By Drew FitzGerald, Joe Flint and Benjamin Mullin
Three years ago, AT&T Inc. executives were in a federal
courthouse fighting the Justice Department to defend their takeover
of Time Warner Inc., a more than $80 billion foray into the
entertainment business.
AT&T won the court battle, but lost in the marketplace. Now,
at the behest of Chief Executive John Stankey, the telecom giant is
giving up its dreams of marrying media content and distribution --
one of the biggest about-faces in corporate deal history.
AT&T said Monday it will spin off its sprawling media
empire, including HBO, CNN, TNT, TBS and the Warner Bros. studio,
into a new venture with Discovery Inc. That follows a February
agreement to hive off a 30% stake in satellite broadcaster DirecTV
and give up operational control of its pay-TV unit, which was
hollowed out by customers trading pricey channel bundles for less
expensive alternatives.
All told, the two reversals erased tens of billions of dollars
of equity value, as AT&T cut deals to exit its investments and
shed debt. AT&T said the full value of the media transaction
includes not just the equity value but also the cash AT&T will
receive for divesting the business.
The original idea behind the two big mergers was to help the Ma
Bell descendant challenge Comcast Corp. in the pay-TV business,
steal digital-advertising dollars from Alphabet Inc.'s Google, and
mount a challenge to Netflix Inc. in streaming.
Now, the company will stick to what it knows -- the wireless and
broadband business. Its executives acknowledged the whiplash felt
by employees still adjusting to the many changes the telecom
company spurred over the past three years.
"The personal reaction is I'm a bit sad," Mr. Stankey said in an
interview, noting that investors haven't been won over by the
company's media strategy. "I'm disappointed that the shift in the
market that occurred caused us to have to step back and
re-evaluate."
Both of the big deals were hobbled by strategic miscalculations
and lapses in execution. AT&T bought DirecTV in 2015 near the
peak of the pay-TV market, just before cord-cutting started to pick
up pace. After winning the antitrust fight for Time Warner,
AT&T was slow to launch a streaming service and struggled to
keep up with rivals plowing billions of dollars a year into
content.
Cable mogul John Malone, a major Discovery shareholder, said
that although he believes Time Warner is doing fine, merging
content and distribution usually doesn't make sense. "I think that
the technology of connectivity and digital technologies are one
focus, and creating content that people get addicted to is another
focus," he said. "And you seldom would find both of those in the
same management team."
The two most successful players in direct-to-consumer streaming
video, Netflix and Walt Disney Co., are almost entirely focused on
entertainment, and don't own cable systems or broadband
businesses.
Deal pitfalls
Time Warner now has been involved in two huge deals that show
the pitfalls of trying to fuse media and new distribution
businesses. Its $106 billion merger in 2001 with AOL Inc. was one
of the biggest flops in business history. Time Warner eventually
spun off AOL.
AT&T's pursuit of Hollywood business set it apart from rival
Verizon Communications Inc., which focused mostly on its core
wireless business. Still, Verizon spent nearly $10 billion
exploring digital media, acquiring AOL in 2015 and Yahoo in 2017.
It later wrote down about half of those properties' values after
they failed to deliver the growth the company promised. Those were
much smaller deals than the ones AT&T made.
AT&T's negotiations with Discovery heated up earlier this
year, when Discovery Chief Executive David Zaslav texted Mr.
Stankey a series of emojis during the airing of the Pro-Am golf
tournament at Pebble Beach, which AT&T sponsors. Talks
continued with face-to-face meetings at Mr. Zaslav's West Village
townhouse in New York City and meals outdoors.
Under the deal announced Monday, AT&T shareholders will own
71% of the as-yet unnamed media company, with Discovery
shareholders holding the remainder. Mr. Zaslav will run the
combined business.
The unwinding of AT&T's two biggest deals within the first
year of Mr. Stankey's tenure as CEO is a signature moment for the
veteran executive, who started his career at an AT&T
predecessor in 1985. The two deals were done under the previous
CEO, Randall Stephenson, but Mr. Stankey supported them and oversaw
the integrations.
After the acquisition of Time Warner, he took charge of a
renamed WarnerMedia division, fighting skeptics -- internal and
external -- who wondered whether a phone company executive could
successfully steer an entertainment company filled with
larger-than-life personalities.
Mr. Stankey's interest in reducing the size of AT&T's
sprawling operations started as soon as he took the top job in the
summer of 2020. The former strategy chief put out feelers to
potential bidders for many of its assets, from the satellite-TV
business to operations in Latin America.
As recently as this spring, Mr. Stankey was defending the
WarnerMedia deal in public remarks, calling HBO Max a pillar of the
company's long-term strategy, along with wireless and broadband
service. But investors weren't buying it, and AT&T shares were
under pressure.
Eventually, the WarnerMedia business came under his scalpel,
too.
"I give Stankey enormous credit for having studied the situation
and come up with a solution for his company, which I think is going
to work wonderfully well," Mr. Malone said of the deal.
