Summary: With the notable exception of Twenty First Century Fox (FOX), traditional U.S. media & broadcasting companies have been in a real funk this past year. The same goes for US telecom companies. But, Tuesday’s approval of the landmark ATT/Time Warner deal could be a game changer. It paves the way for similar synergistic transactions, and a reinvention of business models for both industries.
On Tuesday, AT&T won approval for its $80bn takeover of Time Warner, as a federal judge rejected the US government’s argument that it would harm competition. Further, the decision was handed down with no conditions, paving the way for more similar transactions in the telecoms and cable sectors, and revolutionizing digital content.
MRP recently highlighted how large pay-TV providers are rapidly losing subscribers as 3.4 million households have ditched cable since 2012, many of them opting to go digital with streaming services. Although AT&T is the largest pay-TV provider in the US, it lacks a digital platform and content, the power commodities of the digital age. Exponential growth of mobile data usage has shifted consumer preference from cable TV connections to low-cost video streaming services. AT&T’s incentive is to use Time Warner-owned channels like HBO and CNN to attract more users on every platform.
Other mega deals have been waiting in the wings for this decision, and the M&A floodgates may be prepared to open. Comcast and Disney are prepared to begin a bidding war for Twenty-First Century Fox. Walt Disney Co. had originally agreed to purchase a number of Fox’s assets with a $52.4 billion all-stock offer, but Comcast countered with an all-cash bid of $65 billion. At the same time, Comcast is challenging Fox in the UK as both companies have rival bids in to buy European broadcaster and pay-TV giant Sky. Fox already owns 39%, and has bid £10.75 per share for the remaining 61%, with the intention to then sell it to Disney along with the other Fox assets. But Comcast has also bid £12.50 per share, or $31 billion, for Sky. UK regulators have already decided to approve Fox and Comcast’s bids and EU antitrust officials are expected to approve Comcast’s higher bid by June 15.
AT&T rival Verizon, which already acquired digital assets of AOL and Yahoo, may also consider an entertainment play of its own. The wireless company has reportedly expressed interest in CBS, which is in talks to merge with its sister company, Viacom. Sony Pictures, Discovery-Scripps, or Lionsgate could also be targets for the right price. Whichever company loses Fox could shore up its growth plans with one of these companies, though none are as valuable as Fox.
This level of consolidation is symptomatic of an industry that is being disrupted by outside players. Like AT&T aspires to do, tech companies like Facebook, Amazon, Apple, Netflix and Google – the so-called FAANGs – all create their own content and distribute it directly to consumers. Their ace in the hole has long been more than just content, though, as they leverage what they produce with loads of subscriber data. Going forward, telecoms like AT&T and content producers like Time Warner will inevitably fuse their data, but it will require unifying two companies with very different values and priorities, and could take some time before it is as useful as tech companies’.
However, the advantage that just might save telecom is that they are internet service providers with the ability to offer content produced by their entertainment divisions free to customers, or as part of competitively priced packages. And with the end of net neutrality—which would have kept the internet’s gatekeepers from abusing their power to charge other companies for carrying their data—telecom giants are more likely to aggressively pair their offerings with free content. It is also important to remember that, while ownership of the HBOs, ESPNs, and other big networks may shift around, they will probably remain in the hands of traditional telecoms.
Although AT&T is just beginning a roll-out of “AT&T Watch,” a low-cost bundle of non-sports content that can be accessed across platforms, Comcast and Verizon have already seen success in the digital streaming space. It will take some time for these old telecoms to get their footing, but if they can manage to maintain control of the mainstream channels people already love through consolidation of assets, they will not only survive, but could remain competitive.
Investors can gain exposure to telecoms via the Telecom ETF (IYZ) or streaming services and content providers via the Dynamic Media ETF (PBS).
