Last week, AT&T announced a $43 billion deal to combine its content unit, WarnerMedia, with factual TV network Discovery. The telecommunications giant will unwind its acquisition of Time Warner, which it renamed WarnerMedia, to create with Discovery a new media company that could be worth as much as $150 billion. The move is a sign that the huge conglomerates which resulted from a flurry of mergers just a few years ago are no longer big enough to contend with the major streaming giants Netflix and Disney. 

What’s the context behind the deal?

The much-discussed streaming wars are currently being won, by a large margin, by Netflix and Disney who both enjoyed significant growth during the pandemic. But even Disney is struggling to keep up with Netflix. Netflix has a huge 206 million subscribers and is still growing, albeit more slowly than Disney, which had 106.6 million subscribers as of early April. Netflix had a significant head start over the other streamers, and has a huge international footprint – crucial for continued sustainable growth in this competitive landscape. What’s more, Netflix is finally able to sustain itself financially, and no longer has to borrow money to fund its programming.  

The American media conglomerates anticipated this situation, leading to a raft of mergers and acquisitions in recent years, such as Disney’s acquisition of Twenty-First Century Fox and AT&T’s purchases of DirecTV and, of course, Time Warner. These deals created huge entertainment companies, but the WarnerMedia/Discovery news suggests that even they are not big enough.  

But the new company created by WarnerMedia and Discovery just might be. 

Teaming up to win the streaming wars

The Economist neatly summarised the four key things that a streaming service needs to compete successfully in the streaming wars: scale in the domestic market, high-quality content, a flexible balance sheet and the ability to expand globally. WarnerMedia’s HBO Max meets the first two criteria, but falls down on the third and fourth. Parent company AT&T’s financial woes made it difficult to keep up with Netflix in terms of programming spend, while the decision to licence content to foreign companies, such as Sky in the UK, means that its international footprint is very poor. The merger with Discovery will help WarnerMedia to address both of those problems: it will no longer be held back by AT&T’s revenue sheet, and Discovery+ already has a significant presence in Europe and India.  

The resulting company will present a significant headache for the current winners Netflix, Disney and Amazon. WarnerMedia and Discovery’s combined content library will be huge and diverse: it will include HBO’s critically acclaimed dramas, Warner Bros’ blockbuster films, Discovery’s unscripted shows and a variety of sport and live news services. It will be very interesting to watch how the company unfolds. Will they merge their streaming services, creating a ‘one-stop shop’ that would compare favourably to Netflix but would undoubtedly have a high price point (HBO Max currently charges $15 a month, significantly more than competitors)? Or will they ‘bundle’ existing services and new ones for a discounted subscription price? 

An admission of failure by AT&T

The merger between WarnerMedia and Discovery is a de facto admission by AT&T that its foray into entertainment has failed. When it acquired Time Warner, which it renamed WarnerMedia, just a year after its purchase of satellite service provider DirecTV, the plan was to vertically integrate the businesses of content creation and content distribution – but that plan has been shelved. AT&T’s CEO John Stankey said that the telco giant lacked the global reach necessary to build a successful streaming business that could match the likes of Netflix and Disney. DirecTV will be sold to TPG. 

What does this mean for advertisers?

The question on every advertiser’s lips is ‘how many unique individuals can I reach through as few companies as possible?’. By merging, WarnerMedia and Discovery may provide the most convincing answer yet to this question. They will aggregate more inventory than the separate companies already do, and will provide advertisers with a huge, diverse audience. This will put them in a very strong position, particularly as Netflix does not currently host any advertising on its platform. 

Interestingly, however, WarnerMedia’s ad tech arm, Xandr, is not part of the merger, and will remain under AT&T’s ownership. This is likely because it would take a lot of time, effort and money to disentangle Xandr from AT&T’s customer data, but given the importance of targeting and measurement in TV and streaming, and of mining media companies’ first-party data, it is would certainly be an advantage for WarnerMedia/Discovery to have its own tech stack. 

A scramble to create more mergers

With the streaming landscape now dominated by three giants – Netflix, Disney and now the company formed by WarnerMedia and Discovery – the rest of the industry is now scrambling to form mergers of their own. One of the most significant is Amazon’s purchase of Hollywood studio MGM, confirmed this week for a price of $8.45 billion. The deal will bolster Amazon’s TV and film library for its Prime Video service, and the jewel in MGM’s crown, the James Bond franchise, will help Amazon to compete in the streaming wars, even though it will only own 50% of 007. 

AppleTV+ is yet to take off, despite giving away a huge number of free subscriptions – more than 60% of its 40 million users are thought to be on a free trial. However, it does of course have plenty of money to spend on acquiring another media company if it chooses to do so.  

The other giants of American entertainment, NBCUniversal and ViacomCBS, themselves the products of huge mergers a few years ago, have found themselves in a difficult position. The very fact that WarnerMedia and Discovery have decided to merge is a sign that even NBCUniversal and ViacomCBS aren’t big enough to compete with Disney and Netflix. The problem? There isn’t really anyone left for them to merge with. They have too much competing content to merge with each other and anyway, the Federal Communications Commission prohibits such a move. That is unlikely to change given the current White House’s stance on antitrust. They could purchase smaller media companies, but this wouldn’t give them the global scale they need. 

The race to grow and consolidate audiences continues

As the world opens up again after the pandemic, people will be spending less time in front of their televisions. Many may decide to unsubscribe from some of their streaming services as TV no longer plays quite such a central role in their entertainment schedules. The race to grow and consolidate audiences – and therefore advertising dollars – continues, and the company resulting from the WarnerMedia/Discovery merger will be well-positioned to catch up with the current leaders. 

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