The media sector has had its most tumultuous week in recent memory.
AT&T’s attempt to create a television, film and mobile communications behemoth with the $85.4bn purchase of media group Time Warner hangs in the balance: US regulators have asked it to sell off either some of Time Warner’s cable networks, including news channel CNN, or DirecTV, AT&T’s satellite broadcaster, if it wants to win approval for the deal.
That revelation came just days after it emerged that Walt Disney had held talks with Rupert Murdoch’s 21st Century Fox about buying the latter’s movie studio, cable channels and international business — including its 39 per cent stake in Sky, the pan-European broadcaster.
Barclays analysts summed up the confusion that has shaken investors. “We are at a loss in trying to rationalise some of the news flow,” they wrote in a research note.
Technological upheaval, sweeping changes in audience behaviour and the global rise of on-demand streaming service Netflix, account for some of the turbulence. A US president who frequently broadcasts his loathing of news organisations including CNN accounts for the rest.
The combination adds up to what could become a radical reshaping of the media landscape as content owners, distributors and disruptive technology companies jockey for control. Analysts and investors are talking about all kinds of combinations, some as radical as Apple bidding for Disney, and others as familiar as the Murdoch family taking its second run in three years at buying Time Warner.
Media advisers say much hangs on the outcome of the increasingly public battle between AT&T and the US Department of Justice, a key Washington competition watchdog.
“Everyone is talking to everyone at the moment,” says one of Wall Street’s most prolific mergers and acquisitions bankers. “If the DoJ goes hard on AT&T, we are likely to see some serious ripple effects . . . Time Warner and many of its assets are of interest to many players.”
Randall Stephenson, AT&T’s chief executive, says he is prepared to defend the takeover in court if a settlement cannot be reached with regulators. “Since the day we announced this, we’ve been preparing to litigate this deal,” he told a conference in New York on Thursday. He added that he had no intention of selling the news channel.
“If it goes to the court I believe AT&T will win — but it could take a year,” says Michael Kassan, chief executive of MediaLink, the media strategy group that has advised both AT&T and Time Warner. “Time matters. Who knows what that does to the deal?”
AT&T has said that if they take the DoJ to court, they would push for an expedited hearing.
The reported willingness of the Murdochs to entertain the sale of Sky and other assets to Disney has also reset investors’ expectations and assumptions. James Murdoch, Fox’s chief executive and Rupert’s son, has pursued full control of Sky for close to a decade. The prospect of him instead selling it to another company bewildered longtime observers.
But the calculations could change if the AT&T-Time Warner deal falls apart. Rupert Murdoch bid $80bn for Time Warner three years ago and was rejected. If it ends up back on the market, he would be expected to have another crack. “If Trump turns down AT&T, Rupert could come back,” says one person who knows the mogul.
Fox executives declined to discuss the talks with Disney on the company’s earnings call this week. But James Murdoch and his brother Lachlan, Fox’s co-executive chairman, emphasised their commitment to expanding the business.
“Historically, we’ve always been asset builders,” Lachlan said. “Whether it’s Sky or Star or Fox News or the Fox network, we operate these businesses to build them and to grow and we will continue to do so.”
Barclays analysts raised the prospect that Disney could also join the race to buy Time Warner if it becomes available. Disney has been bolstering its content and intellectual property through acquisitions such as Lucasfilm, Marvel Studios and Pixar and might well be tempted by Time Warner’s assets, which include the Warner Brothers movie studio, Turner cable channels and HBO, the premium cable network.
The Barclays analysts, however, added a regulatory caveat.
If the DoJ rejects a so-called vertical deal such AT&T and Time Warner, which would have combined two companies that operate at separate stages of the production and distribution chain with no overlapping assets, would it clear one that combined companies in the same business?
“If a vertical deal is blocked by the DoJ, we don’t see how management teams get comfortable pitching a horizontal deal to the DoJ,” they wrote.
Doug Creutz, an analyst at Cowen Research, is similarly sceptical. “Theoretically, Time Warner would be ‘back in play’ but we think new bidders could be wary given that if the DoJ objects to an AT&T buy, they might equally object to other prospective buyers of significant scale,” he says.
Disney, Fox and AT&T are not the only potential acquirers. The Fox-Disney talks, which in effect hoisted a “for sale” sign above Mr Murdoch’s entertainment empire, are likely to flush out other potential buyers. These could include Verizon, the US telecoms group that has made no secret of its intention to acquire content assets.
Technology companies are also playing a critical role. Netflix, which now has close to 110m streaming subscribers worldwide, and Amazon, which bundles video content with its Prime subscription, have made significant headway into media territory. Both companies spend billions of dollars on original movies and TV programming.
Viewers are also flocking to digital services. Online platforms have overtaken television set-top boxes as the place people say they watch their favourite programmes, according to a survey from Hub Entertainment Research.
Media advisers working with traditional companies say their clients feel the urge to respond boldly to the rise of “over the top” viewing, which bypasses traditional broadcast and pay-TV channels.
“In a virtually zero-growth environment it makes a lot of sense for big media to look for ways to boost revenue via M&A,” says a senior corporate lawyer who is active in the sector. “The disruption caused by over the top players is huge . . . Unless companies act decisively now, they risk falling behind.”
Apple is also joining the fray. This week it was confirmed that the iPhone maker had bought a series about morning TV starring Hollywood actors Reese Witherspoon and Jennifer Aniston. The company has grand ambitions in original content, having promised to spend more than $1bn a year producing other shows. An acquisition could further its goals.
“My fantasy would be an Apple-Disney tie-up,” says Mr Kassan, the media strategist.
He adds that Bob Iger, Disney’s chief executive, has “embraced technology ahead of most people . . . As such, Apple-Disney could be a perfect fit. That being said, my fantasy is that Bob runs for president.”
Content owners seek control of distribution
As broadband distributors including AT&T try to own some of the content that flows through their pipes, content owners are not sitting on the sidelines, writes Shannon Bond.
Companies including Disney and CBS are investing in their own distribution platforms as they seek more direct relationships with viewers.
CBS has launched digital subscriptions for its namesake broadcast channel and for Showtime, its rival to HBO. Les Moonves, chief executive, said last week that the services offered superior economics when it comes to subscriber revenue: CBS receives three times the revenue per subscriber to its All Access digital service than it does from traditional distributors, such as Comcast, which pays network owners a fraction of their subscription fees.
Disney is gearing up to launch a pair of streaming services: one for ESPN, the sports network; and another for Disney, Marvel and Star Wars movies and TV shows, powered by its recent move to take majority ownership of BamTech, a video technology group.
Bob Iger, Disney chief executive, described BamTech this week as “another game-changing acquisition” that is as significant as the company’s past purchases of Lucasfilm, Marvel and Pixar.
Perhaps not coincidentally, he was speaking as Disney reported a rare drop in profit and revenue in its fiscal 2017, which ended in September, driven by declines in its TV and film businesses.
“We believe creating a direct-to-consumer relationship is vital to the future of our media business, and it’s our highest priority this year,” Mr Iger told analysts on Disney’s quarterly earnings call.
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