AT&T’s $85 billion acquisition of Time Warner was once expected to close by the year’s end. That timeline was thrown out the window on Wednesday by the US Department of Justice (DoJ), which is now demanding that AT&T sell either Turner Broadcasting or DirecTV for the deal to go through.
Selling DirecTV could crush AT&T’s pay-TV ambitions:
- Its pay-TV footprint could severely downsize. AT&T acquired DirecTV for $49 billion just two years ago, and after combining it with its existing pay-TV division, U-Verse, it became the largest pay-TV provider in the US. At the time, U-Verse had only 5.7 million subscribers, while DirecTV had 20 million. Last quarter, AT&T reported 38.6 million video subscribers.
- Its bundle offering could become less compelling. One of the upsides of the DirecTV acquisition was that it enabled AT&T to offer a compelling quadruple-play service option for consumers — a bundle composed of mobile phone subscriptions, fixed-line services, internet, and pay-TV. That said, even without DirecTV, AT&T would still have a pay-TV offering in U-Verse, although its digital TV plans, through DirecTV Now, would be scuppered.
On the other hand, giving up Turner comes with a host of losses, too:
- Turner’s broadcast networks and sports programs. AT&T would lose out on Turner’s rich media lineup, which includes assets like CNN, TNT, Cartoon Network, and TBS, as well as sought-after contracts housed under Turner Sports, including NBA, MLB, March Madness, UEFA Champions League and Europa League, and PGA Championship programming.
- Efficiencies in integrating Turner into DirecTV Now. Adding Turner’s assets into DirecTV at virtually no cost would allow AT&T to offer a cheaper cable and digital TV package. This would give DirecTV Now an edge over other digital TV products like Sling TV, PlayStation Vue, YouTube TV, Hulu Live TV, and the rumored Verizon digital TV service.
- It’s one of Time Warner’s biggest revenue generators. Turner and Warner Bros. have historically been Time Warner’s two largest revenue segments. Last quarter, Turner drew nearly $2.77 billion in revenue in Q3 2017, up 6% year-over-over (YoY) and contributing more than 36% to Time Warner’s bottom line — more than any other segment.
- Turner’s and CNN’s digital presence and partnerships. CNN is the top digital news platform in terms of unique visitors, and also reaches more unique viewers between 18-34 years old than any other digital news publication across desktop and mobile, per comScore. Turner and Time Warner, meanwhile, also have a deep partnership with Snap to create Snapchat Shows.
Meanwhile, the DoJ’s resistance to this deal could discourage merger activity in the near future. Any large telecom that was readying a significant acquisition bid may think twice before doing so. This incident, in particular, sets a precedent for telecom companies acquiring content businesses. It might also impact the willingness of media companies to acquire other media companies — Disney and Fox, for example, were said to be exploring a deal — as well as that of telecoms to acquire other telecoms — such as the (now-dead) T-Mobile and Sprint deal, or the once-rumored Verizon-Charter merger.
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