In 2016, AT&T bought Time Warner for $85.4 billion. The merger brought Time Warner and all its holdings (CNN, Warner Brothers, DC Comics and HBO) under the same umbrella as AT&T telecommunications holdings including DirecTV. The pairing seemed odd when it was announced. A telecommunications company and content company? Most of us assumed there were smart people running the companies, and they knew what they were doing.
In May 2021, AT&T announced its selling all of its Warner Media assets to Discovery for $43 Billion. A little less than 5 years later, and 18 Billion less than they paid for it, there’s been a complete reversal of strategy. Why didn’t this partnership work? The reasons are many.
1. Vertical vs. Horizontal business strategy
AT&T deals in a vertical business market, which means it’s in an industry that focuses on a particular niche. AT&T niche is its phone and internet network infrastructure. Verizon and T-Mobile sell the same cell phones and tablets as AT&T but its AT&T’s network that sets it apart, according to the AT&T ads. In a vertical market, the goal is to get the customer to buy or subscribe to you and you alone and keep the customers’ loyalty.
Time Warner operates in a horizontal market. In a horizontal market, the company meets a need of a wide range of buyers across different sectors and mediums. Time Warner content is shown through Cable, Movie Theaters and Streaming. In Time Warner’s market, they don’t care if you also; watch Fox News or Showtime, go see a Disney Movie or also subscribe to Netflix, as long as you also watch their content too. Essentially, AT&T wants costumers exclusively to them whereas Time Warner is more than wiling to share customers with competitors.
We saw the differences in strategy when AT&T advertised that if you get AT&T services, you can watch HBO on your cellular devices. A person could always do that before the merger! The only difference is a non AT&T customer would have to continue paying for it now? The two different market strategies always conflicted throughout the merger. AT&T never figured out the difference between vertical and horizontal markets.
2. Between a Rock and a Hard Place competing against Corporate Giants
AT&T and Time Warner compete in two different industries against heavyweights in each industry (Verizon, Disney, Comcast). Don’t let social media and TV fool you, money is a finite source even for corporations like AT&T. The company has to continue to build out its 5g network which is uber expensive to build. Time Warner has to continue to create new content to attract and maintain customers. With limited resources competing in two different expensive to operate markets, something had to give. Last Year, AT&T committed to spend $2 billion on original content for HBO Max. That’s a lot of money to me and you, but when it compares to the 16 billion Netflix spent on content, it’s not that much money. Time Warner asked for $4 billion and only got 2. It’s a big reason we see shows we would usually see on HBO on Netflix or on Hulu now.
In the end, AT&T focused on its main craft, telecommunications and put all its money and resources behind building out its 5g network and let someone else deal with the expensive content side project, known as Time Warner.
3. Late to the game
AT&T started HBOMAX during the middle of the 2020 Covid-19 Pandemic. Its competitors Netflix had been around for years and Disney+ had a huge rollout for its opening in late 2019.
HBOMAX, whether because they started it during a pandemic, because it was the last of the big three to the streaming wars or that it can’t match up content wise to Disney+ or Netflix just doesn’t have the subscriber numbers of the other two.
AT&T claims 44 million subscribers for HBOMAX, but if you dig deep into the numbers, one sees that 24 million of those subscribers get the service free from being an AT&T subscriber. HBOMAX really only has 20 million subscribers, which lags far behind Disney’s 100 million and Netflix’s 200 million. The early trailblazer in an industry (Netflix), will always have a name and legacy advantage in the industry. For an upstart to take over it must have either better content, better pricing or something groundbreaking that evens the playing field. What does HBOMAX do that is better than Netflix? Nothing and it’s the major reason for its being in last place of the big three in the streaming wars.
4. Pricing
A HBOMAX subscription costs $14.99 a month. For comparison one can get a basic Netflix subscription for $8.99 a month and Disney+ subscription costs $8.00 a month. Going back to point 3, what does HBOMAX offer to make it worth $6 dollars more than the rest? It is a question that consumers often asked and one that AT&T never could answer.
HBO is living off its legacy as the cable station with the premier shows and movie originals. In the cable industry, HBO is the premier add on that consumers gladly pay for to watch great content. HBOMAX is competing in the streaming market and not the cable market. In the streaming market. HBOMAX is the new kid on the sports team with a reputation for being an outstanding player but has yet to prove it on his or hers new team. Yet, the new kid comes in demanding a starting position, a certain amount of playing time and perks the other players don’t get. Consumers laughed and continued to watch Netflix and Disney+. AT&T could never figure out that it had to lower the price of HBOMAX to make it similar to Netflix and Disney+ or have such superior content consumers didn’t care about paying the price. AT&T choose neither path and it lags far behind the other two in subscriber numbers.
I give AT&T credit for not falling prey to the Sunk Cost Fallacy way of thinking and just cutting its losses and selling Time Warner. In the end, AT&T is always a telecommunications company. It’s what it does best, and they either did not understand or want to spend what it takes to successfully compete in the content industry.
Another Irony of this story is that the Trump Administration Justice department fought the merger tooth and nail and spent millions in manpower, time and money to stop the merger from going through. If they had just waited, oh 3 years AT&T would have done the dirty work for them and saved everyone a lot of time and effort.
Telecommunications and content are like apple and oranges. Two different industries that require different mindsets and skills to succeed in. Hopefully AT&T and other corporations learn the lessons from this failed merger. In the end, bigger doesn’t necessarily mean better.
