By Lillian Rizzo 

AT&T Inc.'s WarnerMedia and Discovery Inc. decided they needed each other to compete in the streaming-driven entertainment world. Now, industry rivals must decide whether they should do the same.

AT&T said Monday that it was spinning off WarnerMedia -- home to HBO, TNT and the Warner Bros. studio, among other assets -- into a new venture being formed with Discovery.

It is a marriage of two media companies seeking to protect themselves from the decline of traditional pay-TV and bulk up the content libraries for their streaming-video services.

Other media companies face similar pressures. "I think this will set something off in the media landscape," said Neil Begley, an analyst at Moody's Investors Service, about the merger agreement. "There's companies out there without a dance partner and don't have enough scale."

The transaction turns a spotlight on Comcast Corp. and ViacomCBS Inc.

Comcast's NBCUniversal -- owner of the NBC network, Universal studio and a collection of cable channels -- viewed WarnerMedia as a possible target, should its assets come on the market, people familiar with the matter said. NBCUniversal saw potential to pitch WarnerMedia's HBO Max streaming service as a subscription offering and its own Peacock streaming service as a mostly ad-supported one, one of the people said.

ViacomCBS, owner of the CBS network and Paramount studio, is seen as a potential alternative, although it has a larger stable of small, low-rated cable networks, this person said.

Traditionally, media executives have worried that any such deal bringing two broadcast networks -- in this case NBC and CBS -- under one roof might run into problems with antitrust enforcers, the people said. But there could be an appetite to test that idea in a modern entertainment industry where streaming giants like Netflix now have more market power than broadcasters.

Robust original programming and deep libraries of TV shows and movies have been key to hooking customers on streaming services. Netflix began spending more on original content as rival media companies reeled titles in for their own streaming platforms -- such as NBCUniversal's pulling "The Office" off of Netflix for use on Peacock earlier this year.

Discovery Chief Executive David Zaslav -- who will lead the new, publicly traded company that emerges from the deal with WarnerMedia -- touted the two businesses' content offerings Monday, voicing confidence that their combined library could face off against competitors. He noted that the two entities together will spend $20 billion on content this year, topping Netflix's previously projected $17 billion content budget in the same period.

Media mogul and longtime deal maker John Malone said he had anticipated AT&T's decision to unwind its media assets, a move that comes less than three years after the telecom giant bet big on entertainment.

"I knew AT&T was going to have to do something," Mr. Malone, a cable-industry pioneer who owns a significant stake in Discovery, said of the move. "This is all about economics and scale and globality."

When cable TV and movie giant Viacom Inc. merged with broadcaster CBS Corp. in 2019, media analysts and executives believed the combined company would need to do further deals to attain the scale needed for a successful streaming future. At the time, analysts contemplated potential targets for ViacomCBS including Discovery, Hollywood studio MGM, AMC Networks Inc. and Lions Gate Entertainment Corp., which owns premium network Starz.

The new Discovery-WarnerMedia entity, which is still unnamed, could also be up for grabs in the coming years as a potentially attractive target for Comcast or a rival looking to beef up its content offering, Moody's analyst Mr. Begley said.

Under the terms of the transaction, AT&T shareholders will hold a 71% stake in the new company, while Discovery shareholders will take a 29% stake. Following the merger, the voting rights of key Discovery shareholders -- including media-asset holding company Advance/Newhouse along with Mr. Malone -- will be reduced, making a potential takeover easier, Mr. Begley said.

Mr. Malone said, "It may well be that there are going to be three, perhaps four global-scale direct-to-consumer companies, and there'll be a whole bunch of niches."

"You're going through a restructuring of the industry for sure," he added, "but I wouldn't count out the ultimate value of a single guy with a creative idea."

--

Benjamin Mullin

contributed to this article.

Write to Lillian Rizzo at Lillian.Rizzo@wsj.com

 

(END) Dow Jones Newswires

May 17, 2021 17:16 ET (21:16 GMT)

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