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AT&T Is Aiming for the Stars

AT&T desires to prevail within the media wars by combining its distribution attain with Time Warner’s content material. Will it work?

In 2000, America On-line (AOL) introduced it was buying Time Warner Inc. for a file $165 billion to create the most important media firm on this planet — combining premier manufacturers equivalent to HBO, CNN and Warner Bros. with AOL’s attain into thousands and thousands of US houses by its on-line service. However a scant 9 years later, Time Warner spun off AOL, price simply $3.four billion, to exit what usually has been described as one of many worst mergers in historical past.

Now, AT&T has tied the knot with Time Warner for $85.four billion, laying out the identical formidable targets. “The content material and inventive expertise at Warner Bros., HBO and Turner are first-rate,” stated AT&T Chairman and CEO Randall Stephenson in a assertion. “Mix all that with AT&T’s strengths in direct-to-consumer distribution, and we provide prospects a differentiated, high-quality, mobile-first leisure expertise.”

However can AT&T keep away from making the identical errors as AOL? Historical past just isn’t on its aspect. Such mergers have “been tried for many years however it doesn’t appear to work out very properly,” stated Gerald Faulhaber, who labored on the AOL-Time Warner merger as chief economist on the Federal Communications Fee and now could be a Wharton professor emeritus of enterprise economics and public coverage.

Not solely are there company-specific challenges to beat, however there’s additionally the added issue of merging a content material firm — Time Warner — with a conduit enterprise — AT&T. “It appears fairly uncommon to truly make that work,” Faulhaber stated. Comcast and NBCUniversal have been capable of combine properly and create synergies from their mixture, however they’re the exception. “My view is that Comcast is an uncommon product and [CEO Brian] Roberts is a really uncommon, very competent CEO,” he added. 

In line with Faulhaber, the error corporations make is to lump the content material and conduit enterprise fashions into the identical bucket of offering leisure. Really, their companies are very totally different. “Conduit is a community enterprise,” Faulhaber defined. “They’re about sustaining a bodily plant [such as cable systems] and ensuring it doesn’t break.”

Content material wants little bodily capital however a great deal of human capital — creators prepared to take dangers and make bets on potential hit TV exhibits or motion pictures. “What you should make a enterprise out of Walt Disney (content material) is simply very totally different from what you should make a enterprise out of Comcast (conduit),” Faulhaber famous.

Breaking Down Silos?

In an interview with CNBC final yr after a federal courtroom cleared the AT&T-Time Warner deal, AOL Co-Founder and former CEO Steve Case seemed again on the errors made within the AOL-Time Warner merger. He recognized two major culprits: clashing cultures and short-term pondering. “There have been lots of people at Time Warner that weren’t as enthusiastic concerning the digital path, weren’t as enthusiastic concerning the web, have been fearful about the way it would possibly cannibalize a few of their companies,” he stated.

“So that they tended to play protection to guard what already existed versus enjoying offense and attempt to create what the longer term can be,” Case continued. “If AOL-Time Warner was run as one firm, not as a bunch of impartial, siloed divisions, it might have enabled us to prepared the ground in digital music, prepared the ground in digital video, and other forms of issues.”

This month, AT&T took steps that might be seen as breaking apart the outdated silos inside Time Warner, which it renamed WarnerMedia. Beforehand, Time Warner had organized content material below the Warner Bros., HBO and Turner items (TNT, TBS, Cartoon Community and different leisure cable channels). Meaning leisure content material might be discovered below any of the three divisions, whether or not it’s episodes of HBO’s Sport of Thrones, the hit sitcom Pals or blockbuster movies equivalent to Batman, Marvel Lady and Harry Potter.

Now, AT&T has organized operations by sort of content material below its three items: Warner Bros., and the newly-created WarnerMedia Leisure and WarnerMedia Information & Sports activities divisions. It positioned HBO, TNT, TBS, truTV and the direct-to-consumer enterprise (which incorporates streaming companies), below the Leisure unit. CNN, Turner Sports activities, Bleacher Report and the AT&T Regional Sports activities Networks went to Information & Sports activities. Warner Bros. has the movie, TV and video games companies, plus household, children and animation content material (Cartoon Community, Grownup Swim, Boomerang).

However the reorganization additionally led to the exit of two veterans: HBO Chairman and CEO Richard Plepler and Turner President David Levy. Plepler had been at HBO for 27 years and Levy at Turner for 32. The brand new leisure boss is Robert Greenblatt, previously chairman of NBC Leisure, whereas CNN Worldwide President Jeff Zucker will probably be accountable for information and sports activities.

