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AT&T/Time Warner deal flexes content’s muscle

4 November 2016 in Trading Ideas

Key Takeaways:

  • AT&T sees an advantage to owning more of the programming it distributes
  • Content brands could be important as consumers use a variety of digital platforms
  • Motifs mentioned: Content is King
  • Stocks mentioned: AT&T’s (NYSE:T), Time Warner (NYSE:TWX), Comcast (NASDAQ:CMCSA), Viacom (NASDAQ:VIAB), Apple (NASDAQ;AAPL), Verizon (NYSE:VZ), Yahoo (NASDAQ:YHOO), Charter Communications (NASDAQ:CHTR), Netflix (NASDAQ:NFLX)

Being a distributor of entertainment programs isn’t a bad business. But distributing and owning the shows people want to watch is even better.

That appears to be a big part of the motivation behind AT&T’s (NYSE:T) recently announced deal to purchase Time Warner (NYSE:TWX) in a transaction valued at more than $85 billion.

Time Warner, of course, is one of the country’s principal media conglomerates, owning HBO, CNN and Warner Bros. studios. AT&T, on the other hand, is a communication titan that runs a major telecommunications network but up to this point owns none of the programming that it pipes through its telephone and cable networks.

News of the deal quickly boosted shares of Time Warner, which have remained about 10 percent higher despite concerns that the deal will face heavy regulatory scrutiny. Time Warner’s stock also comprises about a 20 percent weight in the Content is King motif, which has gained 2.9 percent in the past month. In that same time frame, the S&P 500 has fallen 1.9 percent.

Over the past 12 months, the motif has decreased 3.4 percent; the S&P 500 is up 2.3 percent.

For investors of other content providers, the deal immediately prompted the question as to whether similar deals involving telecom and media firms would eventually come to fruition, possibly including such kings of the industry as Comcast (NASDAQ:CMCSA), Viacom (NASDAQ:VIAB) or Apple (NASDAQ;AAPL), as major players try to create entertainment empires to stay relevant as consumers increasingly choose cheaper, digital alternatives.1

Indeed, as Bloomberg recently pointed out, both sides of this big merger had already been separately working to make it easier for consumers to watch more movies and TV shows online.2  Just last week, AT&T set a price of $35 a month for a web-streaming TV service, DirecTV Now, that will include more than 100 channels when it debuts in November. And Time Warner’s HBO rolled out an online version of its service last year for people who don’t pay for cable.

But this isn’t the first foray for a cable provider scooping up a major media company. In 2009, Comcast bought NBC Universal, while Verizon (NYSE:VZ) bought AOL last year and signed a deal earlier this year to purchase Yahoo (NASDAQ:YHOO).

Outside of those vertical acquisitions, pay-TV distributors have been merging to increase their negotiating leverage over the price increases media companies were charging for content. Earlier this year, Charter Communications (NASDAQ:CHTR) bought Time Warner Cable for $55 billion. Last year, AT&T bought DirecTV for $48 billion, creating the biggest pay-TV service in the country.

This moving and shaking has grown out of the changes in how we now consume content – which is pretty much everywhere. Increasingly, the lines between smartphones, TVs and computers is murky with every device simply existing as a different platform for our choices.

AT&T’s bet is that physical cables will matter less amid ubiquity of wireless devices, and that individual brands will be more important for media distributors in this era of cord-cutting and cable subscription unbundling.

As an article on Vanity Fair’s website noted, this brand-building is why you see Netflix (NASDAQ:NFLX) pouring money into original programming to become essential to consumers who won’t be able to get their shows from any other source. AT&T hopes that Time Warner can build much of the same value proposition.3

1Leslie Picker, Andrew Ross Sorkin and Emily Steel, “AT&T Aims for Empire in Merger Talks With Time Warner,” nytimes.com, Oct. 21, 2016.

2Gerry Smith, “AT&T Needs the Time Warner Content Factory to Survive,” Bloomberg.com, Oct. 27, 2016.

3Emily Jane Fox, “How the AT&T-Time Warner Merger Explains the Universe,” vanityfair.com, Oct. 24, 2016.