This is no small chunk of change, as the company had to pay top price for a media conglomerate that is in fairly good shape and boasts a large stable of assets, including major Hollywood studios, the country’s top pay-TV channel, HBO, and several other cable properties such as CNN and TMC. The appeal of these assets has attracted a number of suitors since the spin-off of Time Warner Cable, including Apple.
A less welcoming environment
To assess the rationale for the deal, we should first give a bit of background.
First, we should mention the very abrupt slowdown in the mobile services market in the United States. If AT&T (like Verizon) is a colossal enterprise, with more than 110 million mobile subscribers in the US, the market has become far more difficult following aggressive moves from T-Mobile and Sprint, and as consumer equipment matures. AT&T had sought to anticipate the change by merging with T-Mobile, but the FCC and antitrust authorities quashed the deal. As in Europe, intense competition is weighing on mobile operators’ margins, while the explosion in traffic is still hard to monetise and telcos will need to keep investing heavily in their networks to keep up. On the other side of the equation, the applications generating this explosion in traffic are largely the product of Internet behemoths such as Google, Amazon, Facebook and Netflix.
Second, in those locations where it is a wireline telco, AT&T is having to contend with cable’s growing dominance (66%) of the Internet access market. For several quarters now, AT&T, Verizon and the country’s other telcos (Frontier, Century Link…) that offer connection speeds over 50 Mbps in only a small handful of locations, are losing customers to cable and its ability to deliver increasingly fast connections, thanks to DOCSIS 3.1 – giving it a steadily growing subscriber base and market share. Plus, the top cablecos appear resolved to enter the mobile market, with the belief that “mobile is the new cable!“.
Lastly, we need to remember the remarkable success of the deal that led the number one cableco, Comcast, to acquire another TV and movie industry giant, NBC Universal, back in 2013.
How will it maintain its cash-flow?
AT&T does not have that many options for maintaining its cash-flow and dividends.
It is forbidden to engage in mobile market mergers. Of course, it can count on 5G to accelerate and widen its lead over T-Mobile and Sprint, as it managed to do (alongside Verizon) with LTE at the outset. But this lead would only last around 18 months.
Acquiring cable companies could open up certain prospects – as the cable market’s consolidation is not yet complete – but will only be allowed in those areas where the carrier has no footprint.
International investments are still on the menu, with the acquisition of two mobile operators in Mexico in recent years. And even if growth in more or less every telecom market is sluggish, AT&T did also have its eye on opportunities in Europe, and later in India… But, like Verizon, AT&T has been focused largely on its domestic market for more than a decade.
It is true that the acquisition DirecTV is considered largely a success. It creates national cross-selling opportunities between mobile subscribers and satellite customers. DirecTV’s roughly 20 million subscribers bolster the company’s negotiating cloud in Hollywood, well above what it had with its 5 million U-Verse subscribers. With DirecTV, however, AT&T was still just a distributor and so sensitive to the slow but sure cord-cutting trend.
A deal that equals both vertical integration and diversification
So the acquisition of Time Warner would change all that. It would allow AT&T to move one or two notches up the programming value chain, positioned in both TV network operation and the production of premium TV series and films. The new AT&T would thus have a very impressive strike force on the content front, powerful enough to fuel its ambitious DirecTV Now TV streaming project.
This does not mean that AT&T is putting all its eggs in the vertical integration basket. It would be foolish to monetise its films, TV programming and channels only through its own fixed and mobile broadband services. So the deal can also be seen as a diversification move. AT&T has no doubt concluded that, more than ever before, content is indeed king.
We would be wrong take away from this merger the idea that is the pipes that govern broadcasting and content. The new understanding is more that, now that we can watch TV, live or in VOD, through a good quality streaming service, competition at the connectivity level will become more efficient, net neutrality rules will rein in the most direct attempts at discrimination… so it is not the pipes but rather the programmes that will be the decisive factors. Along with data on Internet users’ behaviour and habits.
Telcos do have several cards to play when it comes to the TV and video market. Cards that could allow them to stand out from other telcos, open up cross-selling opportunities, secure customer loyalty… When going head to head with the Internet titans, acquiring TV rights to sport and amortising investments in premium productions will nevertheless be possible only for the wealthiest telcos, with the most ambitious video strategies and tens of millions of subscribers. Like AT&T.
How will antitrust authorities react?
It remains to be seen how the Department of Justice (DoJ) and the FCC will react: they could oppose the deal or impose conditions. AT&T will argue the precedent of the Comcast-NBC merger, and the fact that no media or telecoms industry player would be eliminated or have its market share altered. Industry players and politicians that are against the merger will point to the dangers of having the country’s largest carrier get its hands on one of the largest media conglomerates. Others will see opportunities to strengthen provisions for increasing transparency on ISPs’ use of consumer data, and to expand net neutrality rules.
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