AT&T initially retained Warner Bros. CEO Kevin Tsujihara, however he determined to step down this week because of revelations that he helped get hold of roles for an actress with whom he was in a relationship. A alternative has not but been introduced. Tsujihara had been on the firm for 25 years, and his exit signifies that all the outdated Time Warner division heads will probably be gone. In the meantime, AT&T’s new division chiefs will report back to John Stankey, CEO of WarnerMedia and previously the cellphone big’s chief technique officer.

By organizing for effectivity, might AT&T hurt the creativity that has propelled HBO and different cable channels to enduring success? Not essentially, stated Jehoshua “Josh” Eliashberg, Wharton professor of selling in addition to operations, info and selections. “Netflix and Amazon Prime [Video] have demonstrated you can excel on each dimensions and ship inventive content material by way of environment friendly streaming platforms,” he stated. “AT&T, being a technology-oriented firm, can actually improve the technological facet of HBO with out essentially hurting its inventive energy.”

Inside HBO’s Artistic Course of

Eric Kessler, former president and chief working officer of HBO, was there throughout AOL’s problematic reign at Time Warner. “I’m a survivor of the AOL-Time Warner merger,” he stated in an interview with Data@Wharton. “There was a giant situation when it comes to tradition. You place two very totally different cultures collectively and if it’s not managed appropriately you’re going to have important issues — and that’s precisely what occurred at Time Warner.”

As a conduit firm, AT&T goes down the identical path as AOL — aiming to mix its distribution attain and expertise with Time Warner’s content material to prevail within the media wars. Know-how is actually helpful in serving to develop distribution, enhance the streaming service and develop focused adverts. “However you must know, when you’re buying a inventive enterprise, the bounds of expertise,” stated Kessler, a Wharton MBA graduate.

Artistic expertise is vital to creating nice content material, even when there aren’t any ensures for fulfillment. “You’re going to fail. You need to settle for that. You need to give inventive individuals a large berth to function. You need to be prepared to take dangers, and on the finish of the day it’s actually a few leap of religion,” stated Kessler. “You’ll take heed to the imaginative and prescient of the creator of the present, take heed to the programming executives, and also you’re going to carry palms and also you’re going to stroll to the sting of the cliff and take a step and hopefully … there’s a bridge above the chasm. Typically that bridge just isn’t there. That’s simply the character of inventive content material.”

Kessler remembers when David Chase, a workers author for some TV exhibits again within the late 1990s, approached HBO with an concept for a present a few mobster in New Jersey. They shot a one-hour pilot episode and preferred it, in order that they filmed some extra. “We had no concept that David Chase was going to change into a genius and he was going to create … one of many biggest exhibits within the historical past of the medium.” That was The Sopranos, which ran for six seasons.

However, think about Vinyl. “It was the story of a file govt within the 1970s, and it had intercourse, medication and rock ‘n’ roll. What might be higher, proper?” Kessler stated. The HBO present was written by Terry Winter, one of many major writers on The Sopranos, govt produced by rock star Mick Jagger and directed by Martin Scorsese. Plus, it had a $100-million finances. “You take a look at all these parts on paper and also you say, ‘Wow. This must be a terrific present,’” he stated. “It turned out to not be a superb present, and it was cancelled after a yr for quite a lot of causes.”

Some exhibits take HBO a very long time to get on board. That’s the case with Sport of Thrones, the hit fantasy action-drama about feuding kingdoms. “After we have been pitched Sport of Thrones … HBO thought of it for a yr and couldn’t determine [whether or not] to make it. David Benioff [screenwriter and TV producer] walked in and stated, ‘Neglect the dragon. Neglect the magic. Neglect every thing. The present is about one factor — it’s about energy. The way you get it and the way you retain it,” Kessler stated. “That was a terrific line as a result of it enabled us to grasp why this present was going to attach with individuals” since fantasy primarily appeals to area of interest audiences.

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However will HBO’s mojo disappear with Plepler gone? “It’s by no means been about an individual. It’s a few model, and the programming flows from an understanding of the DNA of the model,” Kessler stated. When former HBO CEO Chris Albrecht left in 2007, there was additionally concern concerning the future since he had been accountable for programming when the cable channel developed The Sopranos and Intercourse and the Metropolis. However HBO didn’t derail. “It was an HBO programming technique, and it was an HBO model,” Kessler stated.

