AT&T’s WarnerMedia Era Ends: How Culture Clashes, Massive Debt and Donald Trump Doomed the Merger
In September 2018, AT&T summoned the big players from the worlds of media and advertising to a beachside resort in Santa Barbara. The company had finally closed its $85 billion acquisition of Time Warner, after a protracted fight with the Department of Justice, and wanted to celebrate — and to mark its place at the center of the media ecosystem.
The three-day AT&T Relevance Conference, at the lavish Ritz-Carlton Bacara, featured appearances by Derek Jeter and Issa Rae, as well as AT&T CEO Randall Stephenson. The centerpiece of the event was the unveiling of Xandr — the company’s new platform that was designed to revolutionize the ad business by bringing Facebook-style personalization to TV.
In many ways, Xandr was the fulcrum of the AT&T/Time Warner merger. The idea was that AT&T could combine its scale and customer data with Time Warner’s content to supercharge the value of its TV ads.
Xandr was seen as so vital to the company’s future that its CEO, Brian Lesser, reported directly to Stephenson, and its results would be broken out separately on AT&T’s quarterly statements. Even the name signified its centrality to the telecom’s strategy — invoking Alexander Graham Bell, the inventor of the telephone, the founder of AT&T, and by far the most sacred figure in company lore.
The only problem was, there wasn’t much explanation of how Xandr was supposed to work.
“They could have put out the blueprint for the marketplace. That’s why they brought everyone (to the conference),” says Lorne Brown, CEO of the ad management firm Operative. But the blueprint wasn’t ready. “So instead they put up a bunch of pictures and did meditation.”
This week, the AT&T/Time Warner era will officially come to a close. As Discovery combines with Warner Bros., it will mark an end to one of the most disastrous mergers in media history, perhaps second only to the AOL/Time Warner union in 2000.
The Xandr story is only one piece of the broader misadventure, which one observer called “a nesting doll of ridiculousness.” The story will go down in the annals of mid-’10s hubris, when a telecom looked in the mirror and saw — not the nation’s second-largest phone provider — but a genuine rival to Facebook, Apple and Google. Its foray into media would destroy tens of billions of dollars in market capitalization, force the company to slash its dividend, and cost thousands of people their jobs. And it’s still not entirely clear why it happened.
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The modern AT&T emerged from the breakup of the historical phone monopoly in 1984. Texas-based Southwestern Bell, one of the seven Baby Bells, bought up many of its rivals and then acquired AT&T Corp. in 2005, taking on the AT&T name. In 2011, it tried to buy T-Mobile, the fourth-largest phone provider, but found the limit of how much reconsolidation would be allowed. The DOJ filed an antitrust suit, and the merger was abandoned.
From then on, AT&T would have to grow either organically — or by getting into other lines of business. Stephenson and his top lieutenant and eventual successor, John Stankey, looked around and decided that the best way to compete would be to get into TV. With leaps in wireless speeds, more and more content was being consumed on phones. This trend — which also spawned Jeffrey Katzenberg’s ill-fated Quibi — persuaded Stephenson and Stankey that there was a natural synergy between a phone company, satellite distribution and content creation. They took the plunge, buying DirecTV in 2014 and announcing the Time Warner deal two years later.
“The rationale never made any sense,” says Craig Moffett, a partner at MoffettNathanson, and a critic of AT&T. “The acquisition of DirecTV, and later Time Warner, was never driven by a strategic analysis of what assets they needed to compete, and then a strategy to figure out the best way to go out and get them. It was driven by what assets they would be allowed to buy, and rationalizing an argument for why it would be a sensible thing to buy them.”
Stephenson testified in federal court about the decision in 2018.
“In 2016, we said we need to own content,” he said. “We just think the strategic rationale is too compelling.”
But the strategy remained murky. Stephenson pitched a vision of a vertically integrated company — from content creation through distribution — that could chase the big tech companies, which were also investing in premium video to drive customer engagement. But AT&T would never be allowed to limit access to Time Warner content only to AT&T subscribers. That left it unclear what AT&T could gain from owning content that it couldn’t get from licensing it.
Some looked for other explanations.
“Randall Stephenson hated being a telco,” says analyst Roger Entner, who follows the telecom business at Recon Analytics. “He wanted to be a media mogul in the sexy, glitzy Hollywood universe.”
Stephenson argued that AT&T’s customer data could be leveraged to multiply the value of Time Warner’s advertising inventory. If marketers could target TV ads to households based on demographics or buying intentions, they would be willing to pay more for those ads, and TV subscribers could be charged less, giving the company a competitive advantage.
But that all hinged on Xandr.
A month before the Relevance Conference in Santa Barbara, AT&T paid $1.6 billion to acquire AppNexus. Founded a decade earlier in New York, AppNexus had grown to become one of the leading marketplaces for digital advertising, and had recently branched out to video. AT&T put Lesser — who had come from the major ad buying firm Group M — in charge of AppNexus, and rebranded it Xandr.
