Are AT&T’s streaming ambitions destroying the movie industry?
Warner Bros. made big news this past week by announcing that new feature films in 2021 will simultaneously release in theaters and streaming on HBO Max.
For many that haven’t closely followed the company’s corporate transactions, the decision was a bit of a head scratcher. But once you understand that Time Warner was acquired by AT&T in 2018, who had also acquired DirecTV in 2015, it all starts to make sense. Kind of. In a troubling sort of way.
AT&T clearly believes in vertical integration. Arguably that’s been true since Alexander Graham Bell founded the company nearly 150 years ago. I say “arguably” because it’s not exactly a straight line from Mr. Bell to today’s AT&T. Bell’s AT&T was perhaps the classic model of vertical integration. Bell Labs invented the technology that Western Electric built that was then used by the local Bell telephone operating companies for local telephone service and AT&T long lines for long distance. The company’s publishing arm printed millions of phone books and AT&T operators provided a friendly voice and helped connect your call.
It was a picture of industry dominance from top to bottom. So much so that the U.S. Department of Justice filed an anti-trust lawsuit against the company for anti-competitive behavior, leading to the 1984 dismantling of company. The local telephone companies were split out into seven Regional Bell Operating Companies (RBOCs: NYNEX, Bell Atlantic, BellSouth, Southwestern Bell, Ameritech, US West, and Pacific Telesis). AT&T retained the long distance business, most of Bell Labs, Western Electric, and the Yellow Pages business. The local companies got the local telephone and wireless businesses and part of Bell Labs (Bell Communications Research). Later, AT&T bought their way back into mobile by acquiring McCaw Cellular and renaming it AT&T Wireless, which they then later spun out. They also later spun out Bell Labs and Western Electric as Lucent Technologies.
Meanwhile, two of the RBOCs decided they liked the old AT&T model. Bell Atlantic acquired NYNEX and then independent GTE to form Verizon. And Southwestern Bell took most of the rest of the country, acquiring Ameritech, Pacific Telesis, BellSouth, and independent SNET. They also bought AT&T Wireless and what was left of the original AT&T (long distance). Finally, they renamed the combined company AT&T. As mentioned above, the company didn’t stop there acquiring DirecTV and Time Warner.
This new AT&T is now even more vertically integrated than Mr. Bell’s baby. Time Warner (renamed WarnerMedia) creates the content; DirecTV bundles the content and distributes it. AT&T builds and operates the networks that can carry digital content across the country and around the world, ultimately delivering it into your home or pocket.
Unfortunately for them, the new AT&T lacks one thing that the original Ma Bell enjoyed — total industry dominance. Ma Bell had a near monopoly in local telecom, a total monopoly in long distance, and a virtual monopoly in telecom technology. They could make decisions for the industry without any concern about anyone else. They wouldn’t lose customers, employees, or partners — where would they go?
Today’s AT&T is not so blessed.
Vertically integrating has many advantages — you can control the value chain, drive out inefficiencies, and make decisions to maximize profitability.
But it also comes with significant challenges. I’m not sure AT&T is up for those challenges.
The companies in AT&T’s portfolio come from industries with very different expectations, market disciplines, cultures, and ecosystems.
The entertainment industry is a hits-based enterprise. You hope for more hits than misses, but you certainly don’t expect a 99+% success rate. The networks that AT&T builds and operates, on the other hand, are expected to be nearly 100% reliable. Outages are unforgivable.
The entertainment industry is driven by creative people. They are passionate about what they produce. Their work represents them in a very personal and individualistic way. The telecom industry is driven by efficient technology. I’ve spent most of my career in telecom and yes, there are smart and even creative people in the industry who care about their work, but it’s different. In telecom, you usually only stand out when something goes wrong.
I’m afraid something just went wrong.
In 2020, streaming networks have taken off. As we stay home and find ways to be entertained in our living rooms, Disney+ has grown to over 73 million subscribers in their first year. Netflix has added over 25 million subscribers in 2020 alone to grow to nearly 200 million total. Warner Media launched HBO Max in May of this year hoping to ride that same wave. So far they have only activated 12.6 million subscribers in the 6 months since launch. Disney+ added almost that many in its first few hours!
So, streaming networks are the current shiny thing that AT&T leaders want to chase. They want to turn the crank on the vertically integrated machine they’ve built to deliver growth in HBO Max subscribers. Who cares if Warner Bros. gets squeezed a bit in the process?
It turns out a lot of people care. Most importantly the creative people essential for producing hits. As Christopher Nolan put it “some of our industry’s biggest filmmakers and most important movie stars went to bed the night before thinking they were working for the greatest movie studio and woke up to find out they were working for the worst streaming service.” Those people care and ultimately they have a choice.
Meanwhile, many in the entertainment industry fear that the AT&T/HBO Max/Warner Bros. move will set a standard that all other movie studios will need to follow. I’m not necessarily a huge fan of Hollywood, but we need to recognize that trying to turn a very creative, human-centric industry into an efficient machine doesn’t bode well as a model for other industries that may eventually follow.
Or, perhaps more likely, AT&T will realize that they have not built the 21st century equivalent of Ma Bell, but rather a cobbled together collection of businesses they don’t know how operate in industries they can’t control. DirecTV should have given them a clue. Let’s hope they learn their lessons before they do too much damage.