AT&T-Discovery Deal Is More Evidence Media, Telecom Don’t Mix


First Verizon. Now AT&T.

In recent weeks, the two telecom giants have both called it quits on what used to be a popular strategy: owning distribution and media assets.

Earlier this month, Verizon Communications Inc. agreed to sell its media division to Apollo Global Management Inc. for $5 billion, a move that will jettison once-dominant online brands like AOL and Yahoo. AT&T Inc. followed on Monday with a plan to spin off its media business and merge it with Discovery Inc.

AT&T shareholders will get 71% of the new company, but the move signals that the 2018 purchase of Time Warner Inc. -- for $85 billion, plus tens of billions in debt -- didn’t deliver. Taken together, AT&T and Verizon’s recent moves have sent a message: Telecom and media don’t mix.

It’s the end of an era for so-called vertical integration -- owning media and the means to distribute it -- and that could ultimately throw the spotlight on Comcast Corp., another major carrier that made a bet on media.

“The jury came back on vertical integration a long time ago,” said Craig Moffett, an analyst at MoffettNathanson LLC. “It didn’t work.”

Data Play

When AT&T first announced it was buying Time Warner in 2016, then-Chief Executive Officer Randall Stephenson said the company would use data from its relationships with TV, phone and internet customers to offer more relevant advertising and programming on channels like TNT or CNN.

The idea of owning both sides of the entertainment business has been around for decades. In the early days of cable, TCI, led by industry pioneer John Malone, acquired ownership stakes in cable networks while delivering those channels to people’s homes through cable TV.

Stephenson wanted to follow a similar path for an era when people might watch “Game of Thrones” on their phones over AT&T’s wireless service. But AT&T’s deal to buy Time Warner was slow to get regulatory approval amid opposition by the Trump administration, causing the company to fall behind in the race to compete with Netflix and capture streaming subscribers.

And some people raised doubts about the logic of vertical integration. In 2019, former Time Warner CEO Jeff Bewkes told CNBC that the need to own TV shows and the pipes that deliver them to homes was “a fairly suspect premise.”

AT&T-Discovery Deal Is More Evidence Media, Telecom Don’t Mix

That same year, the activist investor Elliott Management Corp. took a stake in AT&T. The hedge fund wrote a letter to AT&T’s board saying it was “cautious on the benefits” of combining AT&T with Time Warner, which was renamed WarnerMedia.

“We think that, after $109 billion and three years, we should be seeing some manifestations of the clear strategic benefits by now,” the letter said.

On Monday, Elliott Managing Partner Jesse Cohn said the firm supports the AT&T-Discovery deal.

Heavy Debt

Now the world’s most heavily indebted nonfinancial company, AT&T has been unwinding the deals that Stephenson undertook. In February, AT&T said it will offload satellite-TV provider DirecTV in a deal with private equity firm TPG. AT&T had previously said DirecTV was a key asset because it would help distribute HBO Max.

Ultimately, the company spent too much money too quickly, Moffett said.

“AT&T’s balance sheet was wrecked by overpaying first for DirecTV, and then for Time Warner, over a span of just three years,” he said.

Comcast now will be left as the sole industry giant owning TV, internet and entertainment under one roof. The Philadelphia-based company has said owning NBCUniversal has given the company some strategic advantages. For instance, Comcast says giving away the $5-a-month tier of its Peacock streaming service for free has reduced cancellations among internet customers. AT&T has also said that making its $15-a-month streaming service, HBO Max, free to high-end AT&T wireless customers had similar benefits.

But critics have questioned whether such deals couldn’t just be done between two independent companies. Verizon, for instance, has struck deals to offer Disney+ and Discovery+ free for a year to its unlimited-data customers.

The lesson of AT&T goes beyond the company overpaying for Time Warner, Moffett said. It suffered a strategic failure as well.

“They were never able to articulate a clear logic for why they wanted to invest in a legacy media business that they themselves argued was about to enter a permanent secular decline,” he said.

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