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AT&T/Time Warner: Too big to fail. Or succeed?

The mega-media- merger to end all mega… etc. That is until the next one comes along. Except – if it goes ahead – this really might be the last of this kind of deal.

This takeover will be sold hard as a ‘traditional’ vertical integration play – a content owner and a pipes owner come together to serve the consumer and their shareholders better (though, let’s face it, the priority is the other way around). There are a few remaining content singletons out there – notably Disney and the mired Viacom, and, arguably, Netflix – but they can’t join an existing traditional ‘mega merger’ without triggering new antitrust complications.

No, if they go into a deal it will almost certainly be with one of the ‘new’ media players, those that lurk on the edge of media megadom and have made no secret of their plan to join it at some point: The three outriders of the traditional media apocalypse: Google, Amazon, Apple. Deals that bring together the likes of AT&T/Time Warner and before that Comcast/NBCU are, as much as anything, a defensive play against them, or even an indication of tiring of the wait for an offer from them.

Because AT&T/TW is a vertical integration deal, not horizontal, the participants hope it will pass regulatory scrutiny and they will push the Comcast/NBCU deal hard as a precedent. But it is a quantifiably bigger deal (see line one) and is different because AT&T is already big in the pay-TV business (via its 2015 buy of DirecTV) and is massive in the mobile business. Time Warner makes / owns a lot of ‘best in class’ content; Game of Thrones and numerous other HBO hits for example – making these expensive or difficult to get for distribution rivals would be the very definition of market distortion.

AT&T have said this weekend that as they seek to innovate to stay ahead of rivals, owning their own content development is key; because its quicker and there’s more control. Oh dear. This comes close to saying ‘we need a hit factory production line to feed our pipelines to market.’ Nice idea, but there is no such thing; there is no RDK or other ‘open source’ for scripts, or pilots, or continuing dramas. A hit is a hit and a dog is a dog whether your corporation is worth $1 million or $1 guzillion.

And being really big can even damage your content options. Ask Netflix. It says it wants more control and creativity and so is cutting back its library and making more original shows. What it means is that all the cheap license deals done when it was growing up are running out and content owners won’t renew – except for top dollar – for fear of what has been created. So, Netflix has no choice but to make original content some of which will hit – House of Cards, and some of which will bark – Marco Polo – but all of which costs a lot and challenges Netflix basic model of high volume low price subscribers.

Add to this the mega money paid in these takeovers; it often never becomes clear if shareholder returns really do improve sufficiently to justify the price – and the integration risks; Time Warner’s own spectacular misjudgement in ‘the worst deal ever made’ when buying AOL being the biggest warning from history here, and you can see that it is not only regulators who should think long and hard before giving the green light.

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