Brian O’Kelley, the founder and CEO of AppNexus, stayed on as an adviser, but quickly soured on the arrangement. He came to believe that AT&T had vastly overestimated the value of its own data, and had underestimated the difficulty of creating a “addressable” advertising product at Time Warner.
On paper, he says, he could see the logic: “data plus media plus connectivity equals more money.” In reality, it just didn’t work.
“I don’t think the pieces really fit,” O’Kelley says. “Putting AppNexus between Time Warner and AT&T’s data was not a silver bullet. It was not a magic potion. It just didn’t make any sense to us.”
Lesser was given ample resources to make it work, and promised he would deliver, O’Kelley says.
“He told Randall he could do it,” he says. “He pitched himself as the wizard who could pull it off. It seemed like he was the golden child.”
AT&T has a lot of customer data, but it’s nothing compared to the data controlled by Facebook or Google. Google’s dataset covers just about every American. AT&T’s data covers a third of the country — but only when they’re on their phones.
“Madison Avenue wants to advertise to Americans, not to subscribers to AT&T,” Entner says. “One-third reach is two-thirds not enough. If you can’t compete against Google or Facebook on equal terms, don’t compete. It’s not going to be pretty.”
Before the AT&T merger, Time Warner had started to work on addressable advertising through OpenAP, a consortium with other media companies. Under Lesser, the company — renamed WarnerMedia — dropped out of that group to focus on its own solution. At the same time, Xandr appeared to compete with WarnerMedia’s own in-house ad sales unit, before the two were finally merged in 2020.
“I never understood what they wanted us to do,” O’Kelley says. “They had a big sweeping strategy, and no actual idea of what they were supposed to do to make it deliver what they told shareholders.”
Looking back, he says, “It seems silly now to think of AT&T like Facebook.”
Bewkes’ Exit Strategy
Lesser left the company abruptly in March 2020. Through a representative, he declined to be interviewed for this story, citing a confidentiality agreement. But in an interview with the Next in Marketing podcast last November, he alluded to his time at the company.
“AT&T was a really stressful experience,” he said.
AT&T was also stressful for Time Warner employees — who ended up on the receiving end of disruption.
The company had been through the wringer once already, when AOL bought it in 2000, in what is still widely recognized as the worst deal in American corporate history.
When longtime HBO chief Jeff Bewkes took the reins in 2007, he set about slimming the company down, shedding Time Warner Cable, AOL and Time Inc. It became apparent that the remaining assets — including Warner Bros., HBO, and the Turner cable channels, including TNT, CNN and TBS — would be put up for sale, either to another media company or to a tech giant.
“It was an open secret,” one former Warner Bros. executive recalls. “Every year that you didn’t get sold, you’d sort of hope you’d been wrong. But you always knew that something was going to happen.”
In 2014, Time Warner’s board rejected an offer from 21st Century Fox, which was welcome news for Time Warner employees who feared the threat of layoffs — and Rupert Murdoch’s politics.
But the reprieve was temporary.
AT&T announced it would buy the company in October 2016, paying a substantial premium to investors at $107.50 a share.
“I thought it was something Jeff thought he had to do financially,” says Gerald Levin, the former Time Warner CEO who led the AOL merger. “When you’re in the process of making a transaction, everything sounds like it’s right. You don’t get the full meaning of what the acquirer is trying to do and what the history is.”
The timing was bad, coming on the eve of the presidential election. Donald Trump vowed to block the merger, noting in a statement that CNN was “wildly anti-Trump.” After he was elected, the DOJ sued to block the merger — though the department claimed that Trump’s opposition did not influence them. AT&T won its case at trial, but the lawsuit pushed back the consummation of the merger by a year.
Stankey, whom Stephenson entrusted to oversee its integration, would later tell confidants that the case was the main reason the merger failed.
“Stankey believed firmly that was what put the company behind the eight ball,” says one former WarnerMedia executive. “There was nearly a year and a half where we were unable to start launching our streaming service and that delay cost us first-mover advantage.”
HBO Max would ultimately be unveiled to the world on May 27, 2020, more than six months after Disney launched Disney Plus. By then, the COVID-19 pandemic had forced a shutdown of film and TV production, disrupting the studio’s content pipeline. When production resumed, the pandemic brought added costs and delays.
But the problems went much deeper. When Bewkes sold the company, he seemed to assume that his executive team would be left alone to run it. Stephenson and Stankey had different ideas. According to the book “Tinderbox: HBO’s Ruthless Pursuit of New Frontiers,” Stankey told employees that AT&T had paid a premium for Time Warner, and so by definition “something has to change” to justify it.
