Antitrust agencies will be on high alert over AT&T/Time Warner bid October 24 2016
Telco aims to become a content powerhouse by paying $85.4bn for owner of HBO and Warner Bros, but concentration of power is a danger.
by CAROLINE GABRIEL, Research Director
AT&T has pulled off one surprise with its bid to acquire Time Warner for $85.4bn – prompted an opinion from Donald Trump on which most can agree. Trump said the merger would concentrate too much power in the hands of a few, and the current wave of consolidation between US telcos and media/web companies will certainly test the antitrust regulators. Just as Verizon and AT&T have snapped up scores of telecoms and mobile operators to consolidate their power, now they are acquiring content and online advertising assets in the shape of the veteran, but now stumbling, US internet giants.
Verizon has bought AOL and is in the process of acquiring Yahoo, though there are shadows over that deal cast by Yahoo’s massive email hack. Now AT&T has responded in kind with its bid for Time Warner, a move which harks back to the huge power it enjoyed in its original guise as the US national telco.
In 2016, however, traditional telco and mobile revenue streams are drying up and growth lies in adding content, advertising and value-added services to the physical networks, in order to avoid the bit-pipe trap and tap into some of the seams of gold in which Google and Facebook live. If allowed to acquire Time Warner, AT&T would gain the Warner Bros film studio and a huge entertainment content library including the HBO company. The Turner network also has the rights to NBA basketball.
All this could be used to boost the multiplay appeal of the telco’s mobile, broadband and pay-TV services, including those from its most recent major acquisition, DirecTV.
This content would certainly enrich AT&T’s offering in the key area of new competition for TV and video viewers, mobile-first video. AT&T has said that the “future of video is mobile and the future of mobile is video” and has pledged to be the first US MNO to offer nationwide mobile broadband and video, with premium content on every screen from smartphone to living room to car.
“Premium content always wins. It has been true on the big screen, the TV screen and now it’s proving true on the mobile screen. We’ll have the world’s best premium content with the networks to deliver it to every screen,” said AT&T CEO Randall Stephenson.
If approved, the transaction would close by the end of 2017. It is a part-cash deal in which Time Warner shareholders would receive $107.50 per share – $53.75 per share in cash and $53.75 per share in AT&T stock.
It was not only Trump who was criticizing the deal for potentially making AT&T an unstoppable powerhouse in media and connectivity. Regulators on both sides of the pond still tend to assess competition in terms of traditional market boundaries – so a deal which reduces the number of telcos or MNOs is more harshly scrutinized than one which crosses market limits, such as a merger between a mobile and a fixed, or a telecoms and a media, operator. That was seen in the UK, where incumbent telco BT was allowed to acquire leading MNO EE, but Hutchison was blocked from doing the same to Telefonica O2, because it would have combined two mobile players.
However, regulators are starting to be aware that the real power now lies not in connectivity – which must tend to become a utility business of scale anyway – but in the multiplay, and the combination of content and access across multiple networks and devices.
“Vertical integration between programming and distribution in particular raises a number of issues,” said John Bergmayer, senior counsel at consumer advocacy group Public Knowledge. He warned that the conditions of approving the deal must include provisions to stop AT&T discriminating against rival content owners which want to distribute their offerings over its networks; or against competitive networks which want to carry Time Warner content.
Last time there was a big deal between a major network operator and a content player was in 2009, when Comcast acquired NBC universal from GE, and that transaction took over a year to complete, as did AT&T’s purchase of satellite TV provider DirecTV.
So AT&T is likely to be in for a long journey, and one that may bring back bad memories of its ultimately failed attempt to buy T-Mobile USA in 2011. That reminded operators that the Department of Justice and the FCC, often criticized back then for pandering to the interests of the largest carriers, could show their teeth.
Senator Al Franken, Democrat of Minnesota, who sits on the Senate Judiciary Committee, said in a statement on Saturday that huge media mergers “can lead to higher costs, fewer choices, and even worse service for consumers”.
AT&T set out its preliminary stall to shareholders and regulators, listing three key benefits of owning Time Warner – diversified revenue mix to offset slowdown in traditional businesses, with Time Warner representing about 15% of total sales; lower capital intensity in content compared to networks, where the telco has been investing heavily in LTE, fiber and virtualization; and a lighter regulatory environment than in telecoms.
Time Warner CEO Jeff Bewkes said: “Combining with AT&T dramatically accelerates our ability to deliver our great brands and premium content to consumers on a multiplatform basis and to capitalise on the tremendous opportunities created by the growing demand for video content.”
Two years ago, Bewkes and his board rejected a takeover offer from Rupert Murdoch’s 21st Century Fox, which valued Time Warner at the time at more than $75bn. Of course, Time Warner had a disastrous merger back in 2000, with AOL, now part of Verizon. “Time Warner has been through many combinations, many historic,” Bewkes said. “The first one Time and Warner, and then we added Turner, and then we did have a misstep of course with AOL. We are feeling very positive about this.”
In the second quarter, Time Warner’s Turner cable network had revenue of $3bn, while HBO posted sales of $1.5bn, and the Warner Bros. studio had sales of $2.7bn.
Time Warner also has an airwaves licence for a TV station in Atlanta, which it might sell in order to avoid giving the FCC jurisdiction to scrutinize the deal if that licence is transferred to AT&T.