Editor's note: This blog features two separate but complementary analytical insights
Analysis from Seth Wallis-Jones, Senior Analyst for Operators, IHS Markit
AT&T’s proposed acquisition of Time Warner is a major attempt at vertical integration by AT&T that builds on last year’s merger acquisition of DirecTV to create a fully integrated media giant. AT&T will own both the distribution pipes and the content to deliver to subscribers across the US using mobile, fixed line and satellite. With mobile connectivity increasingly commoditised, content will be used as the draw for AT&T as it builds up video services that are now being targeted at the mobile market in the United States. In comparison, Verizon’s nascent deal to acquire Yahoo and build on its acquisition of AOL looks like an increasingly half-baked attempt to leverage the potential nexus between network, content and advertising.
Across the world, content has become a key tool for network operators seeking to differentiate themselves from their competitors, and also serve as a revenue growth opportunity as subscription growth for the core services of operators slows in the face of market saturation. Deals for exclusive access to content have been leveraged to build audiences for digital over-the-top, or OTT, services. While sport has proved to be a major area of competition for the networks as they enter the content arena, properties such as HBO’s “Game of Thrones” hold a similar must-have attraction for audiences.
This is not a consolidation as such but the acquisition of a supplier that creates an entity with significant synergistic scale and financial muscle. AT&T expects $1 billion in annual run-rate cost synergies within three years and improvements to its financial structuring through international diversification and lower capital intensity..
Yet this is not a done deal, and political scrutiny will follow. A major hurdle has arisen as Donald Trump recently railed against the similar acquisition of NBCUniversal by Comcast in 2013, threatening it with a review and potentially a breakup. Trump brought that position to bear over the weekend, threatening to block the deal as the agreement was revealed. Clinton’s campaign has already indicated that she believes the deal should face scrutiny.
Analysis from Ted Hall, Director of Research for Television, IHS Markit
The acquisition of must-have content—the likes of which Time Warner produces, led by HBO’s numerous premium TV series—would leave AT&T well placed to assume a leading role in the emerging online TV revolution in the United States.
Direct-to-home (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. Dish does so 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 is shaping up to be a “virtual” pay TV offering comparable to a typical cable/satellite subscription, while the latter is expected to be positioned as a mobile-led skinny bundle offering. Licence to package content sourced from Time Warner networks HBO, TNT and Cartoon Network, as well as from 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. 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 (satellite) and U-verse (IPTV) platforms in the 12 months to the end of Q3 2016.
Maria Rua Aguete, Director for TV Media Intelligence at IHS Markit, also contributed to both pieces