What AT&T, Time Warner Deal Means for Content Amid a Flood of Distribution

Analysis: Content has never been as valuable, but it’s hard to stand on its own

Last Updated: October 22, 2016 @ 7:39 PM

If AT&T’s $85 billion purchase of Time Warner says anything about the media landscape, it’s that content has never been so valuable. But it has too little power on its own to be king.

Premium entertainment content made by Warner Bros. movies and HBO is like water. Everyone needs it, but it’s useless unless it can be delivered to them. And in a world thirstier than ever, high quality content can command a hefty price even as the media industry at large sails toward an unclear future.

In past decades, TV consumers had basically one pipe – the cable-connected television set – connected to a limited number of channels. Now between their smart TVs, smartphones and tablets, everyone has multiple pipes and can draw from any source that’s online. The sources have competition they never expected – YouTube anyone? – but those that everyone wants to tap into have never been so valued.

And that’s why Time Warner, whose highly profitable cable channels face an uncertain future in the age of cord-cutting, was still able to command such a premium from AT&T, bought at $107.50 a share, a 20 percent premium over the $89 share price at closing on Friday.

“You’re seeing a lot of these deals now to create scale and scope and to provide a company like AT&T leverage against the content owners,” said Kyle Mayer, a professor of vertical integration and M&A at USC’s Marshall School of Business. “As we see a shift toward cord-cutting, the importance of the pipes to the home in terms of the internet is becoming more and more important by the day.”

As more streaming services emerge and have to compete for customers, they need to attract them with content they know and love. Even in the age of peak TV and video cameras on every phone, there’s still a relatively limited supply of that.

Wells Fargo analyst Marci Ryvicker acknowledged the strength of Warner Bros. library of prime programming. “Look, we’ve always said that if there’s a library to buy, it’s Warner Bros.,” she wrote in a Friday research note.

At a September investor conference in Southern California, 21st Century Fox Executive Chairman Lachlan Murdoch said the sea of new internet-based distribution platforms that are emerging on the market, from Netflix to Amazon to the planned live-TV services coming from Google and Hulu, support the value of content.

“As downstream distribution becomes more and more competitive, the value will flow upstream to the content owners,” he said. “It’s like salmon, value swims upstream.”

If the deal goes through the media giant’s shareholders would see that value swimming into their bank accounts to the tune of a 66 percent pop in the stock since the start of the year.

Middling cable channels and the middling shows they carry are on their way out, but higher-end, hit programming like what HBO and Warner Bros. produce has never been as valuable. There have also never been so many potentially interested, deep-pocketed buyers as the line between internet video and TV becomes even more blurred — and eventually erased.

AT&T loudly announced its desire to become a major media player with its $49 billion purchase of DirecTV last year. In a Friday research note, Amy Yong, an analyst at Macquarie pointed out that AT&T is launching three DirecTV-branded streaming services in the fourth quarter, including the flagship DirecTV now, which will carry more than 100 channels — and therefore, would stand to benefit from more content providers with favorable ownership.

“As a result, the company has signed multiple content deals leading up to the launch; a deal with Time Warner could strengthen its content ownership position which holds great value in an over-the-top world particularly if AT&T could control distribution,” she wrote.

But AT&T, a direct descendant of the first phone company ever, is hardly the only massive corporation with non-TV roots making a huge bet on delivering it over the internet.

Amazon and Google, with their combined market cap of nearly $1 trillion, are also very much in the game. Both are said to be launching live-TV streaming services in the very near future, and Amazon has splashed plenty of cash acquiring original content for its Amazon Prime Video.

Sony has its PlayStation Vue live-TV streaming service, which piggybacks on its popular video game console. Hulu, which is owned by a combination of Comcast, Fox, Disney and Time Warner, is also launching a live-TV service in early 2017.

What all those powerful companies have in common is their pursuit of a limited supply of truly watchable — and bankable — content.

The Wall Street Journal reported Friday that Apple — which suspended efforts to launch its own live-TV service last year — had discussed a possible merger with Time Warner a few months back. And with Apple holding a cool $62 billion in cash and short-term investments on its balance sheet and a $628 billion market cap, that could have could have incentivized AT&T to get the deal done fast.

Those buyers are not just coming from the U.S. Chinese tech conglomerate Le Eco just launched a line of smart TVs and a streaming video service and would like to fill it with a healthy menu of programming. Its subsidiary, Le Vision Pictures, recently opened an office in Los Angeles and plans to produce a slate of English-language movies — with distribution across multiple platforms a main part of its strategy.

Even the best content can’t totally sell itself — HBO, which carries some of the most talked-about shows on TV, only had about 800,000 subscribers on its standalone HBO NOW service as of February. However, distributors definitely can’t sell themselves to subscribers without anything good to watch.

The pursuit of prime programming in a constantly changing distribution atmosphere should only get more active — and AT&T just snagged one of the few big fish.

Matt Donnelly contributed reporting to this article.

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