Yesterday’s massive announcement that US telco AT&T is offloading its WarnerMedia to Discovery raises a number of equally big questions. How will a combined WarnerMedia/Discovery SVOD offering fare in the streaming wars? What does AT&T’s exit from media, just three years after entering the space, tell us about the business case for telco/media tie-ups? And what will happen happen to AT&T’s ad tech business Xandr, which hasn’t been included in the deal? VideoWeek spoke with industry leaders to hear their thoughts on the deal:
The announced merger of Discovery and AT&T’s media assets not only creates a new major media giant but also raises some very interesting questions about the future direction of both the streaming industry and the media sector in general. Strategically, there is rationale to the deal.
For AT&T, this is an effective reversal of its previous strategy of building up media assets – even though it will own a majority stake in the new venture – but to do so in a way that does not lead to a sale of its assets at a massively discounted price, as happened with the sale of DirecTV. It will also allow AT&T to concentrate on its broadband and rollout of 5G services, which is at the core of its business. For Discovery, whose CEO David Zaslav will head up the new entity, it provides significantly more firepower to compete with the other global streaming giants, both in terms of resources and content. However, that does not necessarily guarantee success and, as the planned merger of TF1 and M6 in France announced last night demonstrates, the competitive environment is changing rapidly.
What these deals are likely to do is accelerate further consolidation of streaming players. There are two many entrants who probably lack scale on a global basis and, arguably, the US content giants have viewed the world erroneously as merely an extension of the US market.
One other point. The most often asked question is “who will be the streaming winners?”. A better question might be “will anyone win in streaming?”. There is an argument for saying that the current streaming wars lead to continued intense competition which means no one can actually generate a meaningful, sustainable profit in the space.
There’s a lot to say about the merger of WarnerMedia and Discovery. It’s a big story, creating the number one player in ad supported premium video in the US and a top three player in global streaming. Yes, it’s yet another Telco (AT&T) disposing of its advertising and media assets, but for me, the most significant thing is what this says about so-called legacy media businesses.
There is nothing investors, analysts (and the marketing industry) like more than bright new innovators. Netflix, Roku, DAZN – to illustrate the point. Combined with the premature proclamations of the death of linear, then legacy media business seemingly face a bleak future.
However, what we are seeing – especially from those legacy businesses that are vertically integrated with both content and media assets – is that they possess the resources and strengths to enable a very meaningful transition into a digitally native future. WarnerMedia and Discovery should prove to be a $43B powerhouse to drive the transformation towards a Total TV future, harmonising the best of old and new content assets and distribution platforms.
And the media consolidation continues! Discovery leaps to become the number two media company in an effort to feed the beast of content production and broaden its streaming platforms.
Discovery benefited from a strong financial position moving into this announcement, with low leverage and strong cash flow generation. AT&T has been underwhelming with its vertical strategy since the Time Warner acquisition.
Discovery is adding strong content production, as well as some general entertainment and news properties, affording an enviable group of media assets that will parlay into a more comprehensive streaming product. Cash generation is also king in funding content production, as the larger firm will target $20 billion in content production on an annual basis.
This leaves the sub scale media properties, like ViacomCBS at a disadvantage going forward. I expect consolidation of remaining smaller media firms stands at a higher near-term probability as they seek to compete against the now larger players like Disney and AT&T-Discovery.
The combination of HBO Max and Discovery+ certainly creates operating synergies and subscriber scale, when all eyes are on the streaming wars. The long-awaited rollout of the ad-support version of HBO max next month will get everyone a sense of what pent-up demand exists for that, and it will be interesting to see if the subscription model maintains or fades away as the streaming giants become better established and advertising becomes more mainstream again.
Furthermore, I would imagine Viacom and other traditional cable operators are probably not too happy about this news. Viacom had previous ambitions when Scripps Networks was on the market back when, and one would imagine they would have been interested in the AT&T networks assets. For cable operations, this could hurt their leverage around any upcoming carriage negotiations.
Given AT&T wants to focus on competitive growth around 5G, it begs the question as to how remaining assets like Xandr fit into their future. There were rumors about looking to sell that business unit last fall, and since then M&A activity in the adtech space has really heated up. It seems unlikely that Xandr is something that AT&T will hold onto long term given the news about releasing their content, and Xandr recently announced 75 percent Q1 YoY growth, which indicates their intentions for acquisition.
My main reaction to the ATT divestiture of Warner Media is that David Zaslav managed to convert a middling hand into literally the best hand in media.
It is classic Zaslav, with the kind of swagger, relatability and force of personality that enabled him to build NBC’s cable distribution business before arriving at Discovery in 2007.
For ATT, this represents an exit from media, proving, for this cycle, that most permutations of Telco-media tie ups seem a poor fit at best, and a profligate destroyer of value at worst. Between ATT’s analogue video efforts, Verizon’s foray into digital media, and T-Mobile’s exploration of whatever Layer3 was, this cycle has demonstrated that media is a complicated business in transition, poorly suited for telcos’ appetite cash flow and dividend growth.
The next chapter is far from complete. US regulators within the current Democratic administration will have something to say about this expansion of corporate power. We do not know yet whether this deal will pass muster, and, if it does, whether it will be subject to an onerous consent decree, as Comcast faced when it bought NBCUniversal In 2011.
However, if this merger is approved, then the combined company will be a powerhouse across linear TV, ad-supported streaming (AVOD) and subscription video on demand.
One interesting feature of this combined business is that it is well set up for a “last man standing” strategy in linear pay TV. Its heft across the dial will give it significant negotiating power in preserving rates, even in smaller pay TV packages, and potentially the ability to lock in channel space within a slimmed down bundle. It’s must have channels: CNN, HGTV, Food, Discovery, its premium cable assets, and its sports rights on TNT/TBS nearly guarantee its ability to preserve the cash flow of linear. But these assets also enable the newco to catch the “leakage” from cord cutting by offering live and VOD streaming versions of these channels. This is all without even discussing the existing strength of properties like HBO Max, DC comics, and other major studio assets.
The one glaring hole will be it’s technology and product capabilities. Neither company has demonstrated a significant aptitude for managing data-intensive digital, direct to consumer businesses.
In summary, the deal will face heavy regulatory scrutiny, and may yet be killed or hobbled by the government. However if it happens, then this is quite possibly the best positioned company in media.