As he took charge, the telco culture he brought from Dallas seemed an awkward fit in Hollywood. Stankey stands at 6-foot-5, and has a booming voice and the ramrod-straight posture of a military leader. He was not attuned to the mores of Hollywood — a world of power lunches, insincere compliments and roiling insecurities all masked by suntans and thousand-watt smiles.
Stankey would sometimes get frustrated with executives who had come up on the creative side, because they were not fluent in the language of Wall Street. And he showed his displeasure.
“The vernacular of the phone company was very, very different,” remembers one former Warner Bros. executive. “Stankey would speak a lot in financial acronyms — ROIs, EPS and all that shit — and that’s not really the way that filmmakers or Steven Spielberg talk. Your head would be spinning when you listened to him speak.”
In the entertainment business, success is measured in terms of box office grosses and Nielsen ratings. Stankey and the AT&T team urged the executives to think instead about “minutes of engagement” and “cost per minute.” The company knew it was doing well if it was keeping people glued to their phones.
Where Bewkes preferred to make decisions as a group, Stankey instead sought to project a commanding presence.
“AT&T seemed to believe that we were not paid to think — we were paid to do,” remembers one WarnerMedia executive who worked with both of them. “Bewkes would hold court to solve a problem. John would stay up all night thinking about an issue, and then he’d wake up and tell everyone what to do.”
Stankey could be intimidating in meetings, asking subordinates penetrating questions about their work. One executive says he would yell at people if he believed they were failing to catch on to what he was saying or falling short. Another executive disputes this, saying that Stankey’s baritone voice could be mistaken for anger. He also had a self-deprecating sense of humor, supported employees’ professional growth, and showed genuine concern for people’s families, two executives say.
The transition may have been jarring, but some insiders believe that what made executives the most upset was that the old, free-spending days were coming to an end and a culture of greater accountability was being introduced. More questions were being asked about how money was being spent and why and that bothered executives from a different era.
Richard Plepler, the powerful head of HBO, had no appetite for the new regime, and announced his departure within months. David Levy, the president of Turner, left the same day.
“Losing the management at Time Warner was catastrophic,” Moffett says. “It wasn’t just a loss of institutional knowledge. It was a demoralizing blow to the people who remained. It said that their experience wasn’t going to be valued. There was an enormous brain drain.”
But one holdover executive seemed well positioned to thrive under new management. Kevin Tsujihara had risen through the ranks to become CEO of Warner Bros. A Stanford MBA, he could speak Stankey’s language, but he was also a polished movie executive who had built up trust in the creative community. He sat next to Stankey at the 2019 Oscars, and a few days later was given an expanded role, overseeing the company’s animation division. Internally, the belief was Tsujihara was being groomed to take over WarnerMedia if and when Stephenson retired and Stankey replaced him as CEO of AT&T.
Two days after the promotion, the Hollywood Reporter published text messages suggesting that Tsujihara had tried to help get roles for Charlotte Kirk, an actress with whom he was having an extramarital affair. (Tsujihara would deny he ever used his position to secure parts for Kirk.) Stankey had been warned of the issue six months earlier, in an anonymous letter, but an internal investigation turned up no wrongdoing. Now he recognized that Tsujihara would have to go. In the wake of the #MeToo movement, top executives and talent didn’t want to work with a person in a sex scandal. For instance, Katie McGrath, the wife and business partner of J.J. Abrams, the superstar creator that WarnerMedia was courting for a massive overall deal, let it be known that they would not join forces with the company if Tsujihara was still in charge.
But Stankey also felt that Tsujihara deserved a graceful goodbye. Even as he pushed the executive to tender his resignation, he gave him the kind of sendoff that was unusual for someone forced out in the wake of public controversy. Not only did he host a cocktail party for Tsujihara on the Warners lot, he also flew him to New York for a celebratory dinner and to London for another farewell gathering.
Tsujihara’s lawyer declined to comment.
“The whole thing was a fucking train wreck,” Moffett says.
Straight to Streaming
Entner, the telecom analyst, believes the merger could have worked out, if it had been flawlessly executed. But it was not.
“There are few if any management teams that can do this really well,” he says. “You need to have a team of superstars that have no ego and work together.”
To replace Tsujihara, Stankey turned to Ann Sarnoff, a former Viacom and BBC Studios executive with a low profile in Hollywood. Sarnoff proved to be affable and intelligent with a habit of furiously writing notes during meetings. But not everyone appreciated her low-key style. Once the pandemic hit, she was forced to work remotely and thus failed to forge the kind of relationships necessary to succeed in the role.
