Over the weekend, the acquisition of Time Warner Inc. (NYSE:TWX) by AT&T Inc. (NYSE:T) for about $85 billion drew some unkind comparisons to Time Warner’s own purchase of AOL in the year 2000.
That deal, which at the time was valued at $224 billion, was a fiasco, even for shareholders of AOL, which got 60% of the new entity’s equity. Adding 60% of $85 billion to 60% of the $55 billion Time Warner Cable got from Charter Communications, Inc. (NASDAQ:CHTR) , and 60% of the $1 billion spin-off of Time Inc, (NYSE:TIME), the magazine unit, still adds up to a lot less than $100 billion.
The claim back in 2000 was the same one the companies will make today –that “convergence,” or vertical integration of internet pipes with broadcast and movie content, make the whole worth more than the sum of its parts.
But is it really, or is it just an excuse to spend less in hope of monopoly profit?
The Comcast Stock Example
Back in 2012, when Comcast Corporation (NASDAQ:CMCSA) completed the acquisition of NBC-Universal, the USA Network was the top-rated cable network. It had an average prime time audience of almost 3 million people.
USA Network was considered a key piece of the merger. It had hits like Monk and Psych, and reruns of the Law & Order franchise.
Today USA Network is seventh in the ratings, its primetime numbers half what they were. You would be hard pressed to find many NBC Universal networks in the top 25 of the cable ratings, and these are prime-time audiences as low as 600,000 people, about what you’d get on a good podcast.
At the movies, CMCSA’s Universal has watched Walt Disney Co’s (NYSE:DIS) Buena Vista lap it since 2012, literally doubling its share of the box office, while Universal’s share is up just 1%. On TV, NBC ratings have gone from 7.36 million viewers in 2012 to 8.74 million, mainly on the strength of football and reality shows that don’t re-run.
Comcast stock has been, at best, a diffident parent to the NBC Universal assets — placing them under a larger corporate umbrella, hiding them from market competition, but adding no real value.
Why does AT&T want to be in this business again?
AT&T Needs Less Competition
It’s because you can’t prove this failure by looking at Comcast stock. Since acquiring all of NBC Universal in 2012, Comcast is up 80%, against a 72% gain for the NASDAQ. It has more than doubled the dividend to 28 cents per share.
Time Warner executives believe being acquired by a carrier will eliminate ratings pressure, as it did at NBC Universal, and provide a steady stream of profits from vertical integration, as AT&T will pay itself for carriage on its satellite, wired and wireless networks.
But AT&T has also suffered from competition. The stock only passed its pre-recession high in August, and has since fallen 13%. AT&T has been losing telephone subscribers for years, and while its cable subscriber count exceeds that of Comcast, that’s almost entirely thanks to DirecTV, acquired last year. Its U-Verse subscriber count is down nearly 20% since that deal was done.
But even DirecTV has a problem — the rising cost of programming. The satellite company has had to raise bills at an unsustainable rate, and pay TV has been cut by one-fifth as subscribers cut the cord in favor of getting programs over the internet. About 20 million households had no pay TV contract at the end of last year, and that number is rising.
AT&T’s decision to emphasize DirecTV is helping to kill it in the broadband internet market. Comcast and Charter now control 70% of that market. AT&T Wireless still has one-third of the wireless market, but even that share has been cut recently by T-Mobile US Inc (NASDAQ:TMUS).
Both Want the Other to Save Them
Rather than upgrade lines and compete with Comcast stock, AT&T wants to take Time Warner’s content and get the cord-cutters’ revenue from it. Time Warner, meanwhile, wants AT&T to insulate it from competition as Comcast has done for NBC Universal. What consumers want, meanwhile, is to pay only for the programs they watch, rather than for the hundreds of channels in cable bundles.
But if AT&T wants to be Comcast, investors have been saying in 2016, AT&T wants the wrong thing. Over the last year, AT&T stock is up 11%, Comcast up just 3%, and as AT&T has discussed this deal its advantage has been cut by one-third.
The market, in other words, is saying that this deal is stupid, that its aim is simply to reduce investment and jobs, and that maybe the “holy grail” of vertical integration isn’t all it is cracked up to be.
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CMCSA.
