The streaming video business has started consolidating, even though to most investors it is the most recent example of ‘new’ digital media. The reality is that the sector is reaching ‘’peak streaming’ faster than thought, as the reported $US150 billion merger talks between AT&T/Warner and Discovery shows.
Smaller companies and their owners are now being left behind by the heavy content spending by Netflix, Disney, Amazon and Apple – it is an industry that is rapidly maturing a decade after it first appeared with 300 or more offerings in North America alone and hundreds more elsewhere.
It’s a sign that two of the better placed and backed streamers – AT&T and Discovery – have found the cost of keeping up with Netflix and Disney too much and have in effect decided to combine, as well as the growing competition from giants like Apple and Amazon.
If this deal goes through the combined group will be a 5th player in streaming’s major operators- Netflix, Disney, Apple and Amazon but will still struggle to keep up. The combined company will have more than 57 million subscribers, most of whom are in the uS.
Netflix has more than 200, Disney 103 million and Apple and Amazon have a reported 200,000 or more between them through various deals – especially through Amazon’s Prime service.
For AT&T to decision to minimise its involvement and spending in streaming and other electronic media is understandable. It wants to limit spending in media because it has to finance the huge cost of the 5G mobile technology switch and prepare for 6G down the track which will take tens of billions of dollars. It might be the biggest telco in the US, but it is under siege from new rivals and technologies like every other media or tech group and has already lost more than $US30 billion on an earlier takeover of satellite group, DirecTV.
Discovery is in a similar position. It might be controlled by the Newhouse family’s Advance Publications (includes Conde Nast) and Liberty Media whose major shareholder, John Malone is chair of Discovery and the Liberty Media group, a sprawling US based cable TV and production giant.
But while they are substantial media businesses and wealthy individuals, the $US30 billion plus being spent by Netflix and Disney a year alone is too much.
Malone has considerable media interests elsewhere in the US and Europe through Liberty Global. He has boasted he tried to buy Netflix in 2010 but co-founder Reed Hastings said no.
Now Malone and Discovery are reportedly nearly a deal with AT&T combine its content unit, Warner Media with rival Discovery to create a media giant with an enterprise value of $US150 billion.
AT&T’s move comes three years after paying more than $US85 billion for Warner and its suite of cable channels plus its streaming service, HBO Max.
Media reports said WarnerMedia had already been talking with Disney’s NBCUniversal which is controlled by Comcast (which also controls Sky TV in the UK and has a substantial number of cable channels in the US) which is the second biggest US media group after Disney ($US269 billion value against $US315 billion). Comcast has been a late contender in streaming through the Peacock service which started late last year.
The likely structure of the deal will combine Discovery with all of WarnerMedia, which will become a new publicly traded company co-owned by AT&T and Discovery shareholders. It will be a combination of cable channels and streaming video – the two companies had a combined total of 57 million subscribers in the US at March 31.
The cable channels will include Discovery’s HGTV, Food Network, TLC and Discovery. WarnerMedia division, has HBO, Warner Bros and Turner networks CNN, TNT, TBS and several others. Discovery also controls Eurosport and has a stake in OWN network of Oprah Winfrey
The exact split between the two companies couldn’t be determined on Sunday. An announcement is expected Monday in the US.
Discovery has a $US16 billion market cap and a $US30 billion enterprise value (ie a lot of debt). AT&T acquired Time Warner, since renamed to WarnerMedia, for $US85 billion in equity value in 2018.
The Financial Times says the new company, if formed, would have an enterprise value of up $US150 billion – depending on asset valuations.
WarnerMedia launched its HBO Max streaming busness in May 2020. Discovery rolled out Discovery+ in January of this year in the US and HBO Max will go global starting next month and also introduce a cheaper, ad-supported tier.
In February, AT&T in February took a big step and pushed the fading satellite pay-TV operator DirecTV off its balance sheet, selling 30% of it to private equity firm TPG. The spinout valued the enterprise at $US16.25 billion, a steep discount from the $US49 billion AT&T paid to acquire DirecTV in 2015. Discovery absorbed Scripps Networks Interactive in a $US 14.6 billion transaction in 2018.
