If the Time Warner/AT&T merger passes regulatory scrutiny, a new level of scale will be required to compete in the media business. This will almost certainly force a new wave of consolidation.
The combined entity will be a $300 billion-plus content and distribution giant. The next biggest, Disney, is one-half the size. Media giants that looked big a year ago now appear tiny. There are three areas of the media business where this could have huge implications.
Sports rights. AT&T can use its tremendous free cash flow, nearly $15 billion per year, to increase Turner Sports’ investment in sports rights, potentially positioning Turner Sports as a more serious competitor to ESPN, CBS, and Fox Sports.
Having another bidder enter the mix would be an unwelcome development because ESPN and the broadcast networks are increasingly dependent on sports rights to generate advertising dollars and strengthen their negotiating leverage with distributors for affiliate fees. Turner Sports would not even need to be the winning bidder on sports rights to negatively impact the economics for the other networks.
The mere presence of another well-heeled bidder could drive the price of sports rights above a level that is economical for linear networks. Should Amazon, Apple, or Google decide to enter the contest for sports rights, the legacy networks’ problems will mount.
U.S. box office. AT&T’s ownership of Warner Bros. could also have serious consequences for the U.S. theatrical market. Fox and Disney are increasingly reliant on their movie studios to launch big-budget, branded intellectual property. And with the market multiples on their respective cable networks groups declining due to cord-cutting, movie studio profitability is becoming a bigger contributor to the consolidated earnings and market value of each company.
Against a backdrop of declining U.S. movie theater attendance, the reliance on a film slate to drive earnings and valuation is already precarious. It becomes even more tenuous if AT&T’s scale will now allow WB to become more aggressive in securing desired opening weekends, scaling WB Animation’s film slate, and taking more risks with new IP.
AT&T is so large that the studio can hide in its financials. That is a great advantage for a movie studio because stable earnings in other parts of the company can smooth out the variability of box office performance.
On the other hand, Fox and Disney aren’t big enough to hide their studio earnings anymore, exposing their valuations to wild shifts if they release a string of big-budget flops, lose box office market share.
Down the road, WB may also produce films for day-and-date distribution on AT&T’s branded platforms. To the extent that AT&T does not need to monetize the film product at the box office in order to get a good return, studios that are overly dependent on theatrical will now be forced to compete with a new convenient, in-home film product.
Premium channels. Lastly, AT&T can provide much needed nourishment to HBO’s content budget, allowing HBO to more effectively compete in the crowded premium space. If AT&T can scale HBO’s budget by 50%, or by $1 billion over the next few years, HBO can increase its volume of original programming hours and stack full-seasons of shows, thereby increasing subscription value and customer satisfaction. HBO will have more capital to bid on desirable rights, market its content, and improve its technology.
HBO’s new resources will quickly make Starz, Showtime, FX, and AMC look sub-scale. Perhaps even more importantly, HBO can catch up to Netflix spending levels, which gets at what this megadeal is all about: having the scale to stay competitive in the digital age.
Ben Weiss is manager of New York-based investment fund 8th & Jackson, which focuses on media.