What the AT&T-Time Warner Acquisition Means for the U.S. Content industry
Richard Yao
Editor's note: An unabridged version of this article was first published on the IPG Media Lab Medium blog on May 30th, 2018. If you wish to get the latest from us, please consider follow us on Medium and Twitter @ipglab.
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Editor's note: An unabridged version of this article was first published on the IPG Media Lab Medium blog on May 30th, 2018. If you wish to get the latest from us, please consider follow us on Medium and Twitter @ipglab.

Last Tuesday, the long-drawn-out AT&T acquisition of Time Warner was approved by a federal judge, sending ripples through the U.S. media landscape. Much has been written about this acquisition and its immediate impact on the media industry, particularly in terms of how this deal serves as a bellwether on the ongoing acquisition drama between Disney and Comcast over 21st Century Fox’s assets.

Upon further examination, however, this acquisition reveals some larger emerging trends in the media industry, where three groups of companies vying for differentiated content —consolidated media conglomerates like Disney, telecom behemoths like AT&T, and tech giants like Facebook and Apple — will continue to push media consumption towards owned digital channels, restructuring the U.S. media landscape in a post-Peak TV world where controlling distribution is becoming as important as owning content.

Three groups of companies all vying for differentiated content will continue to push media consumption towards digital channels and restructure the U.S. media landscape.

Let’s take a look at how this powerful trio of companies seek to build off on evolving user behavior and reshape the U.S. media industry.

Media Companies Consolidate Into Mega-Conglomerates

Most immediately, this approval could influence Disney’s and Comcast’s competing bids of Fox assets by tipping the scale slightly towards Comcast, given that it is too a case of vertical acquisition of a telecom firm trying to acquire a content owner. However, the Fox board is said to favor Disney over Comcast due to better synergy and market fit. Regardless of who wins the bid, the subsequent acquisition would no doubt create a media behemoth that dominates the traditional media landscape in the U.S. and further propel the industry towards a period of consolidation. Consider that in the short span of three years, Fox went from wanting to buy Time Warner to now selling to distributors, it’s likely that many media companies such as Viacom and AMC Networks will face pressure to sell as traditional media growth slows with the onset of streaming.

Arguably, consolidation is exactly what the traditional media companies need to stand a fighting chance in today’s shifting content landscape. As online content aggregators like Netflix continue to command audience attention with a combination of buzzy original content and back catalog content, the media companies are starting to realize the importance of not only content aggregation but also total control over the content experience by owning the distribution channel. Lest we forget, the number one reason that Disney wanted the Fox assets in the first place is to buff up its content library in preparation of launching its own direct-to-consumer streaming service to better compete with the likes of Netflix¹.

Consolidation is exactly what the traditional media companies need to stand a fighting chance.

Some will likely argue that Netflix has been pivoting away from licensed content to focus on original content to fuel its subscriber growth, but the reality remains that having a large set of catalog content is still a very big part of the value proposition for most standalone content subscription services. A 2017 research reveals that 80% of its U.S. viewing time is generated by the catalog content that Netflix licensed from the content owners, which only serves to illustrate the enormous value that these studios shortsightedly signed away to Netflix before it grows into the contender it is today. In order to compete with a content aggregator like Netflix, the media companies have little choice but to band together and become aggregators themselves.

In fact, one underrated advantage that legacy media companies can leverage to level the playing field is the back catalog they own. In a streaming-led environment, viewers theoretically have equal access to all content regardless when they are released, which means new shows not only have to compete with its peers for attention, but also the classics in the back catalog. The current trend of rebooting beloved old series is, among many things, a testimony to their enduring appeal. As the owners of all the back catalogs, legacy media companies enjoy a big advantage in this regard against the other two rising groups, and further consolidations will help form a formidable library of content to attract a wide range of audiences. Hulu, in particular, is well positioned to benefit from the increasing appeal of back catalog shows, thanks to its unique ownership, to bring them to new generations of global audiences.

As the owners of all the back catalogs, legacy media companies enjoy a big advantage.

