Why AT&T Need Time Warner (and vice versa)

Content Is King but DO NOT Discount Distribution

Well unless you've been living under a rock, you will have seen the news over the weekend about AT&T's acquisition of Time Warner for $85bn. This deal is all about the convergence of content and new distribution models that leverage video streaming, mobile devices and on-demand technology. Whilst many think of Warners as one of the major theatrical distributors focusing strongly on franchises such as Harry Potter, LEGO and DC Comics, this feels like a play for on demand with AT&T having acquired DirectTV in 2015 for $48.5bn, and Warners ownership of HBO, Turner Broadcasting, CNN and 10% of Hulu.

Undoubtedly, this deal is a win win, allowing both businesses to grow and develop both their content and distribution arms. Warners have been lagging for some time behind Disney and Universal Pictures owned Comcast. This is the picture pre-acquisition:

As a combined group, this will place AT&T at the top of the tree with a whopping market cap of $300bn and opens a gap between the big 3 and the second tier which includes 21st Century Fox, Viacom and Sony. The goal for these businesses surely has to be to create a multitude of different revenue streams from the more lucrative cable services, park & resorts, consumer products and media networks to the less profitable content side which drives much of the ancillary revenue and profit growth. What Warners have lacked in distribution capabilities, AT&T have lacked in content. That's why this marriage makes sense.

I expect we will see more movement in the market over the next 3-5 years. Consolidation for some of the smaller players make perfect sense and we will see new buyers in the market, especially in China. It's an incredibly exciting time if you work in either content or distribution as the rules are changing and whilst some historically vital revenue drivers are tailing off (the more traditional home entertainment model), new opportunities are delivering significant growth potential.

Here is a handy guide that I keep updated regularly and an insight into some of the major acquisitions we have seen over the past 17 years or so. We are looking at 18 deals (so averaging roughly one per year) at a total deal value of just under $500bn and an average of $27bn per deal.

It appears to be Disney, Time Warner, Facebook, Microsoft and more recently some of the telecom operators being the most active. What's interesting is that Disney's approach to acquisition is VERY content led and designed to amplify other parts of the business such as theme parks and consumer products. Telecom businesses are more about acquiring content to funnel through their distribution pipeline and potentially using data as a key metric to provide their customers with targeted content and of course advertising.

So what next? All eyes on that second tier...