AT&T-Time Warner deal sparks talk of new era of mergers

Steve Case took to Twitter when he heard about AT&T's proposed $85.4 billion takeover of Time Warner, coining a new hashtag: #DejaVu.

The former chief executive of AOL knows a few things about buying Time Warner, having led the $164 billion purchase of the media company in 2000 in a deal widely regarded as the worst ever, given that it was swiftly followed by a $100 billion writedown.

There is little chance of history repeating itself, despite Mr Case’s wry tweet. AT&T is the largest US telecoms group by market value with more than 140 million mobile customers in the US and Mexico. Its 2014 acquisition of DirecTV for $49 billion made it an instant pay TV rival to Comcast, the largest cable operator in the world, and it has invested $140 billion in its wireless and wireline networks over the past five years. AOL’s value was inflated by the dotcom boom and its collapse was inevitable: there is no guarantee AT&T will not face a similar fate but such a scenario is highly unlikely.

Yet with mobile penetration maturing, the Dallas-based group needs new products and services to sell to its customers. This is where Time Warner comes in, with an enviable array of content spanning superheroes, Game of Thrones, the Harry Potter film series, NBA basketball rights and CNN’s 24-hour cable news.

More innovation

It is unclear what that combination will look like. AT&T chairman and chief executive Randall Stephenson said the company would be able to innovate more rapidly by owning its own content, yet the company will still need to strike other licensing deals if the direct-to-consumer mobile and digital offerings it is planning are to be comprehensive.

For example, an AT&T that owns Time Warner can offer classic cartoons from the Cartoon Network but none from Walt Disney. It can offer cable news from CNN but would need a separate licensing deal to also offer Fox News, which is owned by Rupert Murdoch's 21st Century Fox. It can boast superheroes from DC Entertainment but will need an additional deal if it is to offer Iron Man, Captain America and The Avengers, which are owned by Disney's Marvel Studios.

The point is that vertical integration can only do so much, which may explain why Apple has never acquired a music studio or record label.

For Jeff Bewkes and Time Warner, AT&T’s offer could not have come at a better time. Rich Greenfield, an analyst with BTIG Research, said Mr Bewkes “can see where the entire legacy media world is headed: secular decline”.

He pointed to the changes in consumption patterns, with audiences increasingly deserting linear television, where viewers sit down at an allotted time to watch, in favour of subscription services such as Netflix. Interest in the pricey bundles of channels sold by cable and satellite providers has waned.

Shrinking revenues

The AT&T-Time Warner deal has already sparked talk of a new round of consolidation in media. Pure-play content companies with great brands and intellectual property will not struggle in the short term. But as time goes on and viewers continue to abandon television, advertising revenues will continue to shrink and owners of channels will not be able to command the same distribution fees from cable and satellite providers that they once did.

The dynamics at work in the AT&T-Time Warner deal are also at work in efforts to combine Viacom with CBS. The two groups are controlled by the 93-year-old billionaire Sumner Redstone and were once part of the same company but were separated 11 years ago to unlock the value contained in Viacom's cable channels, such as MTV, Comedy Central and Nickelodeon.

Fast-forward to 2016 and those channels are struggling. Putting them back together with CBS will give the combined group more market heft in negotiating distribution deals with cable and satellite companies and in trying to sell content direct to consumers in “over the top” digital packages. Like Time Warner being sold once again, history is repeating itself. Just ask Steve Case.

Copyright The Financial Times Limited 2016