What's going on here?
What does this mean?
AT&T provides mobile phone services to millions of Americans. After a series of transformative innovations (the internet, mobile phones and then smartphones), the telecom industry doesn’t have a new catalyst to drive revenue growth. By purchasing Time Warner, AT&T would massively diversify its business model (it would make a significant proportion of its revenue from selling content). It also, in theory, would create new ways for the enlarged company to increase revenue by, for example, combining its distribution as a wireless carrier with high-quality content into a package that the consumer pays for with a monthly fee (sort of like wireless pay TV).
Why should I care?
For the stock: Many investors are skeptical of AT&T’s rationale.
AT&T is essentially buying one of their content suppliers. The problem might be that consumers demand content from a variety of suppliers: we want to watch Narcos, Game of Thrones and college basketball’s Final Four (the rights to which are all owned by different suppliers). AT&T appears committed to licensing Time Warner’s content to other media distributors (e.g. its competitor Verizon), which it’s probably required to do anyway by competition law. Quite how it’s going to be able to use Time Warner’s content to differentiate its wireless offering is not really clear yet.
The bigger picture: The lines between telecom, cable and media companies continue to blur.
Comcast, AT&T’s biggest cable TV competitor, owns the media business NBCUniversal and bought Dreamworks Animation earlier this year; it also recently announced plans to launch a wireless service. Verizon, AT&T’s biggest wireless competitor, has agreed to buy Yahoo and is investing in smaller media companies in a digitally focused strategy (e.g. internet TV). AT&T is betting big on traditional media (i.e. it’s expecting Time Warner’s content to remain highly sought after by customers).