AT&T’s lust

AT&T Should Thank the Trump Administration

AT&T’s lust for Time Warner traces a business impulse we’ve seen in action a dozen times in the past half-century.

By JACK SHAFER

The Department of Justice has just done AT&T a big favor by filing a lawsuit to block as anticompetitive the internet provider/satellite broadcaster/wireless conglomerate’s $85 billion acquisition of Time Warner.

Although AT&T has vowed to fight the government’s soon-to-be-announced lawsuit, the company should take advantage of the government’s intervention to retreat. Acquisitions like this rarely make money for the buyer, and such media acquisitions often dissolve into a crucible of tears as the buyer comes to his senses and unloads the properties he once so coveted.

AT&T’s lust for Time Warner traces a business impulse we’ve seen in action a dozen times in the past half-century. Big media companies, thinking that giantism will keep them profitable and maintain growth, stuff themselves via merger and acquisition with other companies. Remember all of those newspaper company mergers and acquisitions? In 1986, as media scholar Ben Compaine wrote, CBS was the largest media company in the United States. It owned a network, radio and TV stations, a major music label, a flotilla of magazines and a major book publisher.

How did that giantism work out for CBS’ owners? Not so well. In the next decade, it dumped its magazines, unloaded its record company and purged itself of its book division. It wasn’t even one of the country’s 10 largest media companies by the time Viacom acquired it in 1999 for $35.6 billion in what was then the largest media merger ever. And how did that giantism worked out for Viacom? By 2006, Viacom was the third-largest media company in the world, but it discovered that it could not make all of its units (movie studio, broadcasting, cable channels, book publishing, outdoor sign) work together coherently. So it split itself into two separate companies.

Remember the $111 billion merger of Time Warner and America Online in 2001? The two companies soon realized they had erred in combining and split up as the decade ended. Time Warner also jettisoned its magazine and cable divisions, slimming itself down to a movie studio and cable channels (CNN, TNT, HBO, et al.).

Why do these media megamergers almost invariably fail? “In large conglomerates, size and complexity is the enemy,” Columbia Business School professor Bruce Greenwald told the New York Times in 2005. “Often, executives can’t focus carefully on each of the businesses, so they don’t run as well.”

The optimists touting the AT&T deal say that giantism can work, and point to two well-run conglomerates that seem to have made the concept work: Comcast (cable, Universal Studios, broadcast stations and NBC) and the Walt Disney Co. (Disney studios, Lucasfilm, theme parks, ABC, broadcast stations and ESPN). The AT&T optimists also say that as media go increasingly global, businesses must build for scale like Comcast and Disney or risk being left behind. Rupert Murdoch’s 21st Century Fox—one of the existing mini-conglomerates—is preparing to sell its movie studio, entertainment cable channels and international broadcasting divisions because it can’t compete in the Comcast- and Disney-dominated sandbox. Possible buyers of the 21st Century Fox assets who think they can compete include aspiring media conglomerate Verizon (wireless, landline, cable, internet properties) and Sony, which already owns a movie studio and a music label.

Another way to consider the current acquisition and divestiture mania is as a reaction to the unpredictable nature of the media business. Technology—which the modern media conglomerates aren’t very good at inventing—has the potential to displace established companies. (Have you been to a Blockbuster lately?) By diversifying into as many existing technologies as possible—cable, broadcast, studios, streaming—the media conglomerates hope to build impenetrable fortresses that will protect them from competition.

But will such investments really work as a hedge against the future? Coming out of nowhere, Netflix and Amazon built pioneering streaming entertainment services that put to shame anything the media companies have established. And the Netflix and Amazon success is only the beginning. Apple (the world’s largest company), Google (the second largest), and Facebook (the fifth) have big plans for video and distribution investments that will likewise sidestep the established media companies. Apple and Google are not just the largest companies—they could buy and sell the media conglomerates several times over without huffing—they’re also the smartest money in town. The fact that they’re building from the ground up instead of buying their way into mediaville with acquisitions might be the best argument against the AT&T deal.

So instead of suing the Trump administration, in the spirit of Thanksgiving, AT&T should be sending Jeff Sessions and the gang a bottle of hard cider, a pumpkin pie and maybe a nice centerpiece of fall foliage. Because this merger’s a turkey.