AT&T to spin off WarnerMedia, merge content unit with Discovery

(Image: AT&T/Graphic: The Desk)

Telecommunications conglomerate AT&T Discovery Communications on Monday formally unveiled a blockbuster plan to merge their respective content divisions, creating a media juggernaut that is structured to better compete against the likes of Netflix, the Walt Disney Company and Comcast.

Under the deal, AT&T will spin off its WarnerMedia content division into a separate company, and that company will in turn be acquired by Discovery Communications in a cash, debt and stock transaction valued at around $43 billion, the companies said.

When the dust settles, AT&T’s shareholders will own 71 percent of the new company, with Discovery’s shareholders controlling the rest.

The deal is still subject to regulatory approval, the companies warned. AT&T’s shareholders do not need to vote on the deal. Discovery’s shareholders do; its biggest shareholder, Liberty Media’s John Malone, has already signaled his intention to approve it.

The merger will combine the scripted television and movie assets of WarnerMedia’s Warner Bros., CNN, HBO and other properties with Discovery’s portfolio of reality-based linear cable channels and content library, bringing together brands like the Cartoon Network, the Oprah Winfrey Network, TBS, TNT and Eurosport under one roof.

The companies said a joining of forces will help better accelerate each company’s direct-to-consumer streaming service — HBO Max at AT&T and Discovery Plus at Discovery — which have each seen its own brand of success though have lagged far behind competitors Netflix, Disney Plus and Amazon Prime Video in terms of paying subscribers (though both services are still relatively new).

Both companies are projecting the deal to close in the middle of next year. Until then, WarnerMedia and Discovery will continue to operate as separate brands.

The spin-off ends AT&T’s tumultuous efforts to transform itself from a telecommunications provider into a full-fledged, vertically integrated media operation.

The trend of telecommunications companies acquiring content and media operations began with Comcast’s acquisition of NBC Universal in 2011. While Comcast has shed pay television customers, its broadband Internet service continues to grow customers, and its broadcast and cable divisions have done well for themselves. Last year, the company launched its own direct-to-consumer service, Peacock, with the hopes of carving out its own space in the so-called “streaming wars.”

AT&T, Verizon and T-Mobile tried to capitalize on Comcast’s success by acquiring media companies of its own. Verizon purchase web giants AOL, Yahoo, Tumblr and Flickr, only to sell each property at a considerable loss.  T-Mobile acquired Level 3, a provider of Internet-based broadband television infrastructure, and launched TVision, a struggling streaming television service that was promoted as the next big thing by the Magenta phone company, then closed several months after it launched in favor of a partnership with Philo and Google’s YouTube TV.

AT&T’s failure ,though, was multi-faceted: Instead of negotiating pay television rights with each programmer separately, the company simply bought satellite television company DirecTV. It then launched a streaming television service called DirecTV Now (later AT&T TV Now, and now simply AT&T TV) that never really caught on with consumers.

It doubled down on its television and film strategy by acquiring Time Warner for $85.4 billion in 2018 after a prolonged and costly legal battle with the U.S. Department of Justice, which sued to block the merger on anti-trust grounds. The content deal allowed AT&T to merge two HBO streaming services into one package that offered access to a vast library of Warner Bros. television shows and film content together with acquired, licensed shows like Comedy Central’s “South Park,” “Reno 911!” and “Chappelle’s Show.” That service, HBO Max, was seen as an incentive to get people into AT&T’s wireless phone and pay TV ecosystem, with the service being offered at a deep discount to most subscribers and entirely free to the phone company’s highest-paying customers.

But HBO Max struggled from the start: The company launched it without agreements in place with Amazon Fire TV and Roku, the two biggest domestic streaming television platforms. That lack of an agreement meant HBO Max was unavailable to around 70 percent of streaming households in the United States when it launched.

As a compromise, AT&T said those two platforms would instead get a re-tooled version of its HBO Now streaming service, which offered HBO original content without the expanded WarnerMedia library and licensed content. The cost of HBO and HBO Max was $15 a month, but Amazon Fire TV and Roku customers received less content for the same amount of money.

A deal was eventually reached — first with Amazon, then with Roku — and all the while, executives were boasting about how proud they were by HBO Max’s limited success. They continued to reassure investors that things were on track, and everything was going according to plan, and dismissed their problems with Amazon and Roku as mere speed bumps. But by then, AT&T had earned a reputation of not knowing what it was doing with WarnerMedia, and some analysts speculated that the only way WarnerMedia could really compete was to merge with a bigger player like Comcast.

That almost happened, according to some reports: AT&T executives did approach Comcast with an offer to merge content libraries and services, but ultimately Discovery won out with a sweeter deal. Key executives at AT&T and Discovery have been discussing a potential merger of content divisions since at least early February, according to a report by the New York Times. Some WarnerMedia executives were caught off guard by the sudden announcement, a separate report published by the Los Angeles Times on Sunday said.

Splitting off its content arm and selling it to Discovery allows AT&T to refocus its business efforts around the future of its next-generation, 5G wireless phone and Internet service along with AT&T Fiber, company executives said on Monday. It will also allow AT&T to shed around $43 billion in debt, which it accumulated in part through its purchases of DirecTV and Time Warner. (A minority stake in DirecTV was sold to TPG Capital last month.)

During a conference call with investors on Monday, executives from AT&T and Discovery touted the numerous benefits of combining each company’s linear pay television channels — WarnerMedia will get reality-based shows and general entertainment programs from Discovery, while the latter will soon be able to offer news, sports and top-tier scripted series domestically.

The merger will fuse together WarnerMedia’s CNN, the Cartoon Network, TBS, TNT, Adult Swim and HBO with Discovery’s flagship Discovery Channel, Animal Planet, Science Channel, the Oprah Winfrey Network and the Travel Channel, among others.

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