New York/Portland: AT&T and Time Warner. CBS and Viacom. Lions Gate and Starz.
Since June, the entertainment landscape has been rocked by a series of deals, and there’s talk of more. AT&T Inc.’s proposed $85.4 billion takeover of Time Warner Inc., the biggest buyout this year, could trigger a new round of consolidation as other phone companies or pay-TV providers look to grow. That has followers of the sector asking which media mogul will be next to place his bet on the direction of the industry—Bob Iger? Rupert Murdoch? John Malone?
“If I were a banker in M&A I’d be rubbing my hands together in glee," said Bernard Gershon, a media consultant in New York and former senior vice president at Walt Disney Co.
The Internet is driving much of the change by upending the lucrative business of selling pay TV to millions of homes. The number of consumers getting cable or satellite service has peaked and begun to decline, jeopardizing $170 billion a year in ad sales and subscriber fees. The old model is being eroded by cheaper online services, led by Netflix Inc., that many budget-minded young viewers watch on smartphones.
The companies that deliver phone, Internet and TV services are preparing for this mobile future in different ways—yet almost all of them have media and entertainment companies in their sights. Three or four conglomerates could come to dominate how films and TV shows are made and delivered over mobile and landline networks, said Kannan Venkateshwar, an analyst at Barclays.
For AT&T, the largest US phone and pay-TV company, that meant paying a big premium for Time Warner, owner of HBO, Warner Bros. and cable networks including CNN and TBS. A year after purchasing DirecTV for $48 billion, Dallas-based AT&T concluded it also needed to own the company that makes Batman movies and hit TV shows like Game of Thrones.
The reason: While known for its ubiquitous satellite dishes, DirecTV is evolving into a mobile and web-based TV service—owning movies, TV shows and cable networks ensures AT&T has programming for the 75 million customers who already pay for wireless and internet access.
By that logic, a whole host of media companies should be looking for distribution partners in an industrywide game of musical chairs. But not everyone is convinced by AT&T’s rationale.
“It’s easy to say that this is the beginning of an M&A wave, but when you poke at it, the strategy here is pretty thin," Craig Moffett, an analyst at MoffettNathanson, said of the AT&T-Time Warner deal. “Ultimately, it’s more about diversification than about creating competitive advantage. It’s hard to see why this would trigger any follow-on deals."
And indeed, some companies are taking different approaches to adjust to the industry’s changing landscape. AT&T’s nearest competitor, No. 2 phone provider Verizon Communications Inc., has opted against acquiring traditional media, choosing to compete with Facebook Inc. and Google in online advertising after buying AOL and reaching a deal to acquire most of Yahoo’s web business.
But others are making moves that show they share at least some of AT&T’s worldview. Comcast Corp., the nation’s biggest cable company, already owns a large media company following its 2011 purchase of NBCUniversal. With its pay-TV subscribers in decline, Comcast is looking at an entirely new business: wireless service. By next year, it will introduce a Wi-Fi-based mobile service by leasing Verizon’s network. Some analysts say Comcast may even acquire a wireless company. In June the company bought DreamWorks Animation, an independent filmmaker, for $3.8 billion.
“I think the most obvious one is Comcast acquiring one of the operators, either Sprint or T-Mobile," said Chetan Sharma, an independent wireless analyst. “Given that the TV business is under stress, they need to move beyond that."
Charter Communications Inc., the second-biggest cable provider, just completed its purchase of Time Warner Cable Inc. and also has plans to sell wireless service. Like AT&T, both Comcast and Charter want to become one-stop shops for TV, internet and phone service.
Charter’s biggest stockholder is billionaire John Malone. The cable industry mogul could leverage his ownership to push for deals with other companies he partly owns, like Discovery Communications Inc., owner of TLC and Animal Planet. In June, Malone orchestrated the $4.4 billion purchase of Starz by Lions Gate Entertainment Corp., the studio behind Mad Men and The Hunger Games.
“In the content world, scale is very important," Malone told CNBC last year. “Clearly there is still room in the media sector to create some bigger and more global entities."
CBS Corp. and Viacom Inc., both controlled by billionaire Sumner Redstone and his daughter Shari, are considering recombining after more than a decade as separate companies. Popular Viacom networks like MTV and Nickelodeon have lost young viewers to newer competitors including Netflix and YouTube. Viacom may also sell its 50 percent stake in the Epix premium movie channel.
Some pay-TV programmers may view Time Warner’s decision to sell to AT&T as a sign that their days as standalone companies are numbered. Analysts have long speculated that smaller media companies like AMC Networks Inc., Discovery and Scripps Networks Interactive Inc. will look for buyers.
Their customers, such as AT&T and Charter, have just gotten much bigger, so they may need to find partners to maintain their negotiating leverage.
Strong family control means some companies, like Rupert Murdoch’s 21st Century Fox Inc., are more likely to be buyers than sellers. Fox tried to buy Time Warner two years ago for $75 billion and recently expanded its ownership of the National Geographic channels and magazine.
But in an online world where every company wants a closer relationship with its viewers, media giants are starting to realize that just making hit shows isn’t enough anymore. Disney, the last remaining big media company without family owners, has a market value of $150 billion, far too big for most companies to swallow. That’s left the company to contemplate deals to find new ways to distribute its programming, such as its recently discarded idea of bidding for Twitter Inc.
“The biggest thing that we’re trying to do now is figure out what technology’s role is in distributing the great content that we have," Disney CEO Bob Iger said at a conference this month. “In today’s world, it’s almost not enough to have all that stuff unless you have access to your consumer." Bloomberg