AT&T Wins Big, Gets Bigger: Judge Approves AT&T-Time Warner Merger

Phil Harvey
6/12/2018
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The first company to make phone calls and the movie studio that debuted "talkies" are combining in a deal that could change media well into the next century.

Following a six-week trial, Judge Richard Leon of the US District Court for DC today announced that he has approved the $84 billion merger between AT&T Inc. (NYSE: T) and Time Warner Inc. (NYSE: TWX) with no restrictions.

The court's ruling ushers in an era of US media companies reaching unprecedented vertical integration and scale, pitting AT&T as a likely competitor on the world stage as both the key distributor of digital content and, soon, the owner of the content itself.

Analysts say this is also likely to kick off a merger frenzy as companies with original content, that reach audiences at scale, are now considered prime real estate. In a call with Light Reading today, Ed Barton, chief analyst for the Ovum Ltd. entertainment practice, sets the scene:

"You've got Sprint waiting at the starting line. You have a whole confab between Disney, Comcast, and 20th Century Fox to sort out as well," says Barton. "I think you can safely say that every other large-scale telco or distributor or network operator in North America will be looking around at every single owner of large content of any significance, and going, 'Can we do something here?' "

The merger of AT&T and Time Warner has been compared to a similar deal by Comcast, but the scale is much different.

In 2011, Comcast Corp. (Nasdaq: CMCSA, CMCSK) bought a 51% stake in NBC Universal from General Electric, creating what was then a $30 billion media behemoth. Also at the time, Comcast had a combination of about 23 million video subscribers and 17 million Internet subscribers. AT&T, which bought DirecTV in 2015, had around 47 million video connections through its DirecTV, DirecTV NOW and U-verse services last year. The company had 141.6 million US wireless subscribers by the end of 2017.

Photo credit: Mari Silbey
Photo credit: Mari Silbey

AT&T first announced it would buy Time Warner in October 2016. The deal was approved by Time Warner shareholders and passed regulatory muster everywhere but in the US. Then President-elect Donald Trump said he opposed big vertically integrated media mergers. (See AT&T & Trump Tangle Net Neutrality's Web.)

In November 2017, after months of back-and-forth between AT&T and regulators, the Justice Department sued to block the merger. Justice asked AT&T to divest certain media properties as a merger condition and AT&T took the fight to the courtroom (and elsewhere). (See DoJ Sues to Block AT&T/Time Warner.)

AT&T maintained throughout its defense of the deal that it needed scale, and the reach of its mobile and broadband networks, to make content less expensive to distribute. Its large mobile and Internet customer base, along with the carrier's focus on lowering the cost to deliver each bit of data, potentially provides AT&T the flexibility to develop more varied and profitable bundles of content and technology for consumers.

This merger is also about big data and who controls it. AT&T, armed with Time Warner's media properties, TV channels, Hulu and other assets, can form a more complete picture of who its subscribers are, and target advertising accordingly. Also, since the mobile industry in the US is near saturation, having a 5G network with a viable content source under one roof gives the company a way to fend off competitors and keep subscribers, with more targeted advertising, widen the margins it can make on each customer, device and video stream on its network.


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The deal will be unlike anything AT&T has done before and will require careful execution to make sure the content studio and distributor work together well. Though AT&T has integrated big technology mergers before, it has never really been a studio owner. "I mean, if we're going to be really unsympathetic, you could think, if you tie two rocks together, sometimes they just sink faster," says Barton.

The cultural differences between tech and telecom companies and entertainment providers are not trivial. "[Telecom and tech companies] don't look at audiences. It's a very, very different relationship with someone to say, 'I'm going to give you a broadband connection,' or, 'I'm going to give you a mobile phone subscription,' to, 'I'm going to entertain you.' There are many, many other things you have to bring to the party. Of course, there's a level of trust you need with your audience, especially if you're going to do things like news broadcasting, or if you're going to provide programming to people's kids," says Barton.

— Phil Harvey, US News Editor, Light Reading

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Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/12/2018 | 5:53:19 PM
court opinion
Here's the court's 172-page opinion:

http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf

The government could seek to stay the court's decision and:

1) delay the merger

2) force AT&T to pay the $500M break up fee for the deal because it would delay the merger past June 21.

The judge strongly advised against it but we'll see what happens.

 
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/12/2018 | 6:25:51 PM
media consolidation
TechCrunch, HuffPost, AOL and Yahoo - Verizon

HBO, Hulu, TBS, CNN - AT&T

NBC, Universal Pictures, Bravo, Dreamworks - Comcast

 

Cable and phone companies went from broadband bandits to media moguls.
Kelsey Ziser
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Kelsey Ziser,
User Rank: Blogger
6/13/2018 | 8:41:47 AM
Re: media consolidation
Media consolidation comparison is helpful, thanks for sharing that! 172-page court opinion sounds like a doozy...maybe it's best to read while also binge-watching shows on Hulu? ;)
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 9:02:44 AM
Court time
So a tankerload of time and money was spent on what has been effectively ruled as a groundless action that may have been nothing more than a political vendetta. Well played, DoJ.
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/13/2018 | 9:40:15 AM
Re: Court time
>> So a tankerload of time and money was spent on what has been effectively ruled as a groundless action that may have been nothing more than a political vendetta <<

 

I think that's a better lede than the one I wrote. :)
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/13/2018 | 9:42:41 AM
Re: media consolidation
I skipped around a bit but I came away impressed with how the presence of Amazon, Netflix, etc. have changed every industry related to every digital thing we do. You can't escape them and you can't take them on directly in their core business.

You have to have the ability to do... something else. I think the judge is wary of what AT&T might do with its market power but he also doesn't see how they can avoid owning as much of the content lifecycle as possible.

Truly an unusual case.
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 9:49:17 AM
Giant steps
Re the analyst-predicted "merger frenzy" -- AT&T/TW isn't much different from Comcast/NBC. Worth watching, though, is what the OTT biggies end up doing regarding distribution channels. The business model they have now works well, but they don't have final control over it.
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/13/2018 | 9:58:19 AM
Re: Giant steps
This does all seem to be building to a point of conflict, right?

The Facebooks and so on NEED to reach the next billion people to keep growing, scaling and so on. They don't own the means of distribution and, as you note, can't control it.

So how will they get that control? Pay the telcos? Buy some of them? Build their own networks (not likely, hasn't worked yet). Am I thinking that part through correctly? Or is their next move something more obvious?
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 10:06:50 AM
Re: Giant steps
Yep -- the problem for the OTT guys is they can never own the distribution channel in full. But they may need to buy into that part of the business so that they have some bargaining power. That would mean investing significant money into what for them would be an unexciting, relatively low-growth and low-profit sector.
brooks7
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brooks7,
User Rank: Light Sabre
6/13/2018 | 10:18:20 AM
Re: Giant steps
 

So, the question would be what part to buy right.  I would think that they should be buying China Telecom right?  That is where the biggest number of people are.

This is the problem for the content guys.  All of the US Carriers have a trivial market share of Worldwide Broadband Consumers.  So, why leverage them at all?  They will lose subscribers if they don't distribute the content that people like.

seven
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