Stephenson retired in April 2020, and as expected Stankey became CEO. To replace himself at WarnerMedia, Stankey found an offbeat choice. Jason Kilar was a former CEO of Hulu, and Stankey believed that he combined creative chops with the disruptive personality of a Silicon Valley visionary — just what he thought WarnerMedia needed. Kilar’s upbeat spirit was welcome in some corners, as was his palpable love of movies, shows and gaming (he saw “Aquaman” in theaters seven times). But traditionalists bristled at his social media habit, preferring their leaders to keep a lower public profile — at one point, Kilar snapped behind-the-scenes photos of HBO Max’s “Friends” reunion intending to share them on Twitter, which caused some consternation. His massive $52.2 million pay package in 2020 also drew ire, coming amid company directives to keep a lid on costs and as WarnerMedia had instituted layoffs.
Kilar will be remembered for orchestrating one of WarnerMedia’s boldest and most controversial bets. In late 2020 — with the theater business still in intensive care — he decreed that Warner Bros.’ entire film slate for 2021 — including “Dune” and “King Richard” — would debut concurrently on HBO Max. Kilar, Sarnoff and film chief Toby Emmerich signed off on the decision, but there were disagreements about whether the films should launch day-and-date. Some film executives believed that there should be some sort of exclusive theatrical window for the movies, albeit a shorter one, which Kilar vetoed.
The move stunned Hollywood, with filmmakers like “Dune” director Denis Villeneuve and Christopher Nolan (whose most recent Warner release “Tenet” was not part of the experiment) decrying the decision. Warner Bros. did make an effort to make everyone whole, paying out hundreds of millions of dollars in bonuses to talent, with the likes of Denzel Washington (“The Little Things”) and Will Smith (“King Richard”) earning $40 million each as a make-good for the move. The new releases bolstered HBO Max subscriptions at a critical moment, as it took time for buzzy shows such as “The Flight Attendant” and “Hacks” to ignite.
“It was a massive driver of subscriptions,” says one WarnerMedia executive. “There weren’t enough splashy shows when HBO Max launched. Those movies probably added 10 million subscribers.”
WarnerMedia continued to churn through executives. Bob Greenblatt, brought in to succeed Plepler at HBO, was ousted after 17 months. Kevin Reilly, who oversaw HBO Max content, also was forced out shortly after its launch.
After a slow start, HBO Max started to get traction. But executives could detect a shift in the corporate mood. Ambitious plans were being scaled back. Shows were getting cancelled more frequently, and the video game division, which came under Kilar’s control, was told it needed to do a better job of meeting deadlines. Kilar changed compensation structures, setting bonuses and other incentives to HBO Max hitting certain targets.
AT&T was facing pressure to reduce its debt in order to invest heavily in building its 5G network to keep pace with other mobile carriers. In February 2021, AT&T announced the sale of DirecTV. In six years of AT&T stewardship, the company had lost 40% of its subscribers and 75% of its enterprise value.
Three months later, Stankey announced that WarnerMedia would be spun off and combined with Discovery, a company largely known for its reality programming, in a $43 billion merger. As the deal neared its official close this week, many executives — including Sarnoff and Kilar — were shown the door, and another round of major layoffs are expected. Staffers have been left demoralized.
“It’s a pretty shell-shocked group over here,” says one executive. “It’s a head-spinning amount of change.”
Some insiders believe that AT&T deserves credit for pushing WarnerMedia forcibly into the streaming era. HBO Max has scored watercoolor hits such as “The White Lotus,” “The Gilded Age” and its “Friends” and Harry Potter cast reunions, and finished 2021 with almost 74 million subscribers, exceeding projections. That translated into awards success. This year, WarnerMedia’s shows and movie received more Oscar, Golden Globe and Screen Actors Guild wins than any other content company. And AT&T is also praised for making meaningful changes in terms of the diversity of WarnerMedia’s workforce, hiring more people of color and providing more senior jobs for them and for female executives.
But others are angered at what they see as the desecration of gold-standard entertainment brands.
“Working at Warner Bros. or HBO used to mean something,” says another. “This is where Clint Eastwood and Chris Nolan wanted to make movies. This is where ‘The Sopranos’ was made. You used to feel so proud to work here. It’s not like that anymore.”
Stankey at least came to recognize that the merger was not working, and pulled the plug. But the foray has cost AT&T dearly.
“The damage has been done,” Moffett says. “Their balance sheet is badly over-levered. The debt they took on, especially for the DirecTV deal, is still with them, and has left them badly hamstrung.”
In December, AT&T discarded the final piece of its former media empire, selling off Xandr to Microsoft for an undisclosed sum.
Levin, one of the architects of HBO, says he could not fault Bewkes for selling to AT&T.
“He tried to make a financial transaction. That’s the one that was available,” Levin says. “He thought it would work. It didn’t. I can’t criticize him for that.”
But he says it’s clear now that AT&T was never cut out to be a media company.
“Programming — whether streaming or not — is an art form,” Levin says. “It’s not a mechanical exercise. And they don’t operate that way.”