how this plays out. But, I suspect a year from now, we’ll know if the deal is finally going to happen. The fun then will be to see how the integration happens and how customers end up realizing real benefits… not just a larger library of content.