Vertical Reality

US Court Approves AT&T and Time Warner Deal

On Tuesday, a US federal judge approved the work-in-progress merger between AT&T and Time Warner. At the end of 2017, the Justice Department had filed a lawsuit to block the $85.4 billion acquisition, claiming the deal would stifle competition and hurt consumers. The ruling was closely watched by players in the telecommunication, media and wider technology industry, given its potential impact on the future of other mega deals and possible changes to business models.

The deal has been in the works since October 2016, when AT&T announced its intention to buy Time Warner (see Instant Insight: AT&T to Acquire Time Warner). We never doubted the wheels of justice would turn slowly, thanks to the economic and political implications of combing two massive companies. Back in late 2016, we cautioned that it would take AT&T time to win regulatory approval, because of the expected level of government scrutiny (see Curb Your Enthusiasm). But after almost two years of platitudes and lobbying by all involved parties, here we are. Time Warner and its many content brands, including Cartoon Network, CNN, HBO, New Line Cinema, Turner Broadcasting, Warner Bros. Animation and Warner Bros. Interactive Entertainment, will fall under the AT&T umbrella.

AT&T will soon have access to premium TV programming, enabling it to create bundles of wireless, broadband and broadcast services mixed with highly-attractive video content suitable for all screens, from smartphones to TVs and in-car display units. For example, it can combine fixed-line and wireless Internet offerings with HBO and CNN, delivering a package that rival carriers couldn’t directly match. If connectivity is really commoditized, then special content allows for a unique angle.

We have long argued that vertical integration is important to compete with online giants, and shared a vision of bundled services in which connectivity and content are smoothly blended together. One justification for companies to come closer together is to ensure survival, particularly in light of the potential encroachment by players like Amazon and Netflix, which carry third-party content and also produce their own original shows. Quality content has become a powerful differentiator.

This decision is particularly interesting given the proposed merger between T-Mobile and Sprint (see Instant Insight: T-Mobile and Sprint Agree Merger Deal). If the vertical integration between AT&T and Time Warner had been disallowed, it would indicate that a horizontal merger between two large carriers would be rejected. Indeed, we have raised concerns that this type of horizontal integration would reduce competition, cutting the number of nationwide wireless carriers by one, as well as choice for consumers. We believe the agreement between the two carriers could still be rejected, particularly as there’s already a precedent in other markets, like the UK, where Three’s acquisition of O2 was blocked by regulators. Although there are no guarantees that the deal between T-Mobile and Sprint will be cleared, AT&T’s growing power has at least given T-Mobile a point of leverage in any debate.

The amalgamation trend is also reaching a peak with Comcast’s efforts to acquire content assets from 21st Century Fox. Comcast, the largest US broadcaster of linear TV, envisions bundling fixed-line and wireless connectivity together with popular shows and movies in an effort to tackle cord-cutting and lower churn. Yesterday, the company formally made an improved all-cash offer of $65 billion for Fox, sparking a bidding war with Disney.

The shift in content viewing habits is an evolution, but all players are right to be concerned. Linear content broadcasting is fading as younger generations gravitate toward on-demand viewing. A content library provides operators with more components to piece together new suites of services, allowing them to target modern behaviour.

We expect the coming months to see a wave of merger and acquisition activity, with media and telecom operators joining forces. In this new world, achieving scale will be crucial to compete with assertive Web giants and keep up with changing consumer preferences. Telecom companies will find it challenging to compete head-on with connectivity alone, highlighting the importance of differentiating products beyond price. We firmly believe that vertical integration will be key to future success.

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