AT&T Overcame Trump, But Can It Beat Netflix?

(Bloomberg Opinion) -- The multifaceted story of AT&T Inc.’s evolution into a media conglomerate is almost worthy of its own HBO show. The drama has stretched from Wall Street to Hollywood, even to the Oval Office, where the company’s quest to buy Time Warner withstood President Donald Trump’s antagonism. But now we’re left with another cliffhanger: Was it all worth it?

AT&T Overcame Trump, But Can It Beat Netflix?

Last week, AT&T officially cleared the last of the regulatory hurdles for its $102 billion Time Warner merger, which handed the wireless carrier ownership of assets such as HBO, the Warner Bros. film studio and CNN, the news network that’s been a frequent target of Trump’s. A New Yorker article on Monday exploring the president’s cozy relationship with Fox News and brawls with CNN reported that the AT&T deal survived despite Trump repeatedly ordering Gary Cohn, then director of the National Economic Council, to ensure the transaction was blocked. 

Whatever went on behind the scenes, AT&T is on to other challenges. Monday brought bigger news for investors that the company is reorganizing its Time Warner division (now called WarnerMedia) to make more sense of the assets and save money, as it shifts resources to develop a new streaming product and ramp up content production to compete with Netflix Inc. The changes have caused a stir and led to the departure of two key executives – Richard Plepler of HBO and David Levy of Turner – in what some fear are early signs of AT&T’s slapdash interference in an area in which it has no expertise. It was enough to send AT&T shares almost 3 percent lower on Monday.

I’ll be the first to admit to doubts about whether the stodgy old phone company is up to the task of running some of Hollywood’s best brands. As it is, AT&T has struggled with the far more straightforward purchase of DirecTV, from 2015. Integrating WarnerMedia and the creative cultures ingrained in its various TV and film businesses is an even greater challenge for longtime AT&T CEO Randall Stephenson. Not only that – he must simultaneously tackle the monstrous debt that’s come from his conglomerate-building. Stephenson may be viewed years from now as an astute dealmaker, or in shorter order as the person who ruined two iconic American companies; it all hinges on getting the initial WarnerMedia integration right. If he doesn’t, he won’t have Trump’s political meddling to blame. 

There are legitimate worries that AT&T asserting its control over WarnerMedia could lead to a damaging exodus of talent, but Plepler and Levy’s departures aren’t necessarily proof that that’s happening. In order for AT&T to do what it must to eliminate inefficient silos and bring the businesses closer into the organization, it makes sense that some of the old leadership would eventually step aside. Stephenson has also brought in Robert Greenblatt, formerly head of Comcast Corp.’s NBC Entertainment, to oversee WarnerMedia’s soon-to-come streaming service and the HBO and Turner entertainment content that’s expected to anchor the product. And so the moves Stephenson and his team are making at WarnerMedia and its crown jewel, HBO, don’t strike me as worrisome yet or even all that surprising. In fact, they’re forward-thinking.  

It’s understandable that shareholders may not be willing to give Stephenson much benefit of the doubt; AT&T’s stock has fallen about 10 percent since the merger closed last June, while shares of its rivals have advanced. Still, the reality is that fewer people are watching traditional advertising-driven TV and Netflix has long been their primary alternative. WarnerMedia would need to be rethinking its strategy right about now anyway, with or without AT&T. There was a reason it became M&A prey, after all. 

AT&T Overcame Trump, But Can It Beat Netflix?

While CNN’s ratings have recovered lately, the network has been lagging behind Fox News and MSNBC during prime-time viewing. AT&T is looking to revamp CNN’s digital products by leveraging AT&T’s Xandr ad business, according to the Wall Street Journal. It also wants HBO to churn out more content, which seems reasonable, as I’ve written before. HBO shouldn’t sacrifice its reputation for having quality shows like “Game of Thrones,” but the long waits between new seasons and new series motivate viewers to cancel during such lulls, which is easy for digital subscribers to do. Meanwhile, Netflix is offering enough at a low enough price to prevent boredom. There must be a way to enhance HBO without destroying its best features. 

The way to do it may be what AT&T seems to be envisioning: a streaming product that is anchored by the HBO brand, but also brings together other Turner and Warner Bros. content to help fill out the offering. An HBO-plus, if you will. Maybe AT&T really is on to something. 

The company also seems determined to meet its debt-reduction goals without cutting its dividend (which I speculated could happen if its plans falter) and without parting with DirecTV (another option I’ve suggested). Streamlining WarnerMedia is thus a necessary step. 

But if it becomes more than a brief disruption and results in the loss of more internal talent, Stephenson may be one of the ones who is next to go. Stay tuned. 

AT&T also expanded Warner Bros. chairman and CEO Kevin Tsujihara’s role to include programming for kids and young adults.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

©2019 Bloomberg L.P.