May 18, 2021

AT&T Discovers Entertainment Is Hard

On yet another day that rocked Hollywood, June Gloom came early for Jason Kilar and his streaming dreams. CEO John Stankey continued the unbundling of AT&T’s ill-advised foray into the entertainment business by merging WarnerMedia with Discovery Channel.

“The Future of Video Is Mobile, and the Future of Mobile Is Video”
In May of 2014, AT&T announced it would buy DirecTV for $48.5B, in a bid to scale up its video offering and to increase its purchasing power for licensed content. The AT&T/DirecTV tie-up was believed to have roughly 27 million subscribers at the time. Additionally, AT&T wanted to be able to offer premium content to all screens used by its more than 100 million mobile telephony subscribers.

Future rival, Netflix, reported 37.7 million paid domestic subscribers at the end of 2014.

Just two years after the $48.5 billion acquisition of DirecTV, AT&T upped the ante and made an offer of $85 billion for TimeWarner. CEO Jeff Bewkes, fresh from fending off 20th Century Fox’s failed purchase of AT&T in 2014, was more open to this vertically-integrated suitor. Rationale at the time was varied, from providing consumers with competitive alternatives to capitalizing on the belief that “the future of video is mobile and the future of mobile is video.” The announcement was made on Oct 22, 2016, at the height of the presidential race between Hillary Clinton and Donald Trump.

At the end of 2016, Netflix reported 47.9 million domestic subscribers.

“Wildly Anti-Trump”
Trump at the time claimed the merger “put too much concentration of power in the hands of too few.” To be fair, both parties were on record as being against the merger, but it was the Trump campaign that argued the prized TimeWarner asset, CNN, was “wildly anti-Trump.” This would eventually lead the Department of Justice to sue TimeWarner to oppose the merger on the grounds of anti-competitiveness. It became the first time in decades that the DOJ would intervene in a merger, but one of many “first times” during the Trump presidency. In June 2018, the deal was ruled legal by U.S. District Court Judge Richard Leon.

One wonders whether the AT&T lobbyists on K-Street were praised or scolded for this result. AT&T spent over $18 million on lobbying in 2018, averaging over $16 million for the prior three-years, including payments to the now-disgraced former Trump lawyer, Michael Cohen. AT&T contributed $2.1 million to the Trump inauguration, an amount similar to John Stankey’s bonus for closing the merger. This money was paid to avoid problems and seems not to have been spent wisely. All this distraction left TimeWarner further behind its rivals.

At the end of 2018, Netflix reported 58.5 million domestic subscribers.

“Modern Media Company”
From the time of the merger finalization in January 2019 to the spring of 2021, AT&T was at work creating a “modern media company.” However, by the time Jason Kilar made the streamer-friendly announcement of day-in-date releases both in theaters and on HBO Max, Netflix was reporting 73.9 million paid domestic (UCAN) subscribers. HBO Max was reporting only 41.5 million legacy subscribers with new HBO Max subscribers at 12.6 million, far behind Netflix, to be sure.

The creation of this “modern media company” involved:

  • A very expensive rebrand (Warner Bros. to WarnerMedia, HBO to HBO Max),
  • A rotating door of executives (Richard Plepler and Bob Greenblatt to Jason Kilar),
  • A fire sale of DirecTV,
  • A rocky launch of a streaming service (source), and
  • A clumsy handling of Warner Bros. talent (source), which
  • Culminated in AT&T throwing in the towel.

But why?

You Gotta Walk before You Can Run. Except Now, You Can Only Run.
The pandemic took a particular liking to the host that is the modern entertainment industry. Although the pace of infections has slowed considerably, changes within the entertainment industry have quickened. It was just a few short months ago that AT&T announced it was unmerging with DirecTV through a sale to TPG partners. For those keeping score, the DirecTV fiasco is estimated to be have cost AT&T $50 billion (yes, a “b”) in enterprise value.

But AT&T is not alone in its failure to grow a telecom business into a new media powerhouse. Verizon abandoned its Hollywood dreams by unmerging with AOL & Yahoo. (AOL: What an omen!) As industry veteran Hank Price noted today, “coming on the heels of its DirecTV spinoff, the [Discovery] announcement is also an acknowledgement by AT&T that it knows how to string wires, but not what to do with them.”

Keep in mind that, relative to rivals such as Netflix and Disney, HBO had been lagging in subscriber count. Looking at the global market, Netflix has 208 million paid subscribers; Disney/Disney+ has 103.6 million (not including Hulu with 41.6 million and ESPN+ with 13.8 million); and ecommerce giant Amazon has 175 million global Prime Video streamers. WarnerMedia (including HBO Max) and Discovery+ have 44.2M and 13M respectively, nowhere near the top three streaming players. AT&T’s purchase of WarnerMedia (through HBO Max) was no more than an attempt to gain video subscribers more quickly.

Move Fast and Break Things (But Don’t Break Everything)
The Silicon Valley mantra to “move fast and break things” had very mixed results for streaming veteran Jason Kilar’s first year at the helm of WarnerMedia. His December day-and-date announcement blindsided the creative community and didn’t help win him any friends in Hollywood. The New York Times reports that Kilar is now negotiating his exit package, which is rather ironic in that it follows a puff piece on Kilar in the The Wall Street Journal only days ago. “The HBO Max Boss’ Script for a New Hollywood” (source) article is a perfect segue into the buckets of schadenfreude now pouring through the 30-mile zone.

What’s Next for Harry Potter, Batman, Scoob!, and The 90-Day Fiance?
A boost of scale will come quickly for the unified WarnerMedia—Discovery entity, with a combined 57 million streaming subscribers if the deal closes today. Incoming CEO David Zaslav is predicting upwards of 400 million subscribers within a few years. Predictions like these are easy (and arguably necessary) at the beginning of any new venture. It is the execution that is difficult, as Bob Greenblatt and Jason Kilar know all too well. Also, immediately on the horizon are the repercussions of an estimated $3 billion in “cost-savings” (aka, layoffs) that have been announced. “Winter is coming” seems to be “Winter never leaves” in the new Hollywood. Such is the high cost of ever-larger mega-mergers.

Also to watch are the next moves of the new entity’s competitors. Rumors now swirl regarding a potential tie-up between NBCUniversal and Viacom, in order to compete in the ever-increasing stakes of the streaming wars. This war continues even now, with reports that Amazon has bid $9 billion to acquire MGM.

Final Thoughts
Scale matters, and the legacy media companies that once dominated the video industry now find themselves struggling to keep up with the tech-media behemoths. Their efforts may ultimately prove futile, as the brutal reality is that companies of Amazon’s size (with a market cap of $1.7 billion) can easily swallow up the largest of legacy TV & film companies. To invoke Job, new media’s chaos-monsters see a $9 billion acquisition of MGM as no more than a small drop in a very large sea.

Stick with TDG to Stay in front of the Curve.


 
Douglas Montgomery is a 15+ year veteran of the Entertainment Business. His time with Warner Bros. was spent analyzing, and living the incredible changes from the VHS era, to DVD and finally Streaming.

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