AT&T and Discovery tie up

Bloomberg has reported that a deal could be signed as soon as Monday to combine AT&T’s media assets with Discovery in a new entity. Some thoughts on the proposed deal.

Strategically, this makes a lot of sense for both companies.

For AT&T, there are several advantages:

1. it allows it to concentrate on its core 5G and fibre businesses, without the distraction of running its media assets. Given the scale of its investment in both, handling the global rollout of a streaming service and managing secular decline in assets such as CNN may have proven to be too much of a burden;
2. The simple rule from the past 20 years is that Telco and Media assets generally do not mix – the mindset between the two sides is too different and it always ends up with the Telco companies regretting their purchase (the one caveat to this would be Comcast and its purchase of NBC Universal). AT&T will thus be exiting this trap in an effective and positive way;
3. A particular issue for AT&T’s HBO Max streaming service was that its international rollout was delayed (e.g. HBO Max would not have rolled out in the UK until 2025), which left the risk it would be too late to the game. The deal will now mean that HBO Max would be able to piggyback off Discovery+’s rollout, meaning it will not face the same issues;
4. Finally, it provides an investment that can be sold down and / or listed at some point in the future, if AT&T needed further investment for its core telecoms / broadband services including 5G.  

For Discovery, it has done a better than expected job of rolling out its streaming services, with 15m D2C subscribers to the end of April. However, given the increasing competition globally in the streaming market, Discovery risked being outgunned by (relatively) more powerful players as time went on and its offering has a finite appeal in terms of its reach. It therefore makes sense to combine with a bigger, and more powerful, entity.

The new company is reportedly being led by the Discovery CEO, David Zaslav, even though Discovery is the smaller partner. If correct, that would suggest that (a) AT&T implicitly believes that Discovery has done a good job at rolling out its streaming business and (b) that the primary driver for the merger of the assets is the streaming business. If that is the case, it raises the question of whether the new entity will keep some of the Warner media assets, such as CNN and TBS. My feel is that CNN will probably go on the block (declining audience, not in a great segment but could attract bids from vanity buyers, helping the disposal price) but the other assets, which provide content, will be kept. The movie studios will almost certainly remain with the business.

From a streaming standpoint, this step is also likely to mark the first step in the global consolidation of streaming services. The simple fact is that there are currently too many players trying to dive into the market. That is understandable but the streaming market is one where scale (particularly in content) is important – these players are now effectively global Pay-TV providers - and weaker players risk throwing good money after bad. Therefore expect more consolidation amongst the streamers with other media companies now rethinking their strategies. What happens, for example, with ViacomCBS’ Pluto streaming service? One possible option – particularly in Europe - is that the smaller US players may team up with European broadcast partners.

A particularly interesting question regards Comcast’s, which has its own streaming assets (Peacock etc) but also an incumbent Pay-TV service in Europe in Sky, which is the #1 player in the UK and Ireland, Italy and Germany. How does Sky fit into Comcast’s global streaming strategy? This was a question before the AT&T / Discovery deal but is likely to be brought into greater focus following the announcement. One obvious route would be to have Sky spearhead Comcast’s European streaming push with its branded streaming services operating ex-Europe but that risks confusion, potential conflict over rights as well as undercutting the viability of its entire streaming strategy. On the other hand, does Comcast sell Sky? That is another option theoretically but it seems unlikely for several reasons, not least Comcast would not receive anywhere near its purchase price.