AT&T acquires Time Warner for $85bn … Content matters more than pipes, being human in a digital world.

October 25, 2016

I was sitting in the lobby of Hong Kong’s Shangri La Hotel, ready to do an executive workshop for Time Warner’s top global leaders. Sitting down next to me, the CFO started to chat. Creating value is easy he said, you just have to think smarter. He then explained how the simple act of recasting Time Warner as an entertainment business rather than a communications business, where the average p/e ratios are almost double, had the biggest impact ever on the organisation’s market cap.

It demonstrated the value of content over pipes. In today’s digitally connected world, anybody can build a network. It is the content that flows through them, and it how it amplifies that content, that creates value for people, and ultimately for investors too.

Last week we saw the same effect in action. AT&T had become desperate, recognising that being a telecoms, or even comms, business, just isn’t special. It agreed to acquire media business Time Warner in one of the largest acquisitions of all time, bringing together Time Warner’s content brands including HBO, CNN and Warner Bros with AT&T’s portfolio of mobile, broadband and satellite TV services. AT&T is the USA’s second largest wireless telecommunications company, and has more than 130 million mobile phone customers and 25 million pay-TV subscribers through DirecTV.

AT&T’s CEO Randall Stephenson said the deal would enable the two companies to move quicker and operate better in a world where people increasingly access content on their mobile devices. “The world of distribution and content is converging, and we need to move fast, and if we want to do something truly unique, begin to curate content differently, begin to format content differently for these mobile environments, and this is all about mobility,” he said.

Gartner analyst Akshay Sharma said the deal was about AT&T trying to become smarter. “Instead of being a dumb pipe provider, now it’s all about content and user experience,” he said.

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So what does it mean for consumers?

The business model

A key concern is whether the newly merged company might use its huge distribution network (the customers of DirecTV and its wireless and broadband services) to give an unfair advantage to its own content, delivering it in a way that is faster or more accessible than competitor content. This would, of course, violate the law of net neutrality, whereby internet service providers should not favor or block any particular products or websites.

AT&T has form for this. It already offers AT&T wireless customers the ability to watch DirecT without it counting against their data plan. This “zero-rating” strategy means it’s cheaper to stream DirecTV than it is to use other services. Following the Time Warner deal, AT&T could extend this zero rating to Game of Thrones, Harry Potter movies or NFL football on TNT. That’s good news for AT&T customers but could be seen to give its own service an unfair advantage over competitors such as Dish Network’s Sling TV or on-demand services such as Netflix and Hulu, unless they pay AT&T to have their own zero-rating deal.

“Whether it’s channel position or recommendations on your home screen, the distributor certainly has the technical capability to give their own content more visibility than their competitors if they are left to do so,” said analyst Jim Nail of Forrester Research.

The end result is that it becomes harder for other content providers to compete for end users’ attention. In the long run this could mean less competition altogether, which could lead to higher prices.

Not everyone agrees. “In reality, regulatory constraints mean that it is almost impossible to use vertically owned content to the advantage of distribution, and it is equally impossible to use captive distribution to the advantage of vertically owned content,” analyst Craig Moffett said.

An integrated experience

This type of deal should allow AT&T to create a better user experience as they access content across multiple devices, whether that’s their cellphone, tablet or TV – an experience that has traditionally been clunky and painful for users.

“They can connect the dots as the content flows from the big screen to the laptop to smartphone or tablet,” Sharma said. AT&T will be able to data mine a person’s location, devices and behaviour in order to provide the right content at the right time in a more efficient way.

“It makes for a more holistic user experience that could lead to consumer-friendly innovations.”

Targeted marketing

Like it or not, advertising helps fund most of the content we consume. The merger of AT&T and Time Warner could mean more granularity to ad targeting. AT&T has already launched addressable TV advertising, where different households watching the same program will see different commercials, through DirecTV. This approach could be extended throughout all of the new company’s offerings and across platforms.

“I know ads are painful to watch sometimes, but it’s necessary because it pays the bills. More contextual advertising means the doctor might get the ad for Mercedes or BMW while the child might see Pepsi, Coca-Cola or video game ads,” Sharma said.

Whilst it is AT&T who has the deep pockets, it is Time Warner who has the valuable brands. Telecoms are companies are  just dumb pipes, and technology companies should remember that it is how you bring them to life for people that creates value. The merger also demonstrates again the borderless nature of the digital world, where sector boundaries are meaningless, and value is in the fusions. Ultimately it also reminds us that, with the power of Harry Potter and even Tweety Pie, we live in a human world.

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