Rationale behind the Time Warner deal
AT&T believes that the resulting combined content and distribution ownership will allow for faster innovation. Time Warner’s media creation team should hear and react more quickly to the shifting consumer needs detected by AT&T’s distribution.
Also, the combined entity could bring better options to consumers upset by high cable bills. As a result, innovation and bundling services together could bring down prices for consumers, helping to lower AT&T’s churn rate and boosting its wireless margins.
During the Deutsche Bank Media, Internet and Telecom Conference on March 8, 2017, John Stephens, AT&T’s chief financial officer, shared updates on the AT&T–Time Warner deal. Stephens said that the fact that no licenses were being transferred eliminated the FCC’s (Federal Communications Commission) jurisdiction to review the deal on its own.
He also said, “You saw that their vote was overwhelmingly in support of the merger. It was well over 95% in favor, so that’s been great. We continue to work with the DOJ in the normal course and we’ll continue to move that forward.” AT&T’s management continues to expect to close the deal at the end of 2017.
The real motivation for AT&T’s acquiring Time Warner seems to be that it’s been frustrated with the lengthy negotiations involved in acquiring content from various content providers. The Time Warner acquisition should help it to solve this problem to a large extent, as acquiring Time Warner’s content will then be a seamless and less time-consuming process.
AT&T’s rising content costs
One of the major costs for distributors is the cost related to content acquisition. Media distributors, including telecommunications company AT&T, cable company Comcast (CMCSA), and satellite providers such as DISH Network (DISH) all have to manage these rising programming costs.
As the chart above shows, AT&T’s Entertainment Group segment’s operating expenses rose ~2.6% YoY (year-over-year) to reach $11.8 billion in 4Q16, compared to $11.5 billion in 4Q15. The main reason for this rise was the acquisition of DIRECTV and increased content costs.