Wednesday, October 26, 2016

AT&T Buys Time Warner: An Expansive Strategy Amid Industry Uncertainty

After Comcast’s $30 billion takeover of NBCUniversal and Verizon’s acquisitions of the Huffington Post and Yahoo, AT&T agreed on October 22, 2016 to buy Time Warner for $85.4 billion. The ability to produce content and deliver it to millions of viewers “with wireless phones, broadband subscriptions and satellite TV connections was not lost on either board.[i] At the time, AT&T sold “wireless service in a saturated market, while Time Warner [was] a content company whose primary assets, networks like CNN and HBO, [faced] tougher times in a cord-cutting world.”[ii] Although AT&T’s board could be accused of empire-building, the stabilizing impact of combining wireless service and content could hardly be ignored in a business-environment so full of change and uncertainty. In other words, with the traditional television industry facing such dire threats to its revenue-structure due to the proliferation of high-tech substitutes, having the wherewithal to formulate and experiment with different distribution means and even content was at the time a fitting strategy.

Due to the internet and the smartphone, the way people paid for TV, the kinds of programming, and the devices to watch it on were “all undergoing transformational change.”[iii] Accordingly, consumer behavior was “neither settled nor predictable.”[iv] One thing was clear: the ability to avoid having to watch commercials was something that viewers prized, and this meant that the traditional television industry would very likely be transformed. “I think we’re all trying to figure this out — how technology and the consumer is going to change, and who are the winners and losers in this future,” said Walter Piecyk, who studies the telecommunications industry at the research firm BTIG. The best argument for the merger, he said, is that AT&T would be diversified in that the company would have both programming content and distribution channels, rather than just one or the other. When you face an uncertain future, diversity can be an asset. “If it turns out that in the future, content becomes more valuable than distribution, the new AT&T will have that; if the opposite happens, it’s covered there, too.”[v]

Randall Stephenson and Jeffrey Bewkes, the chairmen and chief executives of AT&T and Time Warner, argued, “the future of TV will depend on a lot of new ideas that are tested and deployed very quickly. These might include new business models for paying for shows, new ways to distribute and market that content, and new technologies and industrywide standards to make sure it all works.”[vi] Analysts, however, said a lot of these potential products and services could be created from licensing deals. A merger might actually slow down industrywide collaborations, they argued, because it sets up a new giant that others in the industry may not want to work with. “This appears to be about empire sustenance rather than economic efficiency,” said Brian Wieser, an analyst at the Pivotal Research Group.

Expanding a business empire is never without its ethical challenges, not to mention the possible economic hit on market-competition. In the case of the media, a lot of power in a few hands also presents political risks to democracy, especially when the electorate relies on the media for information concerning candidates and policy. In the case of the United States, where the First Amendment of the federal constitution protects media, giving such license to a few rather than many can result in distortions within the democracy. Not only could the few who control the "public airwaves" (an antiquated expression) influence elections and public policy; interlocking corporate board memberships could make it easy for the few private companies that control the media to act in the interest of corporations in other sectors at the expense of the public good. Rather than taking on these "macro" issues here, I want to suggest how the combined merger in this case can be optimized from a business standpoint. 

Moving to the company-level, a possible conflict of interest is involved in this particular merger. Specifically, would AT&T give priority in its distribution channels to its own content from Time Warner? Also, would AT&T restrict Time Warner’s content to the company’s distribution channels? It would not make sense economically “for Time Warner to offer most of its content exclusively to AT&T’s customers. Not only would that destroy its profitability (Comcast’s customers pay a lot for CNN and HBO, so why would Time Warner want to kill that business?), but it would also be out of step with the future. The notion of content tied to specific distribution lines is exactly what consumers [were] moving away from when they [chose] services like Netflix over cable bundles.”[vii] Clearly, maximizing both the types of distribution and the content would be in the combined company’s best interest, especially considering the tremendous uncertainty playing out in the industry after decades of traditional radio and television. 

So in this case, enlightened self-interest can obviate the conflict of interest that is inherent in having content and distribution channels that show others' content as well. Having the wherewithal to put large sums of money into research and development in new means of distribution and how they would impact the type of content is perhaps the foremost strategic advantage in the merger. With the industry changing so much and so quickly, at least as of the time of the merger, being and staying on the forefront both technologically and in terms of content is a prime advantage of this gigantic merger. 

The strategic standpoint at the company- and industry-level is of course not the whole story, particularly as the industry includes the media, which is very important especially in a large republic such as the United States. Weighing the strategic benefit to the firm and industry from the merger against possible costs including not only political ones, but also economic as well (i.e., diminished competition) is especially difficult because different levels are involved (i.e., society, industry, and company), and analysts reside at these various levels. A CEO talking about the case with a U.S. Senator, for instance, will face the problem of talking from one level to another (i.e., company to societal). Ideally, societal actors can work to create and sustain competitive industries and a free and open media, while CEOs still have enough space to situate their respective firms as best as possible strategically. The present case is interesting because the merger has the potential to facilitate the transformation of how content is delivered due to the combined financial wherewithal even as there are major ethical, economic, and political risks or downsides.

[i] Michael J. de la Merced, “AT&T Pledges $85 Billion To Acquire Time Warner,” The New York Times, October 23, 2016.
[ii] Farhad Manjoo, “AT&T-Time Warner Deal Is a Strike in the Dark,” The New York Times, October 24, 2016.
[iii] Ibid.
[iv] Ibid.
[v] Ibid.
[vi] Ibid.
[vii] Ibid.