AT&T - Time Warner Merger


AT&T and Time Warner (TW) recently signed a merger agreement in which AT&T would acquire TW for roughly $85B. This is a big deal, both in dollar amount and potential media industry impact. Generally, the acquiring company pays in some combination of cash and stock. There may be conditions to actually complete the transaction, such as antitrust approval and financing requirements. In the current deal, AT&T plans to get a ton of debt, bringing its total outstanding debt load after the deal to $200B. That means that the combined company will, among other things, need to pay an awful lot of interest every year - meaning it must be very profitable.

Deals over a threshold around $85M are automatically subject to antitrust review in the US. That threshold is, as an aside, what dictated the maximum amount Google was willing to pay for Invite Media. Often very large deals come with certain stipulations by the US or foreign governments. In addition, broadcasters are highly regulated - especially by the FCC. When Comcast bought NBC, for example, it was required to continue to make NBC programming available overall channels. When Verizon bought AOL, there was less traditional broadcast content, so the deal was less impacted (that said, Verizon's use of wireless data in the AOL ad context is still heavily regulated). 

So what's going on here? First, the growth in the cell phone market appears to be tapering. The number of net new subscribers in the US is quite low. There is also some degree of price competition, meaning there's an effective ceiling on industry profitability. While still a very lucrative business (meaning AT&T can indeed afford a high debt load for a while), the writing's on the wall on the growth side. Cellular is, to some degree, becoming a "dumb" commodity. Services like Google Fi have taken it further and are actually white-labeling Sprint and T-Mobile, meaning the customer may completely lose direct contact with wireless provider in the future. Even the worst providers are good enough.

In the meantime, content is changing. The new guard consists of players like Facebook, Youtube, Amazon Prime and Netflix. Each has some new or planned play on the infrastructure side of things. The old guard (Time Warner, Disney, Paramount, etc) is losing its hegemony. That said, Time Warner has a huge range of great assets, including HBO, Warner Brothers, a large interest in Hulu, etc - but not Time Warner Cable (that was spun out and then acquired by Charter). AT&T has DirecTV, Uverse, AT&T Wireless, etc. This new enterprise is a complete suite of offerings - every channel of distribution, and nearly every sort of content. It lines up most directly with conglomeration under the Comcast umbrella, including cable, NBC, Universal - and, starting next year apparently, a wireless service.

There are currently rules about not being able to favor one's own content as a provider, but this is constantly under assault through lobbyists and targeted legislation. So one theory is that eventually net neutrality may be significantly weakened, allowing these players to increase the value of their own services by offering exclusive content only on channels they own. Another is simply that they'll be able to more effectively monetize by controlling the end-to-end experience - and possibly create a truly viable competitor to the new guard. Comcast's Xfinity has, for example, created an experience that allows you to watch TV seamless across all your devices.

As platforms like Apple and Google get more powerful (Apple was reportedly eying TW as well), it may very well be the case that traditional FCC rules separating distribution and content are decreasingly relevant, because the distribution platform - which is unregulated - may become just as, if not more important than the infrastructure. This would mean that a change in net neutrality and a strengthening of the importance of their distribution channel with high quality, unique content is the only way to remain relevant in the future.