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David Poland

By David Poland

When AT&T Met TIme-Warner

This one makes sense.

Not every piece of it lines up. There will be regulatory issues. But the AT&T/Time-Warner merger makes sense for both companies, as well as the public.

Until the United States government decides that the internet is a utility and must stand alone as such, we will see more of this consolidation of content and delivery systems.

Disney, Fox, Sony, and Viacom lack major co-partners that also own a delivery utility. This will change. It will probably change for Netflix at some point, too.

I have been saying for what feels like a very long time that the missing commodity in the Streaming Era is the massive studio libraries. They have been sitting there for a few years, waiting for their lasting value to be determined. And the answer is is that they are greatest long-tail bait possible.

There is a giant, insane maze of rights, both domestic and international, for all the studio libraries. But as each year passes, the tangles get a little less tangled and holding on to those streaming rights gets more and more attractive.

At the same time, a library like Disney’s, skyrockets in value for streaming… even if they are stuck in a Netflix output deal for the next 4 years. When Netflix agreed to a $350 million a year deal for Disney streaming, it was an insane amount of money. Today, you can be sure that Disney feels like it is getting royally screwed and that the value is a lot closer to a billion a year. And to Netflix, it would be worth even more than that, as they will be able to cut back on original programming by a billion or more with Disney as cover, likely building paid domestic subs by 10% or more next year when the number has now been pretty flat for over a year.

Not every studio’s library is worth a billion a year to a as-of-yet-not-built streaming business. But we are heading there… and higher.

There are already an absurd number of overpriced streaming opportunities out there. $15 a month for a narrow swath of content can’t be the future for the entire industry. Or $8 a month for TV that is otherwise free over the air. But serious competition is coming and the content companies are getting ready for that battle, slowly holding onto more rights more tightly until they launch their juggernauts.

The starting gate of all of this has Comcast holding the cable universe as a priority and AT&T focusing on satellite. Both are selling access to the web for streaming. Disney is sitting back, struggling on the TV network side, the next obvious target but without a web access company big enough to eat that company whole. And Fox, which owns the fourth and final major broadcast network, seems to want to be the aggressor, not the pursued.

I still believe that the future of post-theatrical film is subscription-driven and will allow access to nearly everything that exists. Delivery system will, in time, become irrelevant to everyone except for those making money by providing said systems. A function of utility.

A mega-company like AT&T/Time-Warner (AT&TW?) will do many things which will compete separately with other companies. I see the question less as about self-dealing than about prohibiting the big company from hiding massive amounts of content behind exclusive walls.

Of course, exclusivity is not purely a product of mergers. Most Time-Warner movies appear – at least in the first years of their lives – only on HBO/Cinemax. Disney and Sony have been in exclusive deals with STARZ/Encore for years. Paramount has been a part of EPIX. Showtime, after parent CBS broke from Paramount, has been a bit of a hodgepodge on the movie side. The studios were split up amongst the cable nets decades ago. Nothing new there… except ownership.

I do agree that this massive company will be unwieldy to manage. I wouldn’t be shocked if, in 5 years or so, the company were to split itself into 2 companies: AT&T Utilities and AT&T Entertainment. It would be a lot more complicated than this, but it would, essentially, give Time-Warner a MVPD of its own in DirecTV, much as NBC/Universal has Comcast.

Both DirecTV and Comcast are already working on the combination of “cable” and a significant streaming presence. But it’s still half-assed, especially on DirecTV. These consolidations are defensive, not aggressive. How will Comcast Cable or DirecTV’s satellite service survive in a world of streaming anything at anytime anywhere?

They can’t, as they are now. Even with control of the content companies, there are massive changes to come. MVPDs will become primarily the live and premiere window for content. Post-premiere will be accessible in multiple ways, with little control aside from possible windowing, in the hands of the content companies. Corporations love predictability over almost everything. They are not looking to create the newest volatile market.

The next great magic trick is not about consolidation or whose wire you are watching content on… it will be about how to maximize the long-tail world and how to generate big enough revenue streams in that long-tail world to sustain new content.

There will always be a hunger for whatever is next… but how much hunger for how many outlets delivering how many hours of television or theatrical-level “film” every month/year?

