AT&T tonight announced that it will seek to acquire Time Warner. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan also published a blog post earlier today which provides a more in-depth look at AT&T’s current consumer strategy and the context for the merger.
The AT&T Time Warner deal is straight out of AT&T’s recent consumer playbook, which has been focused on entertainment and building value by combining assets to create unique consumer benefit. The best previous example of this was the acquisition of DirecTV and the subsequent zero rating of DirecTV data on the AT&T wireless network. However, the rationale for the Time Warner deal is much less obvious, and risks repeating history as it borrows from the rationale for the AOL Time Warner deal sixteen years ago.
AT&T sees the TV value chain compressing, with content owners like Disney and Time Warner investing in distribution, while distributors like Amazon and Netflix invest in creating content. It is fear of this compression of the value chain and what will happen to those who don’t participate that’s motivating this merger. But the deal is also motivated by AT&T’s desire to offer unique content and content features to its TV and wireless customers. And that’s where the rationale feels thin.
The problem with distributors buying content companies is that content benefits most from receiving the broadest possible reach, while distributors are always incentivized to make reach narrower through exclusives. This creates massive strategic tensions that are almost impossible to resolve – AT&T risks either hurting Time Warner by restricting access to its content, or making its own differentiators too narrow out of fear of hurting Time Warner. Buying a large existing content asset with massive distribution is a very different value proposition from creating brand new content in-house with exclusivity designed in from the beginning. And at $84 billion, AT&T is paying a massive amount for minimal synergies and a thin layer of theoretical differentiation. We need look no further than Comcast’s acquisition of NBCU to see a recent example of the failure of a content-distribution tie-up to deliver any meaningful synergies.