by Jack Shumway
On Saturday, October 22nd, the executive boards of telecommunications giants AT&T and Time Warner both unanimously approved AT&T’s proposed offer to buy the media conglomerate for $84.5 billion. The product of the acquisition would be one of the most massive content and distribution juggernauts in the cable television industry.
For AT&T, the move reflects a prolonged and growing interest in leveraging its impressive distribution capabilities in the area of media content. As the wireless business comprising the traditional core of AT&T’s revenue has become increasingly competitive and saturated, the company has sought to diversify its operations through expansion into areas of content, evidenced by its $48.5 billion purchase of DirecTV last year. With the purchase, AT&T would gain ownership of Time Warner’s formidable media lineup, including networks such as CNN, TBS, and the highly valued HBO channel, as well was the Warner Bros. film and TV studio.
HBO, the most profitable cable subscription business in history, stands out as a particularly valuable addition for its potential to energize and accelerate AT&T’s vision for its own online video service, according to Time Warner CEO Jeff Bewkes. In addition to premium content like “Game of Thrones” and “The Wire,” the channel brings a combined 130 million subscribers via cable and its online service HBOnow, which provides customers access to streamable content without a cable subscription. These assets could prove invaluable in providing both material and a user base for the online-video bundle envisioned by AT&T’s CEO Randall Stephenson. Mr. Stephenson has claimed that the “mobile-centric” service, dubbed DirecTV Now, would include “100 premium channels,” and be comparable to a traditional pay-television package. He also said that, if approved, the deal would accelerate AT&T’s plans to roll out a 5G mobile network capable of delivering 1 gigabyte speeds wirelessly, illustrating the tremendous advantages that the company’s internet infrastructure could provide its content services.
For Time Warner (not to be confused with Time Warner Cable, whose merger with Comcast was blocked by regulatory officials in 2014), the decision to accept AT&T’s offer reflects a trend of increasing consolidation in the television industry, yet still stands out as significant in context of the company’s history with mergers. On one hand, AT&T’s $107 per share offer of cash and stock constitutes a personal validation for Mr. Bewkes, who was criticized for rejecting an $85 per share offer from 21st Century Fox two years ago. On the other, the deal has prompted comparison to Time Warner’s notorious 2000 merger with AOL, a colossal failure also centered around the idea of marrying internet and media assets, which concluded with Time Warner gradually selling almost the entirety of what it acquired. Given the fundamentally disruptive role that internet streaming has played in media content over the past few years, the newfound conglomerate would be poised to enter a far more inviting and expansive landscape.
Since it debuted its online streaming service in 2007, Netflix has thrived in the internet TV world it pioneered and driven a growing willingness to “cut the cord,” illustrated by its 81 million growth in subscriptions compared to cable’s 6.7 million decrease over the past nine years. One study by the investment first by MoffettNathanson, which tracks the media business, attributed half of the 3% decrease in television viewing time during 2015 to Netflix alone. And perhaps most significantly, Netflix has continued to grow even after new high-powered competitors like Amazon and Hulu (jointly owned by 21st Century Fox, NBC Universal, and Disney) entered the market.
If AT&T’s DirectTV Now was allowed to absorb the Time Warner’s breadth of content, however, it could pose a profound threat to cable television and other online streaming services by offering a bundle of channels nearly as comprehensive as many traditional cable packages. The combination of a major news network, movie studio, several popular channels, and premium content from HBO could provide the strongest motivation to cut cords yet, even with Netflix’s $6 billion investment in original content this year.
Before the new company can vie for industry leadership, however, it must face the more immediate and existential challenge of evaluation by regulatory officials. Mr. Stephenson has expressed confidence that the deal would go through, telling CNBC that the merger would be “pure vertical integration,” because the companies do not compete anywhere, and that mergers of this nature are usually achieved by making concessions to regulators, many other in the industry are highly skeptical due to the precedent set by similar mergers in the past and the FCC’s hostile attitude towards the practice of “zero rating.”
Many have noted the resemblance of the deal to Comcast’s takeover of NBC in 2011, which formed the cable giant NBCUniversal. At the time, antitrust regulators approved the acquisition under certain conditions designed to keep Comcast from using its newfound breadth to undermine competition, but it has since drawn criticism from some analysts for violating the agreement. To this effect, BTIG telecom analyst Walt Piecyk acknowledged that the merger “would probably not be a slam dunk with regulators that likely have second thoughts after watching the ineffectiveness of behavioral remedies for the approval of Comcast’s acquisition of NBC.”
This seems especially true with regards to AT&T’s practice of “zero-rating,” in which it exempts its own streaming video services from data-usage caps that it forces other services to pay a fee for. Back in November, the FCC sent a letter to AT&T expressing worry that the practice “may obstruct competition and harm consumers,” by discouraging consumers from using future video and mobile services unaffiliated with AT&T. While AT&T responded that it would offer any other company seeking to be zero-rated the same payment terms available to DirecTV, AT&T’s ownership of the company undermines the significance of this claim, as the fee for DirecTV would resemble money being shifted from one branch of the company to another rather more than a legitimate financial obligation. Zero-rating practices have yet to be explicitly addressed by the FCC or in law, however, so the importance of this aspect of the merger may be substantially influenced by the new political atmosphere in Washington.
In this regard, a populist fervor across the country could spell bipartisan political opposition to the deal. Senator Richard Blumenthal, a democrat from Connecticut, put out a statement soon after the agreement was announced, stating that he “will be looking closely at what this merger means for consumers and their pocketbooks, and whether it stands up to the rigorous review standards set by the Department of Justice’s antitrust division in the last few years.” Even more significantly, President-elect Donald Trump also indicated his intentions to block the merger while on the campaign trail “because it’s too much concentration of power in the hands of too few.”
While it remains too early to assess the merger’s actual prospects of being approved, it is already certain that the regulatory officials’ ruling will redefine the rules of anti-competitive practices in an increasingly interconnected and complex digital age.