AT&T and Time Warner's Merger

This past week, a federal district court judge rejected the Department of Justice's (DOJ) attempt to block the $85B merger between AT&T and Time Warner - allowing the merger to proceed without any preconditions. This will have significant repercussions for advertising and media.

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The suit itself pitted Trump's DOJ against AT&T. As previously discussed, conservative administrations tend to look more favorably upon mergers and acquisitions. In Trump's DOJ, this is not consistently the case, and the government filed suit to block the merger. It was argued by AT&T that Trump attempted to block the case in part because of personal animus towards CNN, though this was ultimately determined not to be admissible in the case (even if personal animus caused the review, that shouldn't mean that a merger that would otherwise violate antitrust laws should be allowed). The judge in the case determined that vertical integration of AT&T and Time Warner would actually create cost savings for the combined customers. The additional revenue that would be unlocked for the combined entity was specifically mentioned by the judge as a positive outcome - "on the revenue side, AT&T and Time Warner expect to see the gains in innovation—particularly by way of a new programmatic advertising platform—that motivated the merger in the first place."

There was a question about whether this would make it more expensive for AT&T's competitors to obtain and distribute Turner content. The court actually determined that, perhaps, this analysis was unnecessary, as distributing Turner content is not necessary to be successful. This decision may,  in addition to creating a media and telecom behemoth, directly contribute to the ongoing erosion of bundled TV . One could view the decision as the evolution of the court's thinking - from one of simply content owners against content owners to a new world where competition includes Netflix, Facebook, Google, etc - and the means of competition continue to change. This was discussed on our Lift Letter on this merger roughly a year and a half ago.

AT&T had created a new Advertising & Analytics unit in anticipation of this merger. Its hope, ultimately, is that it will have a substantial enough collection of data and content to create a viable alternative to Google and Facebook (this is also the goal of Verizon / Oath). This new unit is led by Brian Lesser, who was previously the CEO of Xaxis then GroupM North America, and also was on the board of directors at AppNexus. The CMO is Kirk McDonald, who was previously the president at Pubmatic, and previously the president of digital at Time. The unit is quickly scaling and clearly has significant ad tech know-how at the top. Randall Stephenson, the CEO of AT&T, upon closing the deal, mentioned "You should expect some smaller ... M&A in the coming weeks to demonstrate our commitment to [advertising]." Though it's unclear what he means precisely, there has been speculation, especially given the pedigree of its two leaders, that the Advertising & Analytics unit may seek to acquire AppNexus and/or Pubmatic - and possibly a leading DSP.

Through its assets like DirectTV and the AT&T cell phone business, the company has high quality demographic data via its direct relationships with some 170 million Americans. As discussed previously, distribution companies can currently sell around 2 minutes of advertising per hour. These are among the most valuable minutes because, unlike national campaigns, the devices can personalize the advertising and thus deliver more effective campaigns than simply measuring gross rating points (GRPs) - this can be up to a 6-fold difference in price. This is theoretically possible now for Turner content delivered through AT&T channels (DirectTV), which may unlock up to an additional 14 minutes on these channels.

AT&T's advertising data and channels will now be complimented with true high quality content - as opposed to the user-generated content of both YouTube and Facebook that often leads brands to consider the value beyond direct response of these channels. The company now owns Turner (CNN, TNT, TBS), HBO, and a variety of other properties. AT&T will be launching AT&T Watch TV shortly, which will likely consist of only AT&T's new properties, offered for free to AT&T wireless customers and for $15 / month elsewhere - with the notion that improved data can improve the monetization of this content. In light of the FCC recently ending net neutrality, it is conceivable that this data is zero-rated as well. This creates an interesting contrast - Netflix and YouTube for example, only own the content - meaning each has to rely on others for distribution. Hulu relies on others for distribution and, to some degree, monetization.

It is very possible that this deal will precipitate further consolidation in the content and distribution spaces. With Disney (which includes BAM Tech's streaming assets) and Comcast currently fighting for Fox (which would also include control of Hulu) and Verzion already effecting a similar strategy, movement already appears underway. It wouldn't be unexpected for Charter, T-Mobile, Netflix, Discovery, Dish, and more to continue consolidation. Further, AT&T will likely continue to innovate on new ways to combine advertising, distribution and content that may proactive drive the ecosystem in new directions. In short, this will be an exceedingly transformative new company.