The analysts predicted it would send billions of dollars flooding into the creation of new content to woo viewers, a gamble, the experts said, as viewers show less interest in streaming content at home as they emerge from pandemic shutdowns.
The deal also has the potential to reshape the film industry, with the new company’s access to the Warner Bros. studio and HBO Max, which during the pandemic has released films direct to consumers at the same time as their scheduled theater debuts.
It was the second time in recent years that AT&T has upended the media and entertainment industry. Just three years ago, the company, better known for providing phone and wireless services, purchased Time Warner, an acquisition that gave it control of CNN, HBO, Cartoon Network, TBS, TNT and Warner Bros.
“This is a streaming arms race, and AT&T is making an offensive strategic move to further bulk up its content in the battle vs. Netflix, Disney, and Amazon,” Dan Ives, managing director of equity research at Wedbush Securities, said in an email to The Washington Post. “This was a now or never type of acquisition, with content king in the streaming wars.”
The move also represents AT&T’s apparent abandonment of the idea behind its 2018 Time Warner purchase — that combining a telecommunications company with a gargantuan content provider would give it a leg up in winning new cable subscribers. By shedding its major creative asset, experts say, the company now is positioned to invest more heavily in 5G technology, while drawing revenue from dwindling cable subscription fees.
“There are a lot of companies that are incredibly successful that do unsexy things for less stress than content creation, if they’re looking to compete head-to-head with the tech giants, which is kind of what this looks like,” said Jaci Clement, chief executive of the nonprofit media watchdog group Fair Media Council.
For Discovery and its chief executive, David Zaslav, who will head the new company, the deal represents a revolutionary opportunity. Founded in the 1980s as a producer of documentaries in the Maryland suburbs outside Washington, the network has grown to be the New York-based parent of dozens of domestic and international properties, including Animal Planet, Food Network, HGTV and the Travel Channel.
Once television’s champion of reality programming — for a time it featured shows such as “Sex Sent me to the ER” and “Here Comes Honey Boo Boo,” about a rowdy child beauty pageant contestant — Discovery has undergone a Zaslav-inspired return to its documentary and science-based roots.
While its annual “Shark Week” remains a ratings juggernaut, its two most-watched programs last year were coverage of the May launch of astronauts Bob Behnken and Doug Hurley to the International Space Station, with live coverage of the launch itself drawing 4.7 million viewers. (The Washington Post has a production agreement with Discovery for that programming.)
At a news conference to announce the planned merger, Zaslav said the new company will boast, as of “day one,” 200,000 hours of content across a range of programming genres, including sports, blockbuster films and reality shows. Executives said that combined, the merged company will invest about $20 billion a year in content, exceeding the $17 billion that Netflix has said it will spend on new television shows and movies this year.
The new company would also offer a live news presence via CNN and live sports coverage through TNT and TBS.
“We think together the combination makes us the best media company in the world,” said Zaslav. “We’re not going to stop until we’re the number one global entertainment company, reaching people on every device.”
Analysts said the deal augurs a battle among streaming giants, and is likely bad news for smaller streaming services.
“I think the big piece here is the fact that these guys are going after Disney. That’s the game. Disney is the gold standard, and because of the content libraries, they know that if they’re going to go direct to consumer in the way that they need to, to win, they are basically putting everything together,” said R “Ray” Wang, principal analyst and founder of Constellation Research and author of a forthcoming book on the streaming wars, “Everybody Wants to Rule the World.” “This is the end-all, be-all merger.”
In addition to its theme parks and movie studios, Disney also owns the ESPN sports channels and the ABC television network.
Under the deal, AT&T shareholders would control 71 percent of the new company and Discovery shareholders 29 percent. Both companies’ stock traded down on the news, with AT&T closing at $31.37, down 2.7 percent, and Discovery down 5.1 percent, closing at $33.85.
With an increasing array of subscription offers, AT&T’s HBO Max division had adopted controversial techniques to persuade viewers to sign up — such as releasing top movie blockbusters such as “Wonder Woman 1984″ and “Godzilla vs. Kong” to the streaming service at the same time as theaters. The effort had only mixed success.
Ed Moya, senior market analyst with Oanda, a currency and markets analytics firm, predicted smaller streaming services will be crushed in the content spending wars.
“Costs will eventually go up, and the consumer might actually miss the days of cable TV and adding a couple premium channels,” Moya said in commentary Monday.
The average American subscribes to four streaming services, according to a 2021 survey from J.D. Power. Most households spend about $47 a month on streaming subscriptions, up from $38 in April 2020.
Public interest groups, consumer advocates and President Donald Trump’s Justice Department opposed AT&T’s Time Warner acquisition. The deal gave AT&T, which controls of much of the infrastructure bringing television and steaming services into American homes and smartphones, a premier entertainment company in WarnerMedia, whose titles include “Game of Thrones” and the Harry Potter movie franchise.
But the spinoff is a sign that marshaling such disparate assets has not rendered the benefits AT&T hoped for and that executives believe a separate company would be better equipped to compete with the other major players in the streaming wars that are increasingly replacing cable as a source of entertainment.
Tops among those competitors are Netflix and Disney, which acquired 21st Century Fox in 2019. Netflix is valued at $219 billion. Disney’s market capitalization is about $315 billion.
Executives didn’t say what form the new company’s streaming options would take. WarnerMedia’s HBO Max, which charges $14.99 monthly, claimed 64 million subscribers globally in the first quarter. Discovery’s streaming service, at $4.99 and $6.99 a month, depending on the tier, has about 15 million subscribers, the company said last month.
Netflix, whose basic service costs $8.99 monthly, has approximately 208 million subscribers worldwide. Disney, with service starting at $7.99 monthly, has 100 million subscribers to its Disney Plus service.
AT&T CEO John Stankey has been intent in recent years on growing the company’s 5G mobile network, an effort the company may be able to focus on more directly by spinning off its media properties. (In 2019, The Washington Post formed a business partnership with AT&T to test 5G technology.)
The new company is starting with $55 billion in debt, but Zaslav said he expects it to become a “free cash flow machine,” with $52 billion in revenue by 2023. Last year, WarnerMedia’s revenue was $30.4 billion. Discovery’s revenue was $10.7 billion.
The companies have already identified $3 billion in synergies, Zaslav said.
The deal came “completely by surprise” to CNN employees, along with the rest of the media industry, a senior producer, who spoke on the condition of anonymity because they were not authorized to comment, told The Post. On Monday, the deal was announced during CNN’s morning news show, “New Day.”
“Just to be clear, just so people don’t think we’re avoiding it, CNN [is] part of this deal,” co-anchor John Berman told viewers.
CNN President Jeff Zucker said in February that he expected to leave the network at the end of the year, when his contract expires. When asked last week whether that is still the plan, Zucker declined to elaborate. “My plans remain exactly as I laid them out earlier this year,” he said last Monday.
Now it looks like that could change. Zucker, Zaslav’s longtime friend, could take on a large role in the combined company. During this morning’s virtual news conference, Zaslav praised Zucker and said, “We will be trying to figure out how do we get the best and brightest to stay.”
Jeremy Barr contributed to this report.