Kessler is hopeful AT&T will maintain the creativity flowing at HBO, the king of the premium cable networks. “They acknowledged up entrance the significance of sustaining the [HBO] tradition. They acknowledged up entrance the truth that programming just isn’t their experience,” he stated, pointing to the hiring of NBC’s Greenblatt and choice to maintain HBO Programming Chief Casey Bloys and his staff in Los Angeles. AT&T is “transferring ahead in a method that I hope will allow them to maintain the magic of the HBO model.”

Way forward for Media Is Streaming

Again within the early 2000s, Time Warner executives have been cautious of expertise cannibalizing present companies, based on AOL’s Case. However the media panorama was additionally very totally different. The concept of watching TV on a cellular machine was onerous to fathom. Netflix was only a younger firm renting out DVDs by mail. Quick web was not but extensively accessible, and the iPhone and iPad weren’t but available on the market. TV exhibits and films weren’t but streaming to cellular gadgets. YouTube wasn’t even round but. The cable and satellite tv for pc TV enterprise — pay TV — seemed like a secure guess with its take-it-or-leave-it cable channel bundles. (AT&T’s U-verse and Verizon Fios would launch within the mid-2000s.)

By 2015, the sport had drastically modified. “The broadband market had grown. Netflix had clearly grown. Everyone might see the place the longer term was going,” which was on-line streaming, Kessler stated. Apple got here out with the iPhone and iPad that made watching video on cellular gadgets a lot simpler. Amazon received into video; so did Google’s YouTube and shortly Apple. Extra competitors arrived and plenty of customers have been chopping the twine. “Distributors [such as cable, satellite and telecom-TV providers] weren’t completely happy about it actually, however they acknowledged that was the longer term.”

HBO modified, too. As a result of many on-line video companies have been now competing for viewers, it made sense to get within the sport and launch its personal service referred to as HBO Now, which made its premium content material accessible to anybody, even cord-cutters, based on Kessler. Beforehand, HBO had launched a streaming service referred to as HBO Go, however it was solely accessible to subscribers of pay TV. On the time, HBO and Cinemax collected $four billion from pay TV suppliers, and bypassing them would jeopardize these affiliate charges.

Kessler, whose staff launched HBO Go in 2010, stated if that they had gone on to customers again then, they’d have misplaced much more than they’d have gained. “The maths merely didn’t work.” This sort of inside wrangling is frequent for conventional media. “HBO has been struggling for a very long time with tips on how to combine its inventive content material with expertise [in the face of] altering audiences’ consumption of leisure content material” equivalent to by streaming platforms, stated Wharton’s Eliashberg.

AT&T sees the longer term. Three years after launching DirecTV Now, a web-based video streaming service of cable channels, it plans to launch two new skinnier streaming bundles in April: DirecTV Now Plus and DirecTV Now Max at $50 a month and $70 a month, respectively. The corporate nonetheless gives its DirecTV satellite tv for pc TV service, which misplaced 1.24 million subscribers final yr, and AT&T U-verse, which gained 50,000. DirecTV Now’s development slowed to 436,000 internet new prospects final yr from 888,000, based on its newest 10-Okay submitting with the SEC.

One space AT&T must deal with is growing an environment friendly information analytics functionality, which is according to its strengths, to tell the corporate’s decision-making, Eliashberg stated. It could possibly additionally assume innovatively about content material. “I don’t imply innovativeness solely in content material technology, but additionally in how the content material is consumed by customers,” he stated. An instance is the “interactive film consumption equivalent to Netflix’s Bandersnatch the place customers can alter the narrative primarily based on their temper and preferences.”

However whereas AT&T is righting its ship, charging ahead are different deep-pocketed rivals: Comcast-NBCUniversal, Disney-Fox and the tech giants. Prevailing over them “is not going to be simple,” Eliashberg stated. No less than, WarnerMedia is shoring up different components of AT&T’s enterprise. It introduced AT&T revenues of $18.9 billion final yr, versus $30 million in 2017 with out Time Warner. AT&T’s largest enterprise, its wi-fi and wireline operations, noticed income fall to $144.6 billion from $150.four billion year-over-year.

AT&T appears to be studying from the missteps of AOL. However in the long run, it’s going to take time to see whether or not the acquisition will succeed or not. “AT&T has are available in they usually’re making organizational modifications and restructuring [Time Warner]. They imagine there’s a more practical and environment friendly option to function the group, not simply HBO however the entire WarnerMedia group of corporations,” Kessler stated. “Time will inform whether or not that’s the suitable choice.”

*[This text was initially revealed by Data@Wharton, a accomplice establishment of Honest Observer.]

The views expressed on this article are the creator’s personal and don’t essentially mirror Honest Observer’s editorial coverage.

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