AT&T’s proposed $85 billion takeover of Time Warner Inc. will, in part, help the combined companies push video distribution innovation that may have been slowed by cable companies.
During a call this morning to discuss the merger, Time Warner CEO Jeff Bewkes said various cable companies and other distributors “took a long time” to create direct-to-consumer VOD offerings across all networks because negotiations between various pay-TV providers and network groups held up the process.
“We’ve been trying at Time Warner to get more video-on-demand on, not just our networks, but have it become a universal thing for every American. You go to your set-top or television and that whole dial of networks, hundreds of channels, they should all be VOD just like HBO and Netflix,” said Bewkes.
Bewkes said AT&T, which he called the largest and best at mobile delivery, will help drive more choices and different price points of video distribution for different consumers.
Of course, right now, two of the best examples of that kind of video distribution innovation is AT&T’s upcoming virtual MVPD DirecTV Now – which AT&T CEO Randall Stephenson today said would officially launch in November – and HBO Now, one of the most successful early direct-to-consumer video services.
BTIG analyst Rich Greenfield said that HBO Now is likely one of the key assets driving AT&T to the deal with Time Warner.
“AT&T is not buying Time Warner for its basic cable networks. AT&T is buying Time Warner to get at its content creation engines Warner Bros. and HBO, with HBO one of the only legacy media assets to establish a direct-to-consumer business (HBO Now),” wrote Greenfield in a research note (reg. req.).
The direct-to-consumer business model is a big challenge to the traditional linear TV model on which cable companies rely. For AT&T, which recently bought DirecTV and became the biggest pay-TV provider in the U.S., the erosion of linear TV’s popularity seems less of a concern. AT&T reportedly expects DirecTV Now to become its primary TV platform by as early as 2020.
AT&T’s apparent desire to shift toward an all IP-based delivery of video services helps explain Time Warner’s rationalization for combining with a pay-TV provider, considering that Time Warner in 2008 spun off Time Warner Cable (TWC).
Bewkes called TWC a regional cable company, which he said covered about 12 percent of the country, and that it needed to be consolidated to get more scale. But Bewkes said the world is much different now, with net neutrality, mobility and broadband distribution now playing much bigger roles in delivering content to consumers.
Bewkes said that Time Warner’s tie-up with AT&T would better enable its channels to offer direct-to-consumer products, customized subscription packages and more effectively targeted advertising.
“A lot of the distribution companies, particularly the cable companies, have been slow to provide innovations for consumers,” said Bewkes. “We think this will help spur that across the industry.”
On top of competing better with cable in terms of video distribution, the AT&T-Time Warner deal could also be seen as a response to cable companies' steps into the wireless industry. Cable giants like Comcast and Charter have been gearing up to offer wireless services, creating new avenues of competition.
“We believe AT&T is aiming to combine DirecTV and Time Warner assets to position itself to compete longer term with the cable industry, which is set to enter the market with a video-centric mobile service next year. While starting as an MVNO, we expect the cable industry to pursue the sub-scale wireless carriers – T-Mobile (Buy) and Sprint (Neutral) – to create an integrated wireless video offering and lock in existing subscribers,” wrote UBS analyst Doug Mitchelson in a research note.
Greenfield agreed, stating that Comcast, which already owns NBCUniversal and this year bought DreamWorks Animation, is less inclined to want more content in order to better compete with AT&T.
“Comcast has already bought more content this year via DreamWorks Animation and has talked to the value of kids content implying they want even more. We have to imagine Comcast will be even more focused on wireless as we head into 2017, if the AT&T Time Warner merger is approved – can Comcast really resist buying T-Mobile?” asked Greenfield.
Meanwhile, Charter could be feeling stuck in between AT&T and Comcast. As those companies seek to shore up single missing pieces in their respective product portfolios, Charter still needs wireless and content to get on even ground.
“Consequently, we believe if Charter sees any pressure in the coming quarters from the virtual video overbuild in their footprint, it will have to re-evaluate its 5-year post merger plan outlined during the TWC deal. While the investor expectation at present is for Charter to commit its cash flow towards large scale buyback of its stock in the period after 2017, we believe M&A could become a much bigger priority for the company over the coming year,” Barclays analysts wrote in a research note. “While Comcast and AT&T are just solving for singular gaps in their offerings (wireless and content, respectively), Charter will have to focus on both wireless and content in the coming years. Given the massive integration the company is in the midst of after the TWC/BHN transaction, this strategic pivot could prove to be very difficult to achieve.”