AT&T is acquiring Time Warner Inc, including the HBO, Turner and Warner Bros brands. The 50/50 cash and stock based bid has a total transaction value of $108.7 billion. The deal is subject to approval by Time Warner shareholders and the US Department of Justice and and is expected to close by the end of next year.
AT&T positioned the rationale for the deal as combining Time Warner content with its own distribution networks, including mobile (United States and Mexico), broadband (in the United States) and satellite TV across the United States, Mexico and Latin America.
Turner Broadcasting includes programming networks such as CNN, Cartoon Network, TNT and Adult Swim which are sold across the world. HBO has also launched several subscription video-on-demand (SVoD) products including HBO Now, HBO on Demand and HBO Go, the latter of which is available in 60 countries, and HBO sells its content in 150 countries.
This would allow the combined business to improve targeting of cross platform products and advertising, while also feeding data back data to inform content creation.
In 2015, Turner generated revenues of $10.6 billion. HBO $5.6 billion and Warner Bros. $13.0 billion. After eliminations total revenues amounted to $28.2 billion with operating income of $6.9 billion and net income of $3.8 billion. Time Warner subscription revenues totalled $10.1 billion with advertising revenues of $4.6 billion and content sale revenues of $12.8 billion.
AT&T highlighted that Time Warner would remain editorially independent - a statement directed towards criticism that CNN could be affected by AT&T’s ownership in a highly politicised environment.
Across the world, content has become a key tool for network operators seeking to differentiate themselves from their competitors, and an opportunity for growth as revenues from operator services tail off in the face of market saturation in developed markets. In 2015, total fixed line Revenue Generating Units (RGUs) for the whole US market fell by 3.7 million to 326 million as voice and pay TV subscription declines. Since completing the DirecTV deal in July last year, AT&T has started to phase out its U-Verse IPTV service, transitioning pay TV customers to DirecTV. In November, the operator is planning to launch DirecTV Now, an online package of more than 100 pay TV channels that will be priced at $35 a month.
While sport has proved to be a major area of competition for channel operators as they enter the content arena, properties such as HBO’s Game of Thrones hold a similar ‘must have’ attraction for audiences. The acquisition of must-have content the likes of which Time Warner produces – led by the HBO’s numerous premium TV series – would leave AT&T well placed to assume a leading role in the US’s emerging online TV revolution.
It is highly unlikely that AT&T would (or be allowed to) offer Time Warner channels on an exclusive basis. Following Comcast's acquisition of NBCUniversal, the cable operator was forbidden from discriminating against rivals in its video programming distribution strategy. In the case of AT&T, regulators may look at the possible impact on sports rights acquisition, with DirecTV maintaining a long-term agreement for NFL football and Time Warner’s Turner holding rights to MLB baseball and NBA basketball.
In the United States, DTH operator Dish Network has blazed a trail in ‘pay TV lite’ – services that provide access to slimmed-down channel bundles without the need for a traditional TV subscription – with its Sling TV offering, but the competition is about to heat up. AT&T is set to launch a pair of new online subscription TV offerings, DirecTV Now and DirecTV Mobile, before the end of 2016. The former will be a ‘virtual’ pay TV offering comparable to a typical cable/satellite subscription, while the latter is expected to be a mobile-led ‘skinny bundle’ offering. Licences to package content sourced from Time Warner networks HBO, TNT and Cartoon Network, as well as the Warner Bros. studio, would give AT&T the opportunity to make both services highly compelling.
The need to be competitive in this area is becoming paramount, with the likes of Hulu and YouTube preparing linear-channel-based online subscription offerings of their own. And in the context of the wider pay TV business, future growth in the saturated and declining traditional TV market is likely to come from online services – AT&T has shown that it is not immune to the cord-cutting that has eaten into the cable sector, losing a combined 132,000 subscribers across its DirecTV and U-verse platforms in the 12 months to the end of Q3 2016.
This is not a done deal or one that that will easily pass without political scrutiny. A major hurdle has arisen as Donald Trump recently railed against the acquisition of NBCUniversal by Comcast in 2013, threatening it with a review and potentially a breakup. This weekend, Trump stated: 'As an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few.' By making this an election issue both sides may be forced to take a stand against the deal, and indeed Hilary Clinton’s campaign has already indicated that she believes the deal should face scrutiny.
From a movie point of view, this acquisition places another major film studio within a much larger media conglomerate that provides internet and phone services and so has an additional subscriber base to tap into. Only Universal is similarly placed with Comcast, although all studios are part of a larger organisational structure. For Warner Bros’ film activities this widens its reach to market its tentpole movies (which is the majority of its output and it is usually near the top of US and international rankings) domestically and in Latin America, which is an advantage when compared to its competitors. However, because film revenues fluctuate year-on-year depending on the slate –and in fact all three areas, theatrical, home entertainment and TV licensing, have decreased since 2013 for Warner Bros– we do not expect the acquisition to have a significant impact on Warner Bros’ market share of the US or international box office.