Therefore, it is not hard to see how this inevitable trend of media consolidation will likely lead to an M&A frenzy. In order to stay competitive against the content aggregators, legacy media companies will likely start buying smaller media companies as well as publishers that have started producing video content of their own in recent years to capitalize on the digital video boom². Usually, those smaller video content creators, such as Vice, Buzzfeed, Refinery29, already have some investment relationships in place with the bigger media holding companies³ that could easily translate into acquisitions. While it is clear by now digital video alone will not save the publishers, perhaps the quest for more content as more and more media companies prepare to ramp up their OTT efforts will make them desirable acquisition targets.

Telecom Giants Morphing Into Media Companies

Looking further, a bigger implication of this federal approval is that it clears the way for the merging of content creators/owners and content distributors. The US telecom players have realized how commoditized the broadband and wireless services that they offer have become in most mature markets and are starting to leverage content as an important differentiation point to attract and retain customers. In other words, the dumb pipes are getting increasingly smarter by aiming to own the content they deliver. That, coupled with the rollout of 5G networks on the horizon and net neutrality on its deathbed, will lead to a significantly advantageous position for the telecom companies to own the U.S. media landscape.

The dumb pipes are getting increasingly smarter by aiming to own the content they deliver.

So far, AT&T & Verizon have both shown ambition to expand their video offers. AT&T already owns DirecTV, which has amassed 25.2 million subscribers and keeps growing its streaming audience. On Wednesday, it unveiled a new internet TV service Watch TV, which some AT&T subscribers will get access to for free. As a result of the Time Warner acquisition, AT&T now also owns HBO, whose premium content already has a solid mass of streaming audiences through its two apps and will be a significant asset for AT&T to create subscription bundles to attract customers.

Verizon, on the other hand, launched go90 in 2015 to venture into the streaming video space to lackluster results so far. Last month, CEO Lowell McAdam said Verizon will focus on partnering with an existing OTT providers, such as Hulu, Dish’s Sling TV, and PlayStation Vue, which marks a pivot from its previous plan of building its own streaming service from scratch.

The two smaller major carriers T-Mobile and Sprint are now eyeing another attempt at a merger to combine their strength, and will likely coming out with their own video streaming initiate or partnership as well. Late last year, T-Mobile acquired Layer3, a regional TV distributor that offers an expensive skinny TV bundle, whose assets it plans to leverage to offer an over-the-top streaming service with significant discounts for T-Mobile customers. They also partnered with Netflix for a promotion where subscribers of its unlimited family plan could stream Netflix for free.

And that unique capability to bundle video content subscriptions with their existing phone and data plans, likely with some sort of discount, speaks to a unique opportunity for the telecom companies to vertically integrate into the media business. With more and more content consumption happening online and especially on mobile, cable TV carriers are losing their claims to the audience, which opens up the market for wireless carriers to jump in and expand their ad business in the process. AT&T, for example, is reportedly in talks to buy digital ad exchange AppNexus in order to make deeper inroads into the digital advertising space while augmenting its advertising technology, whereas Verizon has had its ad tech operations for a while now thanks to their acquisition of Oath via Yahoo. While consolidation on the sell side in general is not good for advertisers as it limits their options, it also creates opportunities to have unified platforms, standardized reporting and consistency of inventory, which are increasingly important factors in the addressable TV market.

The unique capability to bundle video content subscriptions with their existing data plan services presents a unique opportunity for the telecom companies to vertically integrate into the media business.

Once 5G networks roll out and become widely available, this trend will only grow more prominent. Promising faster and more reliable connectivity, 5G will likely replace home broadband services the same way that cellphones gradually replaced landlines for most U.S. households, especially taking into consideration all the wirelessly connected smart home devices that are transforming our homes. This roll-out will likely give another boost, albeit temporary, to the streaming services as more TV viewers are encouraged to cut the cord.

Unlike broadband services, however, 5G connectivity will likely come with a data cap, at least in the first couple of years, which means that zero-rating practices, where wireless carriers can simply wipe off the data usage of accessing certain website or streaming services from counting towards the data cap, will become a powerful tool for telecom companies to funnel customers to the content and services that they own at the expense of alternatives. And with the likely demise of net neutrality, carriers could theoretically offer preferred fast-lane access to the streaming services they own and throttle the speed of accessing rival services, further creating a moat in the wireless markets with content as a differentiation point. In five years, perhaps the best (and most cost-effective) way to watch HBO shows will be to switch to AT&T.

