Why Time Warner needs AT&T

Tells DOJ that without AT&T, HBO can’t compete with Netflix, Google, Amazon and, maybe soon, Apple.

From Legacy Media Writes its own Obituary, posted Monday by BTIG’s Richard Greenfield:

Late last Friday night, the DoJ and AT&T/Time Warner filed their pre-trial briefs, with their trial expected to start on March 19th… We were most intrigued by the brief’s commentary on industry change and the challenges facing legacy media companies.  We have pulled out and analyzed relevant quotes from AT&T Time Warner’s brief  below.

The new video revolution is defined by the spectacular rise of Netflix, Amazon, Google, and other vertically integrated, direct-to-consumer technology companies as market leaders in both video programming and video distribution. For these massive Internet platforms, vertical integration means a new model of delivering high-quality programming “over the top” of existing wired and wireless broadband networks directly to consumers’ televisions, phones, and tablets—a “flywheel effect” where video content drives deeper engagement on their platforms, creating more sales and advertising revenue from participating retailers and advertisers, subsidizing the cost of the service to consumers, putting downward pressure on consumer prices, and supporting additional investment in video content.

The advantages of this model explain why Google now offers 50+ channels of premium content on YouTube TV for $35 a month, why Amazon and Netflix create award-winning original programs exclusively for their customers, and why Apple and Facebook will each spend $1 billion on video content this year alone.  In the television industry, the disruptive impact of these new competitors could hardly be more dramatic…In only a few years, this phenomenon of “over the top” premium video has irreversibly reshaped the landscape for the creation and delivery of television content, pushing all players in the market to respond in numerous ways that benefit consumers. This merger is one of those responses.

Greenfield writes:

We continue to be fascinated by the ease at which tech platforms are building content, compared to the challenges facing legacy media morphing into platforms.

Plenty more where that came from.

My take: I’m struck by how different Apple’s premium TV business model is from Netflix and the rest. Apple isn’t counting on advertising revenue “to subsidize the cost of the service to consumers.” It’s going to Hollywood in part because the others are, I think, but mostly to sell more hardware.

2 Comments

  1. Jonathan Mackenzie said:

    This is an important story.

    What’s happening here is disruptive but probably unsustainable.

    In reality advertising is not “supporting additional investment in video content.” The OTT (over the top) services are burning cash. It’s not puzzling at all why these platforms can make content but the legacy media can’t morph into platforms. Netflix and the others are essentially dumping their content into the marketplace. Netflix’s negative cash flow was about $3.40 per subscriber last quarter. They are effectively borrowing a dollar each month to keep each customer. Legacy media won’t do that willingly.

    More importantly this can’t go on. Many folks claim that a critical mass will be achieved and customers will eventually pay for themselves. Maybe, maybe not. But everyone should be clear what is happening right now. Content is being sold for less than it costs to make and deliver to the customer. Sure that has upended the industry, but it’s hardly an enticing new business model.

    In this new world video content is valued about the same as a bowl of pretzels at a bar — eat all you want, just don’t leave your seat. And Apple can afford to join in and offer free snacks for their customers to help keep them loyal. But eventually someone is going to have to start charging for this stuff again. Aren’t they?

    1
    March 13, 2018

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