Over the weekend, AT&T agreed to purchase Time Warner for $85bn in an effort to expand its holdings into the content realm. This follows a flurry of merger and acquisition activity–both successful and unsuccessful, and mostly horizontal–in the media/telecom space in the last 18 months. That included AT&T’s acquisition of DirecTV ($49bn), Comcast’s blocked bid to acquire Time Warner Cable (and Charter’s successful bid for $79bn), and the proposed but ultimately abandoned Dish and T-Mobile combination. The previous major vertical integration between an MVPD player and content producer/provider is the Comcast and NBC Universal merger that closed in 2013 (for a total of approx. $30bn). Verizon entered the ad tech space in June 2015 when its acquisition of AOL was completed, and now in July 2016 announced it was making a further push with its potential $4.8bn acquisition of Yahoo.
While the proposed deal looks clearly beneficial for Time Warner’s shareholders (at a 36% premium to Time Warner’s pre-bid share price), the benefits from AT&T’s point of view are less obvious. The regulatory environment in the telecom space is very restrictive, and so obvious benefits such as exclusive content rights, preferable distribution arrangements, reduced content costs, or other typical synergies are largely prohibited. It is more likely that AT&T’s primary motivation is one of diversification: their core wireless business has been maturing, and the addition of both DirecTV and now Time Warner’s assets significantly broadens their revenue generators.
As to whether the transaction is ultimately allowed by regulators, one early indicator is the stock price of Time Warner today, which is midway between the previous TWX stock price and merger deal price ($87 as of Monday 24th 11am, vs. $107 deal price), suggesting that the investors assume a 50/50 likelihood that the transaction is ultimately permitted. Vertical integration plays are typically less likely to face mandatory divestitures compared to the combination of two distributors or two content providers. Furthermore, regulatory oversight is likely solely with the DOJ rather than both the FCC and the DOJ, due to the limited exposure of the deal to spectrum licenses or distribution facilities (the purview of the FCC). We thus believe the transaction is more likely than not to ultimately be allowed, just as the Comcast-NBC deal was, but it is by no means guaranteed.
In the new world of skinny bundles and cord cutting, not every network or entertainment brand will survive and most will have to re-invent themselves. AT&T is betting that CNN, TNT, TBS and HBO (the #1 premium television brand with 36 million subscribers) have the appeal and the scale successfully navigate the transition.
From a marketing/advertising perspective, we believe vertical integration will help the ecosystem figure out cross-screen distribution, measurement and planning in a faster and better way. This is therefore good news given that cross-device is the single biggest challenge for media vendors, marketers, and agencies today. The new ATT-TW entity would have a more diversified footprint than the combined NBCU/Comcast deal before, and thus should lead to similarly positive results in terms of industry innovation. Specifically, it will bring under the same roof 131 million wireless subscribers, 26 million MVPD subscribers, and 46 million premium TV subscribers (including Cinemax). In terms of advertising technology, the firm will put together a unique stake and expertise in developing consumer data, addressable television advertising, and programmatic cross-platform media buying.
This wave of horizontal and vertical integration within the traditional media/telecom world is of course partly motivated by a desire to counteract the growing competition from pure digital players for consumers’ time and data, and advertisers’ budgets. Digital media (search, social, digital video and display) has just reached 50% of advertising dollars in the US and just two companies (Google and Facebook) now control two thirds of that revenue. Having grown from social networking and skateboarding dogs, both internet giants are now keen to attract and/or develop premium talent and content and expand the ad tech footprint into linear media and mainstream brands. The ATT-TW deal may lead them to intensify their efforts in that direction.
According to the latest MAGNA forecasts (updated on October 4), linear national television ad sales will show little or no growth over the next four years (2017-2020), when excluding the incremental sales in Olympic and election years, as CPM increases will barely offset ratings erosion. Cable networks’ ad sales will slightly outperform (+1.6%). Meanwhile ad sales generated by digital video (including YouTube, full episode players, Hulu, and video networks, but excluding social video), will grow by a 28 percent CAGR over the same time frame.