Nation & World

AT&T-Time Warner deal marks a year

Consumers wait for splashy products, lower prices

Sipa USA/TNS

Randall Stephenson (left), chairman and CEO of AT&T, and Jeffrey Bewkes, chairman and CEO of Time Warner, are sworn in before a U.S. Senate Committee during a hearing on the then-pending AT&T and Time Warner merger in December 2016.
Sipa USA/TNS Randall Stephenson (left), chairman and CEO of AT&T, and Jeffrey Bewkes, chairman and CEO of Time Warner, are sworn in before a U.S. Senate Committee during a hearing on the then-pending AT&T and Time Warner merger in December 2016.

As AT&T and Time Warner mark the anniversary of their merger, they’re preparing to debut the most visible manifestation of that marriage — a streaming service that will showcase HBO content and compete with Netflix.

For AT&T executives, the first year as a media and telecom giant has been about setting the stage to better compete in the entertainment industry. Among the changes, the company reorganized Time Warner, now called WarnerMedia, to put its entertainment brands under the same leadership.

It tapped AT&T veteran John Stankey to lead the integration as WarnerMedia’s CEO. It lost several entertainment executives, including HBO and Turner’s longtime CEOs, and replaced them with former NBCUniversal chairman Bob Greenblatt. And it launched an advertising and analytics company called Xandr.

AT&T analysts say it’s too early to judge such a large and ambitious deal, but Wall Street isn’t the only audience watching. Customers are waiting for the Dallas-based company to launch the big, splashy and lower-priced offerings it has promised.

The combined companies also have to prove they can compete head to head with streaming competitors, maintain WarnerMedia’s image as a magnet for creative talent and hold onto the Hollywood magic with hit TV shows and movies.

Geetha Ranganathan, a senior media analyst for Bloomberg Intelligence, said AT&T’s ownership of “a bunch of A-list media properties” alone isn’t a winning strategy. It must demonstrate entertainment know-how.

“At the end of the day, it’s going to become a bunch of telephone guys running a media business,” she said. “That’s a little bit of a gray area.

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“And it’s too early to say one thing or the other, but it definitely presents a challenge. These are not seasoned media executives. They are telecom veterans.”

WarnerMedia executives declined requests to be interviewed for this story.

Dallas-based AT&T’s quest to become a media behemoth began more than three years ago. The company announced in fall 2016 that it had reached a deal to buy New York-based Time Warner, which includes HBO, Turner and Warner Bros.

The deal was valued at $108.7 billion, including debt.

At the time, AT&T chief executive Randall Stephenson called Time Warner and AT&T “a perfect match.”

“We’ll have the world’s best premium content with the networks to deliver it to every screen,” he said in a statement when the deal was announced.

The deal was tied up for years as AT&T fought an antitrust challenge by the Justice Department. The merger closed last summer on June 14, two days after a judge sided with AT&T in the court battle.

But AT&T had to keep some of WarnerMedia’s businesses separate until February, when the Justice Department failed in its attempt to appeal.

As AT&T faced opposition from the Justice Department — and President Donald Trump — Stephenson campaigned for the deal by pledging that it would unleash innovation and lead to video products that customers love.

Stephenson wrote a memo he called “the ‘Magna Carta’ of our merger.” In it, he said the reasons for the deal “all boil down to one thing: We want to get the most content to the most people at the lowest prices, delivered on any screen, particularly mobile.”

What’s ahead for consumers

AT&T has not yet announced the name of its new streaming service or its price, but its leaders are banking that it will be a hit.

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It will feature WarnerMedia’s extensive library of content, from movies such as “A Star is Born” and “Aquaman” to TV shows such as “Friends” and “Seinfeld.” The beta version will launch by the end of the year.

Stephenson said last month at a J.P. Morgan Technology, Media and Communications Conference in Boston that he expects the subscription video-on-demand service to attract “tens of millions of subscribers.”

Stephenson also said the streaming service will become AT&T’s “key video product.”

But will it stand out in a crowded field? Netflix’s service costs $13 a month. Hulu costs $12 for its ad-free service. And Disney announced an even lower price for its streaming service, Disney+, which will launch in November — $7 a month.

HBO’s streaming service, HBO Now, is pricier than those offerings at $15 a month. And AT&T’s new streaming service will tack on additional TV shows and movies, likely increasing the price.

A lot of the merger’s success will ride on the new streaming service, said Ranganathan of Bloomberg Intelligence.

“If they keep the price high and don’t have the content to back it up, they are going to see people cancel in droves, which is not going to be good,” she said.

“That’s their biggest near-term challenge.”

Entertainment companies are pouring money into producing and licensing content. Netflix, for example, is expected to spend $15.1 billion this year on content, according to Bloomberg estimates.

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Stephenson said WarnerMedia spends about $14 billion a year on original content and licensing rights. HBO, in particular, has stepped up spending on content, he said.

HBO increased its original scripted programming by 50 percent in 2019, WarnerMedia spokesman Emile Lee said.

He declined to provide a dollar amount.