As I have written before, the danger of day-n-date is not that the market wouldn’t find balance between the films that work well with that distribution pattern after a period of extremes (not unlike what we are seeing in the streaming universe right now). The problem is that the process of finding balance for the distributors would likely be quite destructive for exhibitors (as we are seeing in the indie world right now), changing the foundations on which this is all built.

But this is far afield from the mergers of the moment.

The cost of leasing top-end new content was multiplying, so Netflix shifted to their original content strategy, which has actually slowed the growth in value of streamed content a bit.

Ever since Netflix created the streaming market – and make no mistake, they were the absolute first mover outside of free YouTube – the clock has been ticking on the value of selling content to Netflix (and those that have followed) being overcome by the value of content creators selling streaming content themselves.

The AT&T/Time-Warner merger is the first tipping point event. Time-Warner has been, really, more aggressive than anyone (pre-Comcast/NBC/U merger) about trying out the streaming waters. They’ve built Warner Archives, first as a DVD service and then as a streamer. They’ve bought existing online businesses, like Flixter (and Rotten Tomatoes with it), before dumping it earlier this year… not the solution. They bought into Hulu this summer, which I would imagine is someone’s next takeover target… a LOT cheaper and with less-focused leadership than Netflix.

With AT&T as a parent, I would expect that Time-Warner will sell off its 10% of Hulu and build its own “NewFlix,” putting a mixture of new and old WB library content, film and TV, into a OTT, discounted for DirecTV subscribers, but at a price comparable to Netflix for anyone who wants to subscribe.

Disney still seems to me to be the logical eventual buyer of Netflix.

And that leaves Paramount, Sony, and Fox.

Sony, through its PS3 programming, has the best shot at building their own standalone OTT distribution.

I like Fox to end up with Hulu as its OTT base.

And Paramount’s world changes massively in a re-merger with CBS, the only broadcast network with a paid OTT business in operation.

6 major OTTs at $12 a month is $72 a month, leaving roughly $30 – $48 a month for everything else.

If Comcast and AT&T are making solid revenues providing internet access, they can press that advantage and also offer a better level of service by adding (as such) cable/satellite access service as an add-on to the OTT service.

That puts a new kind of value on Charter (which bought Time Warner Cable to become the #2 internet provider in the US), Verizon, T-Mobile and Sprint… as well as Google’s expanding internet access service.

I’m sure, as all these companies consolidate and experiment, that there will be an ugly few years of fighting over who gets what share of the somewhat inflexible pie. But in the end, I still see much more content, available with much more flexibility, for everyone at a price not much different than what people are spending on cable/satellite today.

Don’t fear The Merger. Everyone will always feel like they are paying too much or being left out for not being willing to pay that fare. But there is no scenario in which I see the consumer who is willing to spend within current norms getting less for their money 5 years from now… especially 10 years from now.

The threat is to the ecosystem of new original content, not to the consumer. Because the longer the tail on content, the less wide an audience focused on what is new, the fewer dollars to keep that machine going (or at least, the less motivation for content creators who are already deeply invested).

3 Responses to “When AT&T Met TIme-Warner”

  1. Jspartisan says:

    Dave must be an att customer, because as someone who is not. The thought of this terribly run company, having its claws around one of the most important film libraries on Earth, is a nightmare scenario. They would put that library behind a pay wall, for only their customers, and the rest of would rarely get a chance to access it. I hope this deal doesnt happen, and deals like this never come close to happening again.

  2. Jspartisan says:

    One more thing about Netflix. There is no other streaming, that has articles written about what it’s adding, and what it’s losing each month. Also, no one seems to give a shit what other sites lose, but they sure as shit worry about the content Netflix is losing. The clock may have been counting down on the studios selling content to Netflix, but they are also creating services no one gives a shit about, as much as Netflix, which is the problem these studios face today.

  3. palmtree says:

    “The threat is to the ecosystem of new original content, not to the consumer.”

    Yes, to the first half of this, but…new shows are still going to be what drives these behemoth companies. I find access to an extensive library to be rainy-day comforting, but that doesn’t mean I will partake of it over new content.

    So isn’t it a real possibility that consumers reject the new original content from this merger that is mediocre and risk-averse, thereby putting it in jeopardy? What brilliant franchise is AT&T going to come up with that Warner Bros. couldn’t on its own?

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