AT&T's Time Warner deal to create challenges for Sling, Netflix, Amazon, Hulu and others

Game of Thrones - Emilia Clarke. Image courtesy of HBO

AT&T’s announced $85.4 billion acquisition of media giant Time Warner Inc. signals a ramp-up in consolidation of content assets that many video industry players and analysts predicted would happen. Gaining ownership of HBO and its online outlet, HBO Now, as well as Warner Brothers and Turner -- which has a classic-movies SVOD service waiting in the wings -- gives AT&T a huge chunk of content for its pending linear OTT service, DirecTV Now.

AT&T's deal for Time Warner is just the latest – but so far the largest -- in a series of maneuvers by larger corporations to scoop up pricey media and entertainment assets with key pieces of online video delivery services and infrastructure. For example, in August Disney carved away BAM Tech from Major League Baseball Advanced Media, buying a 33 percent share. And last year and early into this year, major cloud players including Amazon and IBM bought up numerous delivery providers.

On the surface, Time Warner's media assets should allow AT&T to compete directly with linear MVPDs like Sling TV and PlayStation Vue, and give Netflix, Amazon and Hulu a run for their money. “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,” said IHS Technology Director of Research Ted Hall.

Analyst Rich Greenfield of BTIG said that AT&T's strategy in buying Time Warner is to get direct access to Warner Bros and HBO's "content engines." But other analysts are somewhat skeptical that owned content will help AT&T long-term.

For one thing, AT&T will likely have to spin off some Time Warner assets -- perhaps Turner, a Barclays investor note said. "AT&T has indicated that it may need to divest some assets to gain consent from the government. In this context, we could see some or all of Turner becoming available in the coming quarters,” Barclays analysts wrote Monday.

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HBO, in the meantime, represents an important piece of the online video and pay-TV ecosystems that AT&T is now planting both feet into. Between its DirecTV purchase (and the pending launch of DirecTV Now, a linear OTT video service similar to Sling TV) and its existing U-verse video service, having ownership of one of the few content providers to successfully establish a pure-play OTT service, HBO Now, is important for AT&T.

AT&T executives also said the DirecTV Now platform the company is building could help Time Warner's various brands more quickly branch out into the online video space.

It's interesting to note that HBO’s position of importance in the content element of this deal is probably due in large part to Time Warner CEO Jeff Bewkes’ steadfast refusal to spin off the network a couple of years ago, despite pressure from some investors -- followed by the launch of HBO Now on the strength of its original programming alone.

AT&T’s purchase is in line with the belief of Barclays analysts that within five to seven years the video landscape will consist of just three or four “vertically integrated conglomerates” that offer wireline broadband, wireless voice and data, and competitive content packages to consumers.

“All these approaches effectively point to ISPs wanting to move into the service layer instead of being content with monetizing just the transport of data. The most valuable service layer at present in this respect is video,” Barclays analysts wrote.

Owning that video content and a great deal of IP delivery infrastructure would enable mega-conglomerates like AT&T/Time Warner to offer video “without restrictions placed by the multitude of content rights carve outs” that plague both pay TV and the still-fragmented OTT market. UBS analysts also speculated that AT&T would pull content from Netflix’s licensed library in order to offer its own exclusives, enhancing its OTT competitiveness against the SVOD giant as well as Amazon and Hulu.

Still, analysts at UBS felt that Time Warner’s content assets are not necessarily going to be used just to compete in the OTT space. “We expect AT&T would enhance the pay TV bundle with Time Warner's content, not break it, similar to Comcast (Buy)/NBCU's behavior,” the analyst firm said in its investor note Monday.

MoffettNathanson analysts were even more skeptical that AT&T’s supposed strategy to own and distribute more content through the deal will work. Locking down content as exclusive to its service would be self-limiting, and, if it becomes a vertically integrated distributor, FCC program access rules would prevent AT&T from making its owned content completely exclusive.

“The logic of vertical integration in Media and Distribution is relatively clear. The practice isn’t,” said Craig Moffett and Michael Nathanson in their take on the deal. “Said differently, it’s not what you could do that matters. It’s what you can.”