(Bloomberg Opinion) -- Three years ago this month, Hollywood executive Peter Chernin and AT&T Inc. CEO Randall Stephenson shared a dinner on Martha’s Vineyard. Stephenson is still waiting for his dessert to arrive.
It was the meal that sparked the idea for Stephenson, a practically lifelong member of the staid telephone industry, to enter the TV and film business by acquiring Time Warner, a then-$60 billion giant of the media world. After Stephenson struck the deal, he told Bloomberg News that it was Chernin who “first got me to appreciate the library that this company owns.” That library includes HBO, with hits like “Game of Thrones” and “Succession;” the Warner Bros. studio, which that year had an almost 17% share of the box office; and the rights to “Friends,” a sitcom that hasn’t aired fresh episodes in more than 15 years but has taken on new life as the Holy Grail of the streaming-TV market.
In June of last year, 601 days after the companies agreed to merge, Time Warner officially became part of the Dallas-based wireless-phone carrier, defeating an attempt by the U.S. Justice Department to block the transaction. AT&T’s WarnerMedia division, as the Time Warner assets are now called, is seen as one of the biggest threats to Netflix Inc., though it doesn’t yet have a competing product to show for it. In fact, little more has come out of the WarnerMedia acquisition so far than reports of culture clashes, differing visions and high-profile personnel exits.
According to the New York Post this week, some HBO staffers have been put off by the brusque management style of their new WarnerMedia boss John Stankey, a longtime AT&T executive. The Dallas-based C-suite is putting pressure on its Hollywood employees to ramp up HBO’s production slate as they coalesce around building a new streaming app named HBO Max, the strategy for which is still nebulous and seems to keep changing. They have a deadline to unveil the product to investors on Oct. 29. Later in the year, HBO Max will officially join the alphabet soup of video services already offered by AT&T:
The subscription on-demand product sounds akin to Walt Disney Co.’s Disney+ and Apple Inc.’s Apple TV+, which are both launching within the next three months and gunning for Netflix Inc.’s subscriber base. They’re spending billions of dollars to fill out their apps with HBO-quality content. In theory, AT&T is sitting on a set of assets best suited to draw a wide streaming audience, with HBO’s high-quality programming, plus news, sports, comedy, cartoons and popular films. But merger integration issues and AT&T’s lack of experience in the content business pose major challenges.
The price could also turn off subscribers. HBO Max is expected to charge a few dollars more than the stand-alone HBO Now app, which at $15 a month is higher than Netflix’s $13 monthly fee and more than double the $7 that Disney+ will charge. In fact, bundling Disney+, Hulu and ESPN+ will be just $13.
The irony is that while Stephenson tries to transform AT&T into a media conglomerate, the wireless business that’s effectively been overshadowed by the merger is improving. It's the healthiest area of the company. Wireless accounted for 37% of AT&T’s revenue in the last 12 months, but it was nearly 50% of Ebitda, according to data compiled by Bloomberg. That cash flow is helping AT&T contend with a heavy debt load, which stood at $194 billion as of June.
Wireless network performance has gotten better as new spectrum has been deployed, boosting AT&T’s image as the carriers transition to 5G service. Based on scoring by various outlets that track wireless connections, AT&T was able to crown itself America’s “fastest, best and most reliable network,” which are useful bragging rights for TV ads as the industry battles for customers. More important, AT&T is saving money through a public-private contract it won to build FirstNet, a network for first responders. Put simply, while AT&T’s workers climb towers to set up FirstNet, they’re also prepping its airwaves for 5G.
These improvements haven’t yet reduced churn, or the rate at which customers are leaving AT&T, but that could be next should the wireless business stay on track. And if T-Mobile US Inc.’s takeover of Sprint Corp. overcomes state opposition (16 attorneys general have sued to block the deal), there will be one less competitor for AT&T and a chance to raise prices.
AT&T’s DirecTV satellite business continues to shrink, with the company losing 946,000 video subscribers in the second quarter, including DirecTV Now customers who canceled in the wake of price hikes. That streaming service was recently renamed AT&T TV Now as the company moves away from the fading DirecTV brand. It also introduced a new service this week in certain markets called AT&T TV, which is a similar live-TV and on-demand app with various package options, but also involves using a streaming box where users can access other services they may subscribe to, such as Netflix. It became clear this week that AT&T TV and HBO Max together are at the center of Stephenson’s vision for the new AT&T.
The idea must have seemed so sweet three years ago. But peering into the kitchen, it’s all still a bit hectic. He'll have to keep waiting for that dessert.
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Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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