AT&T’s advertising behemoth is coming for Facebook and Google

The AppNexus acquisition will allow AT&T to build out its real-time ad exchange within two years. (Mike Mozart/Flickr)

When AT&T officially closed its $85 billion acquisition of Time Warner, it spun up advertising as one of four core pillars of its newly expanded business. Over the next few years, that business could grow into a beast tough enough to fight off the digital ad giants of the world.

Though linear television is experiencing some secular decline, it’s still a massive advertising magnet. According to eMarketer, TV ads will slip 0.5% in 2018, and as a result, TV’s share of total U.S. spending will fall from 33.9% in 2017 to 31.6% this year. Despite the fall, TV ad spending in the U.S. this year will still total $69.87 billion.

Before the merger, AT&T had access to a modest amount of ad inventory through its DirecTV platform. By adding Turner—home of channels including Cartoon Network, CNN, TBS and TNT—AT&T is effectively tripling the amount of ad inventory it can sell to ad buyers and marketers.

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But the key piece for AT&T is its massive troves of customer data. AT&T has more than 170 million direct-to-consumer relationships across its TV, video streaming, mobile and broadband services in the U.S., mobile in Mexico and TV in Latin America. On top of that, buying Time Warner gives AT&T a host of digital properties including HBO Now, Boomerang, FilmStruck and the upcoming DC Universe streaming service. All of that data—including email addresses, IP addresses and device IDs—will now be at Turner’s disposal thanks to AT&T, according to Alan Wolk, co-founder and lead analyst at TV[R]EV.

“AT&T has all of that, of course, and can easily provide [Turner] with it. That will make it easier for them to better target ads (in a way their competitors can’t) and to make better programming decisions. They can even start running better targeted addressable ads,” Wolk said in a blog post.

Turner’s ad-supported programming and AT&T’s customer insights will be funneled into the combined company’s advertising and analytics business, led by CEO Brian Lesser, former CEO of GroupM North America.

Lesser said that AT&T plans to “reinvent advertising.”

“AT&T’s in a unique position to do that because we are now content owners—Time Warner is one of the best content libraries in the world—and we’re also distributors of content, and we have technology and data,” Lesser told CNBC. “Imagine you’re home and you’re watching your big screen on your living room wall. [It’s] DirecTV and you’ve also got an AT&T phone in your pocket. We’re the only company that knows you’re watching a big screen on the wall and you’ve got a small screen in your pocket. Imagine, you’re watching content and instead of us interrupting the content with a traditional commercial break, we can show an icon on the screen that indicates to you that there might be a mixed reality experience where you can get more information about the car you just saw or the dress you just saw.”

Lesser said that AT&T has the technology to do that type of advertising right now. And the company now has another important technological piece in place after its recent acquisition of AppNexus, a firm that specializes in machine learning and predictive analytics, advertising technology and video.

“Ad tech unites real-time analytics and technology with our premium TV and video content,” said Lesser in a statement. “So, we went out and found the strongest player in the space. AppNexus has scale of infrastructure, advanced technology and diverse talent. The combination of AT&T advertising & analytics and AppNexus will help deliver a world-class advertising platform that provides brands and publishers a new and innovative way to reach consumers in the marketplace today.”

The AppNexus acquisition will allow AT&T to build out its real-time ad exchange within two years so it no longer has to sell its ad inventory using “brute force,” as AT&T CEO Randall Stephenson recently phrased it. But even now, with AT&T still putting in the grinding manual work to sell advertising, the company has a $1.8 billion ad business that’s achieving double digit growth. And soon, Stephenson said it’s likely that other media companies will show up wanting to sell their ad inventory in AT&T’s marketplace.

Barclays analyst Amir Rozwadowski said anyone paying attention to Stephenson’s and Lesser’s recent comments won’t be surprised by the AppNexus acquisition.

“However, while the company’s business is growing at relatively healthy growth levels (double digit rate), its $1.8 billion revenue run rate suggests that its business still remains a modest contributor to the company’s overall top and bottom line trajectory. Rather, we expect the company to utilize its enhanced capabilities to improve the value proposition of key elements of its distribution and content monetization capabilities,” Rozwadowski wrote.

Wells Fargo analyst Jennifer Fritzsche said AT&T—along with rival Verizon and its Oath digital platform and ad business—is better positioning itself to compete with digital ad companies like Google and Facebook.

“Recall, just last week at [a June] 5G conference, a large part of T CEO Randall Stephenson's talking points was dedicated to T's advertising efforts. Specifically he noted, ‘And then the third element is ad technology. When you have those kind of direct-to-consumer relationships, you have, we believe, incredible insights to those customers. What are they watching? Where are they when they watch it? What times are they watching it? You begin to have understanding of the customer that is really, really unique. With ad technology, we're demonstrating already with the small ad inventory we have today, that's very powerful that you can create some serious value when you combine those,’” Fritzsche wrote.

Digital is currently outpacing TV in terms of ad spending, which is good news for Facebook and Google, and bad news for CBS, Discovery, Disney, Fox, NBCUniversal, Turner and every other company that makes a living off advertising on television. According to research from Magna, digital ad spending totaled $209 billion worldwide (41% market share) and TV ad spending totaled $178 billion (35% market share) in 2017.

But if AT&T can begin to offer the same kind of precise audience targeting for its TV ads that digital companies offer on their online platforms, then AT&T should be able to not only grow its own advertising business but perhaps begin to reclaim ad market share from Facebook and Google.