We’ve also summarized the following articles related to this topic…
Telecoms: Comcast makes $65 billion offer to steal 21st Century Fox away from Disney
After weeks of signaling it would do so, Comcast is making a play at 21st Century Fox’s TV and film assets. Hoping to derail Disney’s pending, stock-based $52.4 billion deal with Fox, Comcast is stepping in with a higher, all-cash offer for $35 per share, which totals approximately $65 billion.
Comcast’s bid is for the movie studio 20th Century Fox, 20th Century Fox Television, Fox-owned cable networks (including FX and National Geographic), several regional sports TV networks, and the company’s stakes in international networks Sky and Star TV. It also includes a 30 percent stake in the Hulu streaming service. Just like the Disney deal, Comcast would become a majority owner of Hulu if its proposed acquisition is approved.
Fox Broadcasting, Fox News, and Fox Sports are not part of the agreement, and the plan under the Disney deal is for them to be spun off into a company called New Fox. That will also occur if Comcast wins over Fox’s board and becomes the leading suitor. Verge
Telecoms: Data Sheet—Why AT&T’s Time Warner Deal Brings the Future of Television Closer
The Justice Department charged that AT&T was buying Time Warner so the carrier could charge its competitors more to carry CNN, HBO and NBA games on TNT, or maybe even cut them off altogether to make its own distribution services more popular. AT&T said just the opposite–it was buying all that content to lower its costs and to create more futuristic services, like a mobile app that mashes up news clips from CNN into a personalized video news feed for every viewer or a mini-package of cable channels watchable on a mobile phone for $15 a month.
AT&T’s incentive is to use HBO and CNN as carrots, not a stick, to attract more users on every platform. Big media’s reluctance to go along with AT&T’s new ideas to transform TV for the mobile era led the carrier to buy Time Warner in the first place. Now that AT&T has won, expect change to come rapidly. Whether that will be enough to justify the $108 billion price tag is another question. Fortune
Telecoms: Can AT&T really go head-to-head with big tech?
Now that AT&T has Time Warner, can it actually compete with Netflix and Amazon? AT&T will now have ownership of valuable content, from the DC Comics universe to “Game of Thrones” to Turner Sports and CNN. But while content may be king, there are other important factors.
The FAANG companies have mastered the art of using data to fuel their distribution. The more time people spend watching Netflix or Amazon content, the more data those companies have to inform their programming decisions and tailor their offerings on a consumer by consumer basis. AT&T has the ability to wed its vast trove of subscriber data with Time Warner content, but it will require unifying two companies with very different values and priorities.
AT&T’s first move on the content distribution front will be “AT&T Watch,” a low-cost bundle of non-sports content that can be accessed across platforms, including mobile. The bundle is free for AT&T wireless unlimited customers and will cost $15 per month for others. Stephenson will likely use “Watch” as a trial run for applying AT&T subscriber data to its new content offerings.
Taking on Netflix and Amazon will also require thinking like a tech company, rather than a telecom company. All of the FAANG companies are constantly improving their products, from user interface to stream times to recommendation algorithms. AT&T-Time Warner will have work to do to build a comparable experience. CNN
Telecoms – Judge rules AT&T can purchase Time Warner
Last November, the Department of Justice slapped an antitrust lawsuit on AT&T’s proposed acquisition of Time Warner and the trial resulting from that lawsuit wrapped up last month. The DOJ has maintained that merging the two companies as is would threaten competition, but AT&T has said the deal won’t produce anticompetitive effects and moreover, that the DOJ hasn’t effectively demonstrated that it would. Today, US District Judge Richard Leon has issued his ruling on the suit and has declared that AT&T can buy Time Warner.
Judge Leon reportedly put no conditions on the deal and the result of this case stands to have far-reaching effects on the media landscape and other groups considering or seeking vertical mergers. Most immediately, Disney’s bid to buy a chunk of 21st Century Fox may be impacted as the ruling could encourage Comcast to put forward a competing bid, as it has already announced it might do. Other deals on the line include the proposed T-Mobile and Sprint merger, CVS’ purchase of Aetna and Cigna’s acquisition of Express Scripts. Engadget