WarnerMedia is using its size and its range of entertainment to develop strong relationships with Hollywood talent. For example, it has worked with actor Michael B. Jordan across various media. He starred in “Just Mercy,” a Warner Bros. Pictures release, and signed a first-look deal for his production company, “Outlier Society.”

Warner Bros. signed an exclusive deal with Mindy Kaling to write and produce TV programming for all of its platforms, from streaming to cable. And it’s negotiating a deal with J.J. Abrams, the director and producer behind “Star Wars: The Force Awakens.”

AT&T may be an entertainment newcomer, but it has been cooking up its strategy for years, said Jay Tucker, executive director of the UCLA Anderson Center for Management of Enterprise in Media, Entertainment and Sports.

It began adjusting to the changing ways people consume content ahead of the merger, he said. It’s had a stake in several smaller subscription-based services, such as animé streaming service Crunchyroll.

In 2016, it launched DirecTV Now, a subscription-based streaming service with a cable-like lineup of live channels.

Tucker said AT&T’s biggest edge is its existing relationships with millions of customers. “AT&T is uniquely positioned to put the business back in show business,” he said.

Combining forces

AT&T is looking for new ways to combine its technology with WarnerMedia’s entertainment. In New York City, it’s building a 20,000-square-foot incubator where it will develop new products and advertisements.

The WarnerMedia Innovation Lab is expected to open in early 2020.

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In Los Angeles, Warner Bros. Studios is hosting a two-day event this weekend about what 5G could mean for the future of entertainment. The fifth-generation wireless network is expected to bring faster, more reliable mobile service and support virtual reality experiences that could drop a viewer in the middle of a TV show or live sports game.

And AT&T previewed how its network and WarnerMedia’s content may pair up in the future.

At the giant annual technology show in January, CES, people could check out how in-cabin entertainment may look in autonomous vehicles. Warner Bros. and Intel displayed a concept car in which passengers could watch an immersive experience in Batman’s Gotham City instead of driving.

WarnerMedia’s entertainment brands have given the legacy telecom a clever way to draw customers into stores, too.

For example, AT&T had a Batmobile in its Chicago store on Michigan Avenue. The display led to a jump in store traffic, AT&T Communications CEO John Donovan said this month at the Credit Suisse Communications Conference.

Some stores gave away movie tickets to the Warner Bros. movie, “Fantastic Beasts: The Crimes of Grindelwald.” Others set up displays to promote HBO’s “Game of Thrones.”

“We’re learning as a company what are these new currencies that you have and how to manage them and execute them,” Donovan said at the conference. “So we’re very, very enthused about what WarnerMedia is going to do for the wireless business, for the TV business and so on.”

He said store employees can talk about upcoming TV shows and movies with customers while they sell wireless service or answer questions about a new phone. The entertainment brands help them make stronger sales pitches, he said.

Facing criticism

When campaigning for approval of the deal, Stephenson pledged to offer new services, sustain a tradition of entertainment excellence and play fairly with competitors.

But critics say AT&T is using its size and valuable content to strong-arm competitors — and they say prices of AT&T’s products are going up, not down.

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During the antitrust trial, Sling TV’s group president, Warren Schlichting, testified that the deal would give AT&T leverage to force Dish’s streaming service, which offers “skinny bundles” and lower prices, to carry more channels.

That ultimately would drive up prices for customers, he said.

Since then, he said, his predictions have come true. HBO is not available on Dish or Sling TV after the two parties reached an impasse in negotiations last fall. Schlichting said WarnerMedia tried to force the company to pay for subscribers, whether or not they wanted HBO.

“We’re living through it right now, almost like it was scripted,” he said.

Viacom and A+E Networks have also squabbled with AT&T over content licensing — and aired their grievances in public.

Schlichting said the merger created a power imbalance. AT&T now has less of a reason to compromise with Dish as it can gain customers for its own TV services, which have WarnerMedia’s content, if customers leave Dish or Sling TV.

AT&T is the largest pay-TV company in the country with U-verse, DirecTV and DirecTV Now.

“We’re damned if we do, damned if we don’t,” he said. “If we pay the high prices, then they have extorted us. If we don’t pay the high prices, they’ve taken our subscribers.”

HBO said Dish is to blame.

“Dish has made it apparent that they have no interest in carrying HBO,” it said in a statement. “We have made extremely reasonable offers and received no true level of engagement in return.”

Stephenson also raised red flags last month when he said that AT&T will pull back licensing rights for popular shows and movies from some streaming rivals as it prepares to launch its new service.

The merger has yet to fulfill another promise that AT&T made — lowering prices.

In April, in fact, it raised the prices of its DirecTV Now packages $10 a month. Its price point of $50 to $70 a month is lower than some satellite or cable TV packages but more expensive than internet-based rivals such as Hulu Live and Sling TV.

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John Bergmayer, senior counsel of Washington, D.C.-based consumer advocacy group Public Knowledge, said his group opposed the AT&T-Time Warner deal because of concerns that it would stifle independent content producers and reduce competition.

As media companies get bigger, he said, they have more influence and ability to raise prices. That may explain what’s happening with AT&T.

“Maybe they are raising prices because everyone else is,” he said. “But one way or the other, they say they wouldn’t — and they did.”

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