Google can swoop in and buy Time Warner, but why bother?

The tech giant is doing just fine, thank you very much. With $61.2 billion in cash and a market cap of $397.62 billion, it could blow 21st Century Fox out of the water if it were to enter what is currently an auction of one. But while all the speculation about such a scenario makes for great headlines, that prospect glosses over the fact that both companies are in fundamentally different businesses. The same goes for Amazon or Facebook or any of the other cash-rich Silicon Valley giants that might kick the tires of an entertainment conglom.

Michael Nathanson, a media analyst with MoffettNathanson, described any such union as a “complete culture clash,” and noted that he’s “not sure why a tech company needs to buy a media company when they can simply license what they need.” Netflix has built up a pretty compelling suite of programming by renting content sourced from outside production companies, after all.

Having shed its publishing and cable divisions, to say nothing of its former bunkmate, AOL, Time Warner is skinnier than it has been in decades. Despite its reduced waistline, it’s still less nimble than digital players.

“The typical overhead structure of traditional entertainment studios would likely not be tolerable for a digital media company,” said Mark Patricof, co-founder and CEO of Mesa Global, an investment bank focused on the media and tech sectors.

So why do the names of digital firms keep coming up as possible buyers? Beyond the fact that they can afford it, there is a strategic logic to why tech giants would be interested in media makers. Google and Facebook want to sell ads, and having Time Warner gives them plenty of programming to expand their ad reach. Likewise, Amazon and Apple may be in the e-commerce and device spaces, but finding a way to lure consumers to their sites can helps pitch their wares. With a click of the cursor, you can go from downloading “Game of Thrones” to stocking up on paper products.

“Content is king, because it’s the Trojan Horse that gets people into the ecosystems that are these companies’ core businesses,” says Peter Csathy, CEO of Manatt Digital Media.

Silicon Valley has flirted with making content, but its overtures are economical. Google’s effort to elevate the level of programming on YouTube through its estimated $100 million investment was relatively modest; Amazon is spending more, shelling out $100 million in the third quarter of 2014 on programs such as “Alpha House.” But that’s a fraction of what studios dish out to produce and distribute TV shows and movies.

“When you look at Amazon or Netflix, there’s a certain industrial logic to them having their own studio, but the reality is that Time Warner is going to go for $100 billion and they’re spending hundreds of millions to make a few shows,” said Rich Greenfield, a media and technology analyst at BTIG. “It’s a little different.”

Were HBO and its HBO Go program available independently, say, it’s easy to see why Google might be attracted to such a premium brand. It would nicely complement its Google Fiber investment, not to mention its Google Play store. As part of a bundle controlled by the pay-TV industry that Google and other internet companies are currently disrupting, it becomes less appealing.

These companies want to bring together and host content from a variety of players, but buying Time Warner imperils that delicate balance.
“It makes them instantly non-neutral, and they all want to be Switzerland,” said Rebecca Lieb, an analyst at research firm Altimeter Group.
Moreover, Microsoft’s recent announcement that it will stop cooking up original series for Xbox and close Xbox Entertainment Studios demonstrates the limited appetite that technology companies have for the challenges of developing programming.

“Tech companies aren’t really comfortable with the high cost of creation,” said Brian Bedol, co-founder of Bedrocket Media Ventures and the founder of Classic Sports Network. “They’d be inheriting a ton of legacy and infrastructure costs.”

A combo of tech and traditional media also would run counter to the current trend in mergers and acquisitions. Diversification was the rallying cry of an earlier generation of dealmakers, but now media companies are banding together as a defensive measure, fortifying themselves against an onslaught of cable and internet distribution empires. Leverage, not breadth, is this year’s fashion.

When it comes to making gaudy purchases, Google, Facebook and others have been attracted by potential, not profits. Witness the search engine’s $3.2 billion deal for home automation service Nest Labs or the social network’s $19 billion purchase of WhatsApp.

“These are companies that are based on technology and innovation and disruption, and Time Warner is almost the opposite of those things,” Lieb said.

The history of technology and media partnerships is a sad one. AOL and Time Warner ended in divorce after their combined valuation shriveled, and Sony has never figured out how to integrate its devices into the films and television shows its entertainment division creates.

Google, Amazon or another digital player may have a stomach for risk, but some gambles only lead to heartburn. Just ask former Time Warner CEO Gerald Levin.