The industry reacted with shock to yesterday’s announcement that AT&T was backtracking on purchase of Time Warner — now WarnerMedia — and merging the business with Discovery.
The deal means that AT&T shareholders will get 71% of the new company, still unnamed, while Discovery shareholders will get the other 29%.
The deal means that AT&T has recognised what activist shareholder Elliott Management was saying in 2019, when it built a stake in the telco.
It said then in a letter to shareholders: “AT&T has been a disappointing investment for its shareholders relative to nearly any benchmark.” And it a series of M&A deals by AT&T, including the US$67 billion acquisition of DirecTV in 2014 — it had “damaging results” said Elliott — and the $109 billion purchase of Time Warner. Elliott sold the last of its shares in November.
Since then new CEO John Stankey (pictured) has listened to Elliott. A big stake in DirecTV has been offloaded to a private equity investor and now the former Time Warner is on the way out too.
Elliott’s managing partner Jesse Cohn and portfolio manager Marc Steinberg said: “AT&T has now executed on its promise to streamline operations and re-focus on its core businesses, all while improving operational execution, enhancing its financial position and advancing its corporate governance. As investors, Elliott supports AT&T in its efforts to best position the company for future success.”
They called Stankey’s decision to sell WarnerMedia “another impressive step in the company’s recent evolution”.
Meanwhile gaming title Comicbook.com worried that WB Games will be split up, with some titles going to the new company and others staying with AT&T — or maybe going to another games company entirely.
It said: “WB Games has several high-profile games in development, including Lego Star Wars: The Skywalker Saga, Suicide Squad: Kill the Justice League, and Hogwarts Legacy. It seems like a safe bet that these projects are all safe following the merger, it’s just unclear exactly which company will end up publishing them.”
WarnerMedia and Discovery might also have to rationalise channels and production. WarnerMedia owns not just HBO but also the original Warner Bros movie brand and news channel CNN. It also owns the Harry Potter and Batman franchises.
Nevertheless the Discovery management team, in charge of cooking, science, travel and nature channels, seems set to take over, led by CEO David Zaslav, a former cable TV executive.
Hollywood’s daily paper, Variety, noted that WarnerMedia and Discovery were at different stages in their global streaming roll-out. Discovery has launched its streaming service in the UK, Poland and eastern Europe, “and debuted this year in India, Japan, Spain, Italy, Nordics, Netherlands, Middle East, Turkey and Saudi Arabia”, and said there were plans to expand into Latin America.
But AT&T’s WarnerMedia has launched its HBO Max only in the US so far, “though a Latin America roll-out is expected in a matter of weeks, while launches in Europe are planned in the next few months”.
Variety speculated that the merger would disrupt European satellite and broadband operator Sky, which is owned by Comcast. It “has long-term licensing agreements in place for key European markets with WarnerMedia.”
London-based analyst Paolo Pescatore of PP Foresight told Capacity: “Video streamers are fast becoming a one stop shop window for all viewers’ content needs. However, users cannot continue signing up to a plethora of services — which is leading to a disastrous experience. Netflix is the market leader, fast followed by Disney+ and Amazon Prime. There is a long tail of others which have been late to market and are finding it hard to compete head on with the market leaders.”
Will other telcos follow the lead set by AT&T and also by Verizon, which has untangled itself from AOL and Yahoo?
Chris Lewis of Lewis Insight said: “Orange started the trend by getting out of video content creation. Depending on the specific country I think there is room for the telcos to add content packages on to their broadband offerings but owning and trying to distribute content is a tough market. Telcos are fundamentally national players and the content market such as film content is global.”
Pescatore said: “Over the last few years AT&T has been preoccupied with integrating DirecTV and WarnerMedia. These big money making moves have not turned out the way AT&T had hoped and have been an unwanted distraction.”
He added: “All of this has happened while rival telcos have strengthened their respective positions in connectivity and the proliferation of video streaming. Moves to spin off these businesses will allow AT&T to focus on core strategic assets, reduce debt, increase shareholder value and ramp up 5G in order to compete with rivals Verizon et al.”
Lewis agreed: “I can’t help feeling that managing a global content business just isn’t the same as building out a national connectivity offering. If anything, connectivity becomes more embedded in our daily lives but the business model is one step removed from much of the content and the apps that we use to live our digital lives.”
Pescatore said: “While content will still play an integral role many telcos have bought such assets at their peak given that viewers have flocked to streaming services. Failures have been more evident in the US with AT&T’s move for ailing DirecTV satellite service as well as Verizon with Yahoo and AOL. Others including BT and Telefónica have failed much better, predominately due to greater focus and direction.”
Lewis noted: “The dynamics of the TV and content market are quite separate from the telecoms industry. Cable TV plays a major role in some parts of the world, IPTV, VOD [video on demand] and subscription services increasingly globally. Different investment cycles and ways of funding the production and distribution of content all have to be taken into account as well.”
