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.

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[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.

The Internet Eclipsing Television Networks: Toto, We’re not in Kansas Anymore

Internet start-ups can be said to profit, at least potentially sometime in the future, by leveraging the commons, or public space, even enlarging it in the process. Companies founded on the scarcity paradigm of privateness and even public policy based on a de facto privatized tenet have accordingly gone on the defensive. Although Thomas Kuhn’s The Structure of Scientific Revolutions would suggest that the old guard must die off before the new paradigm can come into its own, the internet revolution has shown a remarkable yet subtle persistence in “seeping through the cracks” into the “light of day.” 

Faced with a burgeoning digital landscape, traditional commercial-television networks had already established a “rear-guard” mentality wetted to the status quo by the time the Aereo case hit the U.S. Supreme Court in 2014. At the time, rather than paying a cable fee, that company picked up television signals on the public airwaves and sent customers the signals over the internet (charging for use of the receptors).[1] Before the advent of cable television, “television” was free, being paid for by the same kind of television commercials that many networks still profited from as the Court heard the case’s oral argument; and yet, the default assumption had (conveniently) morphed into the tenet that viewers should pay for television (including the commercials!), which implies that the public airwaves had somehow been privatized. "You can't take our signal. You just can't," said Les Moonvies, CEO of CBS, as if he were some rejected child-actor.[2] Imagine if a network CEO had made a similar exclamation in the 1960s. "They're my airwaves, Mine!" Although copyright law deserves protection, the networks’ use of the law to protect a “transformed” privatized ethos of what are still public airwaves even as those companies continue to sell and run commercial ads evinces a slight of hand that just does not meet the smell test. Perhaps trying to get away with having something both ways goes along with leaning too much on the status quo for support.

Also associated with the rear-guard mentality is the lobbying strategy of erecting legislation as an artificial bulwark that can buy some additional years of profit. For instance, the ad- and cable-based television networks could seek to “fortify” copyright law based on the assumption of de facto privatized air-waves. Indeed, this assumption has kept the American people from questioning the requirement that political campaign ads must be purchased. If the airwaves are public and broadcasters enjoy licenses to use the commons at a profit, then the notion of purchased political ads could be the outlier; the licensees could legitimately be required to run the ads gratis. Already, when the U.S. president wants to speak to the nation, he does not pay for airtime.

Ironically, the U.S. president who had run on the banner of “real change” (and refused public financing, which, by the way, presumes privatized airwaves) backed the old guard in the case, American Broadcasting Companies v. Aereo. The forces with a vested interest in the status quo are without doubt formidable. However, the internet was already transforming the entertainment industry even before Aereo came along. So, the significance of the case should not be overstated. On the day of oral arguments, David Frederick, the attorney for Aereo, observed, “The cloud-computing industry is freaked out about this case.”[3] Regardless, the cloud industry could still anticipate a promising future. Stepping back from the particular firms party to a dispute takes some of the airs out of the old tires of the tired default.

Indeed, just as the stolid broadcasters were doing battle with the fresh upstart from another era—that of the twenty-first century—Netflix announced plans to increase prices for new subscribers. Citing a “burgeoning roster of paying customers and profits that exceeded expectations,” the managers of the internet-based provider of shows and movies had decided to take their sleek operation out for a spin to see what it could really do.[4] Even without the new content, such as the award-winning series, House of Cards, the managers were well within their proper purview in raising prices out of a sense that the “burgeoning” market would bear it. That is to say, the company legitimately stood to gain from having essentially formed a new industry, with all the risks one would expect. Antithetically, the defense being playing at CBS and other television networks has the distinct odor of weakness befitting an old antiquarian who refuses to retire.

In short, industries could not but change dramatically given all of the computer-based change unleased from the 1990s and well into the next century. The fate of one company (i.e., Aereo, or Napster before it) pales in comparison to the sea-change would all-but-certainly make the second half of the new century very, very different from even its first two decades. Admittedly, placing bets on the commercial winners and losers is fraught with ambiguity; even so, we ought to know which team not to root for—and, even more pathetically, to be on.

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[1] Michael Wolff, “The Battle Over Aereo Will Shape TV’s Future,” USA Today, April 21, 2014.

[2] Christopher Stewart and Merissa Marr, "High Noon for Diller's Aereo," The Wall Street Journal, May 24, 2012.

[3] Richard Wolf, “Aereo, Broadcast TV Collide in High Court,” April 23, 2014.

[4] Mike Snider, “Pumped-Up Netflix Raises Its Fees,” USA Today, April 22, 2014.