So Why Would AT&T Acquire Time Warner?

As has been widely reported in the media, AT&T and Time Warner announced that they have entered into a definitive agreement under which AT&T will acquire Time Warner. But what are the reasons for the acquisition? They could include, among other things:

• Ability to combine AT&T’s networks with Time Warner’s content library (which includes e.g. HBO, Warner Bros. and CNN) and its ability to create new content. This will bring AT&T customer insights across TV, mobile and broadband and will allow AT&T to offer more relevant and valuable ads, innovate with ad-supported content models, achieve better informed content creation, and make products smarter and more personalized. AT&T has been previously lacking content to advertise on. Going forward, AT&T might gain new growth from content and advertising.

• The company might also be planning to bundle content with its wireless service so that the customer only gets one monthly bill

• The acquisition provides financial benefits. It is for instance expected to diversify AT&T’s revenue mix and lower capital intensity. The combined company will be less dependent on wireless service and TV distribution, both of which are difficult businesses. And the rise of OTT players like Netflix has shown that content can be more powerful than distribution.

• The acquisition will create a stronger competitive alternative to cable and other video providers. Owning content such as the Game of Thrones would give AT&T an advantage, attracting users to AT&T’s DirecTV Now streaming service, and bringing income from licenses. With attractive content, AT&T would be in a better position to compete with the likes of Netflix and Amazon Prime. In fact, AT&T has been losing video subscribers from its DirecTV satellite business and U-Verse pay-TV.

• AT&T might also be reacting to the trend where content companies like Google, Facebook and Amazon are showing interest to expand into the telecom space (examples include Google’s Project Fi, undersea cables financed by the companies, Facebook’s Telecom Infrastructure Project, Google Fiber, drones, high-altitude balloons, etc.).

It will be interesting to see how much AT&T will be investing in creating original content going forward. As an example, Netflix might be spending $6 billion on original content in 2017.