Zero-ratings will become a powerful tool for telecom companies to funnel customers to the content and services that they own at the expense of alternatives.

To be clear, it obviously doesn’t make economic sense for AT&T to restrict HBO content to be only accessible to their own subscribers and no one else, as the media business is inherently always looking for the maximal audience for their content. Rather, the point here is that AT&T can make the experience of watching HBO much cheaper and smoother on their network so that for fans of HBO content, the need for a better HBO experience becomes a strong incentive to choose AT&T over the other carriers.

The Tech Giants In The Wings

That last point of data-driven recommendations speaks to a particular strength of this last group to take over the U.S. media industry. Technology companies, specifically, the big platform owners, have a long history with the media business and all have some sort of video content initiatives in place. Facebook keeps on adding more content to Watch and is expanding into long-form vertical videos via an Instagram spin-off. Google is doubling down on YouTube TV while Amazon is seeing early success of using Amazon Channels to bundle together streaming services and become an aggregator of sorts. Even Snapchat is venturing deeper into original content development as it readies to launch scripted original content.

The big platform owners have a long history with the media business and all have some sort of video content initiatives in place.

As our media consumption becomes increasingly digitized, these digital platform owners stand to take a big bite out of the media industry, which makes perfect sense given that’s where consumer attention has been going for years. Similar to how the telecom companies aim to use content as a differentiation point for their largely commoditized services, the platform owners are looking to use content as a way to draw attention and keep users locked into their respective platforms for monetization purposes. And as previously mentioned, their expertise in data collection and using data to personalize services gives them an edge over the first two groups in conquering the media space⁴. On the other hand, the tech giants are not well-versed in the dynamics of the media industry, so for the most part, they are still fumbling to form a cohesive content strategy.

In the midst of all this frenzy, the media industry has been on the lookout for years for Apple to officially enter the video content market by launching their own video subscription service. By now, it is clear Apple’s strategy has evolved over the years — instead of launching its own live TV streaming services or launching a direct Netflix competitor, the Cupertino company has adjusted its content strategy to focus on a handful of quality original content first. It has signed with a slew of A-list stars and creative minds including Steven Spielberg, Reese Witherspoon, M. Night Shyamalan, and most recently, Oprah for content development. It currently has two unscripted original series, “Planet of the Apps” and “Carpool Karaoke,” on Apple Music, a subscription service with over 50 million subscribers.

Apple has adjusted its content strategy to focus on a handful of quality original content first.

While the details of Apple’s video content service, such as cost and branding, are still up for speculation, it is becoming clear that it is taking a holistic approach toward content development. For example, Apple has ordered several high-profile original series from Reese Witherspoon’s production company Hello Sunshine, in addition to co-producing an original podcast. The multi-year content development deal with Oprah also spells big opportunities for cross-category content production. Whether it’s integrating Oprah’s Book Club picks (or Witherspoon’s, for that matter) into Apple Books, or leveraging the O Magazine to drive interests in its upcoming premium magazine and news subscription service born out of the Texture acquisition, Apple is in a unique position to use Oprah’s brand as a content ambassador across multiple media categories and to drum up interests in its subscription services, which is quickly becoming a growth area for Apple.

The fast-growing esports segment represents another interesting growth area that tech giants can leverage to conquer the post-Peak TV media landscape. Despite the efforts from some traditional media companies such as Turner Broadcasting and ESPN to incorporate esports content into their programming, there is no denying that Amazon’s Twitch and Google’s YouTube Gaming remain the two leading platforms where more than 900 million of global esports audience regularly turn to to get their fix. As esports continue to grow, they offer Amazon and Google valuable assets to capture a coveted demographic that is drifting away from the traditional media outlets.

Overall, major trends in the U.S. media landscape are pointing to a near future of consolidations and vertical integration of content production and distribution. Anti-monopoly concerns will likely grow prominent among legislators, as the increasing data-driven nature of the media industry will likely invite further scrutiny. Therefore, it is not hard to imagine that after an intense period of M&A, the next administration in power would have sufficient reasons to break apart the new media conglomerate to decouple media ownership from distribution so as to protect consumer interests, and such is the cyclical nature of business. After all, as the famous Jim Barksdale quote goes, “there are only two ways to make money in business: You can unbundle, or you can bundle.”

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