Through channels including its flagship Discovery Channel, TLC
and Animal Planet, Discovery dominates the unscripted and reality
genres. The deal promises to boost its streaming ambitions, giving
it access to a deep shelf of scripted TV content and classic shows
from the WarnerMedia library.
Mr. Zaslav will have to figure out how to market the high-end
HBO Max streaming service, which costs $15 a month, and the
Discovery+ service, which costs less than half that. Discovery+
already has 15 million subscribers.
AT&T executives often complained that the antitrust lawsuit
seeking to block the Time Warner deal delayed its entry into the
streaming-media business. AT&T couldn't close the takeover
until 2018, some 20 months after the deal was struck.
"You can't cry over spilled milk, but had the transaction been
approved a year earlier and not gone through the ridiculous
approval process," Mr. Stankey said, AT&T might have had a "leg
up" to deliver results in streaming.
Makan Delrahim, the former Justice Department antitrust chief
who fought unsuccessfully to block the merger, said Monday the
company's decision to sell WarnerMedia vindicated the government's
original arguments.
"ATT's combination with [Time Warner] was motivated by an effort
to salvage a bad deal made for DirecTV, which was why they couldn't
execute it well," Mr. Delrahim said, adding that the pending
spinoffs of both DirecTV and Time Warner will allow AT&T and
Discovery to focus on wireless service and content, respectively.
"Credit to Stankey to be willing to rip the cord and say, 'Let's
get back to what we know best.' "
WarnerMedia's streaming efforts have been beset by strategy and
personnel changes.
HBO already had a streaming service when AT&T completed the
takeover, but Mr. Stankey felt it was too narrow an offering to
compete with the likes of Netflix. Initially, Mr. Stankey laid out
a three-tiered streaming plan that included an entry-level option
for movies, a second one for original programming and blockbusters,
and a third for Warner Bros. content. He eventually switched gears
to push for an all-in-one $15-a-month service.
Top executives at HBO, Warner Bros. and parts of its Turner
broadcast networks left after the AT&T takeover. Mr. Stankey
said his goal was to break down the silos between the former
divisions of Time Warner, so they could work together to propel the
streaming plan.
Hedge fund Elliott Management took the equivalent of a $3
billion stake in AT&T and published a broad critique of its
strategy, noting the exodus of experienced executives. The activist
investor later bowed out of its pressure campaign but eventually
secured many of the changes it demanded in 2019, including a board
chairman independent from the chief executive and asset sales.
Elliott manager Jesse Cohn welcomed the Discovery deal on
Monday, saying that AT&T "has now executed on its promise to
streamline operations and refocus on its core businesses."
Streaming problems
When the start of the Covid pandemic triggered a surge in
streaming in March 2020, WarnerMedia hadn't yet launched HBO Max.
That service launched in May, after rivals like Disney had been
racking up new subscribers. Production shutdowns made it tough for
the service to get new content ready.
The high price of the HBO Max service relative to rivals added
to the difficulty for the company in signing up customers. And some
consumers were confused about how the service differed from the HBO
channel or digital brands such as HBO Now and HBO Go. AT&T
doesn't break out numbers for HBO Max alone, but it said, combined
with HBO, there are 44.2 million subscribers, most of them HBO-only
customers.
By spring 2020, WarnerMedia again went through a major
reshuffle. As Mr. Stankey moved to the CEO office, he installed
former Hulu CEO Jason Kilar as chief executive. Mr. Kilar moved to
streamline the company further with layoffs, including the
leadership of HBO Max. He opted to consolidate all content under
Warner Bros Chief Executive Ann Sarnoff, who has little creative
experience.
Ultimately, more than 2,000 people were let go, including many
were executives with decades of experience in the entertainment
industry. That led to morale problems at the Warner Bros. movie and
television studios and other parts of the media unit.
Mr. Kilar and a handful of other top executives were only
brought into the loop on the Discovery deal in the past week or so,
a person familiar with the matter said. Mr. Stankey declined to
comment on when other top executives were told of the
negotiations.
Asked about Mr. Kilar's future with the company, Mr. Stankey
said it would be Mr. Zaslav's call on who stays and goes after the
deal closes. Mr. Zaslav declined to comment on Mr. Kilar, and Mr.
Kilar didn't respond to requests for comment.
Mr. Kilar's team also is pondering their future. Some division
heads and staffers are optimistic about working again for a
pure-play entertainment company, instead of part of a telecom
giant, people inside Warner Bros. said.
Asked Monday whether telecom and media combinations made
long-term sense, Mr. Stankey said he didn't know. "I won't conclude
that there isn't possibly going to be that kind of reordering in
the industry over time," he said. "But for right now...that's
probably a mismatch at this juncture."
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com, Joe Flint
at joe.flint@wsj.com and Benjamin Mullin at
Benjamin.Mullin@wsj.com
(END) Dow Jones Newswires
May 17, 2021 20:41 ET (00:41 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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