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? ;)
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 | 9:02:44 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. :)
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
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 10:41:43 AM
Re: Giant steps
Yes, although buying in China might not be an option for a while. But what about TMob/Sprint when those two come together?
brooks7
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brooks7,
User Rank: Light Sabre
6/13/2018 | 1:02:27 PM
Re: Giant steps
 

I guess you missed my sarcasm.  Buying Charter, Comcast, Verizon, AT&T, and CenturyLink altogether ends up being less than a 10% of Worldwide market share.  So pretty much a waste of time.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 1:43:17 PM
Re: Giant steps
By simple population numbers, yes. But by monetary value, markets are far from equal. Anyway, the Web giants have had things their way for over a decade now. They now face a potential end to their literal free ride. My guess is they already know this. But the options are limited, and much less attractive than what they've had so far.
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
6/13/2018 | 3:45:06 PM
Re: Giant steps
Perhaps we'll see more deals like what Netflix struck with Comcast.

Telcos get their vig and the billing relationship, internet content providers get their distribution without blocking, service reduction AND they benefit from zero-rating or whatever you call it when you don't charge for certain kinds of traffic.
mendyk
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mendyk,
User Rank: Light Sabre
6/13/2018 | 3:54:18 PM
Re: Giant steps
Agree -- side deals will help OTTs keep distribution channels open. They are especially important for Netflix, which is a one-trick pony compared with Amazon, Google, etc.
brooks7
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brooks7,
User Rank: Light Sabre
6/13/2018 | 11:32:24 PM
Re: Giant steps
 

Content has owned distribution for 3,000 years.  Not going to end now. 

seven
mendyk
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mendyk,
User Rank: Light Sabre
6/14/2018 | 8:46:04 AM
Re: Giant steps
Now THAT'S sarcasm, right?
brooks7
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brooks7,
User Rank: Light Sabre
6/14/2018 | 10:31:37 AM
Re: Giant steps
LOL! No, it is the truth, justice, and the American Way.

Now let us take a look at the Linear TV market.  As you recall, this was a complete monopoly for a long time.  Who pays who?  Does Disney pay Comcast?  Nope, Distribution PAYS Content.  Has since the days of the Illiad.

There is no possibility that Netflix is paying an ISP for distribution.  It will be the other way around.  And ALWAYS has been.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
6/14/2018 | 1:46:34 PM
Re: Giant steps
I'd make a distinction between content producers and content aggregators. Netflix is an aggregator. Disney is a hybrid producer/aggregator. Distributors pay for content because they need something to distribute. Aggregators pay content producers because they need something to aggregate.  It's a trickle-down system, and content producers are the last to be trickled on.
brooks7
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brooks7,
User Rank: Light Sabre
6/14/2018 | 8:44:39 PM
Re: Giant steps
 

So, Comcast...aggregator other than NBC universal and will always PAY content....that is what you just posted.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
6/15/2018 | 9:15:08 AM
Re: Giant steps
Comcast's core business is content distribution. It pays for the content it needs for that business, just as any other business pays for the resources it needs to operate. It doesn't mean that content is more valuable than the distribution of that content. Content without distribution has limited monetary value.
brooks7
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brooks7,
User Rank: Light Sabre
6/15/2018 | 12:19:24 PM
Re: Giant steps
Dennis,

Actually, it means exactly that.  Why do you think Netflix is trying to move from the content distribution business into the content creation business.  Add in Comcast.  Add in AT&T.

Why do you think they want to spend their money?  They do so to be in businesses of greater value.  Otherwise, they would be wasting shareholder money.

Now I know you personally have a jaded view.  But remember, you are being PAID to create content.  I recognize that you would like it to be more and that you see yourself at the mercy of the distribution channels.  That is because you have chosen a content path that has limited value.  That's okay because most content is of little value.  THere is a very high percentage of Youtube videos with 0 or 1 view.  That is low-value content.

Carriers have a business model a lot like "Field of Dreams".  They don't ask IF there is an ROI.  They ask WHEN they will get an ROI.  Content (and products) work differently.  They have a much higher ROI ceiling, but the floor can be negative.  The whole idea is to try to find ways of reducing that floor (which is why we end up with content franchises - Call of Duty, the MCU, Book Series, remakes of old TV shows).  The goal is to try to provide a higher likelihood of success.  

The way to make out as a Content Generator is (to use actor analogies) to be Brad Pitt or Bruce Campbell (who has a great book on the topic).  How do you build a career (business) based on lots of smaller roles??

Who makes more money Film Makers or Theatres?  Even if Film Makers can't get a film into Theatres, they can use other distribution channels.  There will always be more.  So, let's say Comcast starts charging Netflix.  Guess what, other channels will get more business and Comcast will lose.  There is no example in History where distribution beats content.  It is because there is a lower barrier to entry on distribution than there is on premium content.

Content being charged by carriers will NEVER happen.  We talk to carriers and they WANT it to happen.  But it won't.  They will spend $B trying to do so.  In the end, they will just put in bigger pipers, up the service rates, and make more money.  None of the large US carriers is in trouble.  They just want more money.  Nothing wrong with that.  They are lying to themselves, vendors, analysts and the press about these "woes".  To lose content, they will go back to consumer revenue of dial-up.  Which means they would lose tremendous amounts of revenue.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
6/15/2018 | 12:27:00 PM
Re: Giant steps
I kind of stopped reading once I hit the insults. Just kidding, sort of. Anyway, there's no point talking at each other. Different perspectives yield different opinions. Or to steal a line from Sir Charles Barkley, "I may be wrong -- but I doubt it."
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