T AT&T Inc

By Amol Sharma 

AT&T Inc. and Time Warner Inc. are suiting up for the Great Media Game. Their strategy to win is more about defense than offense.

The strongest case for the gargantuan merger is that it is a hedge against a future where the first point of entry for a media consumer might be Netflix, Facebook, YouTube or Hulu, just as easily as a cable or telecom company.

AT&T's $50 billion acquisition of DirecTV tethered the telecom giant to a pay-TV business that has begun to decline and could be in store for serious pain if cord-cutting accelerates. The good news for AT&T, Comcast Corp., and others is that consumers will still need broadband subscriptions to sign up for their favorite streaming services.

Now, with the Time Warner deal, there will be another hedge for AT&T: Any emerging streaming platform will need to license content from the big media conglomerates to survive. Time Warner won't likely be left out of any aspiring "skinny" online TV bundle from Google, Amazon or Apple, or TV-like platform on social media, be it via Facebook, Snapchat or Twitter. (A side benefit: AT&T will take on Time Warner's 10% ownership of Hulu alongside Comcast, Walt Disney Co. and 21st Century Fox Inc.)

AT&T Chief Executive Randall Stephenson noted that Time Warner had created an "amazing franchise" by distributing its content through many outlets, and "we don't imagine that changing."

Time Warner doesn't have as much territory to defend on the cable dial as companies that own a dozen or two dozen channels. Most of its wealth is tied up in premium channel HBO, TNT, TBS and CNN. So there hardly could be a better target in the media world for companies planning for the breakup of the every-channel-under-the-sun cable bundle.

OK, so "defense wins championships," right? But what about the alternate case, that great offense prevails?

Obviously, AT&T would rather be the new TV distributor of the future. Its planned DirecTV Now streaming service is a start. One could imagine, to the extent regulators allow it -- and that is an open question -- opportunities to package HBO, TNT and CNN content for AT&T mobile video customers in new and interesting ways.

"There's more video going on mobile," Time Warner CEO Jeff Bewkes said in an interview. "That's why AT&T with its scale is such a great home for our content."

Mr. Bewkes also points to new opportunities to do household-level targeting with ads, making them more valuable and supporting content costs. Of course, AT&T was already in position to do much of that sophisticated ad targeting without Time Warner's help.

The risk for AT&T is that a new entrant in the media-telecom world will have more game. What if Amazon, which already has growing TV ambitions, floats a new cablelike bundle that takes advantage of its e-commerce store -- running ads before shows that direct viewers to buy diapers or shoes on its site? That might very well allow Amazon to offer TV services for lower retail prices than competitors.

Or what if Facebook grows so powerful as a video conduit that it effectively becomes the future of broadcast?

For Time Warner, the decision to sell now is also something of a hedge -- a defensive maneuver. On a micro level, the company is in as solid shape as one could hope in a turbulent media world. CNN's ratings are flying high on election coverage, but could crash down to earth thereafter. The NBA playoffs on TNT were a huge hit last spring, but if the NFL's recent ratings woes are any indication, sports TV won't be immune to the pressures on the pay-TV bundle forever.

On a macro level, the one thing media companies don't have is access to consumers. Some TV networks, from CBS to HBO, are betting they can build direct-to-consumer businesses on their own to cater to the growing ranks of cord-cutters and cord-nevers. But they have found, in many cases, that support from big traditional distributors like cable providers -- the experts in marketing, packaging and customer service -- would help those products gain traction.

In AT&T, Time Warner will have a giant pay-TV and broadband provider on its side. And to the extent AT&T creates more digital media products -- on mobile or TV -- Time Warner will be well placed.

The markets still generally place a premium on media stocks compared with distribution ones, if their trading multiples are a guide. But the gap has been narrowing, a sign that the true source of power in the industry isn't so clear.

The "dumb pipes" and the must-see content need each other.

Write to Amol Sharma at amol.sharma@wsj.com

(END) Dow Jones Newswires

October 23, 2016 16:50 ET (20:50 GMT)

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