AT&T and Time Warner: Finding the Synergy that Matters
Summary: Forget what you read. Innovation Synergy is the only thing that counts.
There have been a lot of reasons raised by management and supporters of why the merger makes sense. The biggest reason is that integration of content production and distribution will allow a more efficient way to create compelling content that will have a ready pipeline for delivery. This will lower the risk of content production and increase investment. For the distributor, having an assured pipeline of content will lower the risk when increasing distribution availability. The shareholders win because investment in both content and distribution is at lower risk, thus allowing greater growth and higher profitability. Consumers should win because there should be a greater flow of content.
The negative argument is that vertical integration concentrates the entire value chain in fewer hands and will result in fewer choices at higher prices due to being an oligopoly. For shareholders, vertical integration can be value destructive because a merger of different cultures and products will cause management inefficiency and declining execution in both production and distribution. There are no natural cost synergies since the business is not reducing overlapping businesses. There is no reason to expect either the producer or distributor to create better deals if working together within a company compared to working with independent firms. In contrast, in this cloud based world, the costs differences are nominal. So, putting aside the potential antitrust issues, how can a deal like this be justified?
Per the AT&T press release, the future is mobile and mobile is video. All true but how can it make a difference if the content is sourced from a subsidiary vs an independent company. Any complete content bundle would have to include content from independent producers. A telephone (telco) company brings no special cost advantage. Regarding mobile, the biggest advantage is that the telco can deliver video cheaper if it builds a bigger network and uses the extra capacity for video at lower average cost. But that is a function of delivery economics and have nothing do with content bundling. The telco would only be threatened if there were content scarcity and it needed to assure a steady supply of a relatively scarce commodity. However, there is no evidence that there is a restricted supply of content or that the existing media brands have the power or desire to restrict supply to the distributor. On the contrary, the recent surge in content production by upstarts Netflix and Amazon demonstrate that content can be readily expanded when needed by the distributor.
Cost and Revenue Synergy?
Here is another interesting statement from the merger press release “AT&T expects $1 billion in annual run rate cost synergies within 3 years of the deal closing. The expected cost synergies are primarily driven by corporate and procurement expenditures. In addition, over time, AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis.” Given these different types of businesses, where are the cost overlaps? Are there that many excess middle managers, accounting clerks, leasing agents, etc.? If that is the case, it suggests the management of both companies need to focus on their core business to eliminate basic internal inefficiency and not try to increase their management scope to another business. They clearly already have their hands full.
What about unique revenue opportunities? This usually occurs when a new product can be made only if completely assembled internally or the cost of using licensed components make the product non-competitive and therefore not a revenue opportunity. In the case of this merger, content to be offered only to AT&T customers is probably the best possibility. This arrangement can only be done on a limited basis without diminishing the overall value of the content. Also, competitors could offer similar deals using content from other suppliers of equal appeal to consumers. These type of revenue opportunities will have limited worth in a market where high value content is so plentiful.
The Innovation Synergy
About the only management discussion of innovation as the reason for the merger relate to the possibility of new advertising opportunities and ways to increase the business models around ads and subscription packages. This may be possible but there is little to indicate that either company have been constrained by the available business models or they have special skills that will create business model innovation.
Innovation Synergy could justify compelling reasons for a merger if they existed and could be executed. Both companies have potential innovation synergies that go unmentioned by management. For AT&T a mobile world means delivering many types of content to many types of devices. This means the rapid repackaging of content to fit exploding numbers of use cases from the mobile phone, to smart networks and Internet of Things, to autonomous vehicles and many other mobile cases that are emerging. It also means across geographies. When it comes to networks and customers, the emergence of artificial intelligence will allow a level of personalization that was previously impossible. Applying this network capability and intelligence has amazing possibilities. There are so many iterations that are possible with different content packages that innovation could happen much more efficiently if the content and distribution were under a common owner.
For Time Warner, it is a leader in TV and movie entertainment that dominates film and the TV business. But in a mobile world, traditional TV must compete with short “YouTube” type programming so popular among the young. It must also compete with newer platforms such as Facebook, Snapchat and Instagram that are driving new entertainment formats and taking consumer time and generating advertisers’ interests. New formats such as AR and VR are emerging and the content to drive these markets are still yet unknown. An innovation synergy could result if the deep library of technologies within AT&T could be accessed by the creative community to accelerate growth of the new formats.
Executing the Innovation Synergy
Innovation is usually something that comes from the start-up community. Large companies are built for scale once an innovation has been proven. The management processes and slow speed of a large company usually work against innovation synergy. This problem is much harder when internal groups within a company are from different types of businesses, which would be the case in this merger. A successful merger integration and accessing the innovation synergy would require people that can work within a large company environment and yet maintain the agility of thinking like a start-up. Someone from the big company would not like the lack of processes and the start-up person would balk at the endless structure. In short, it is a huge cultural challenge and would only fit a limited number of people.
Summary
A vertical integration such as AT&T and Time Warner might have made sense during the golden era of TV before mobile became king. It was always desirable by media companies to control distribution and often resisted by independent content producers who feared the power of the Media mogul. In fact, content producers successfully passed the “Fin-Syn law” in 1970 to prevent too much power by integrated media. That is because innovation used to happen relatively slow. Not anymore. Innovation is what drives markets and mobile adoption and content usage. Some of the biggest stars among the young are only on Internet channels. The benefits of this deal mentioned by management appears from an outdated playbook. Management should ditch the past and look closely at how to create the “Innovation Synergies” needed to make this a winner in this new era of rapid market changes.
About the author
Hassan Miah is the Co-Founder and Chief Strategy Officer of Robin8 (www.robin8.net), a people profile platform that uses artificial intelligence to match the most influential people to advertisers. He was previously at Creative Artists Agency (CAA) and worked on Tele-TV, the first major venture between Hollywood and the telephone companies. https://www.linkedin.com/in/hassanmiah
