correction

An earlier version of this column cited a figure for AT&T deals involving WarnerMedia that did not reflect the full value of the deals to shareholders. The version has been updated.

If you’re aware of WarnerMedia, it’s probably as the proprietor of HBO, or as the studio behind the Batman and Harry Potter movie franchises. To AT&T, however, WarnerMedia is apparently an enormous headache, one it just announced it would spin off into a new venture with Discovery Inc. in exchange for $43 billion in cash and debt. AT&T shareholders will also get stock in the combined entity. By my calculations, the total value of the deal for shareholders is still billions less than what it cost AT&T to buy the company three years ago.

A sad day for AT&T shareholders is, in another light, actually good news: It took AT&T only three years to figure out it had made a mistake. It took 18 years to unwind the last disastrous merger Warner was involved in, the AOL-TimeWarner megadeal that closed in 2000.

Obviously, it would have been even better had billions not been wasted trying to turn a stodgy telecom into The Future of Entertainment. And though hindsight is 20/20, I’m going to go out on a limb and say it was predictable that this deal, too, was likely to fizzle, because the rationales for both mergers were remarkably similar. So were the problems.

Ultimately, they’re the reasons that the future of streaming probably belongs to the Disneys and the Netflixes (and maybe the Discovery Networks) rather than a telephone company.

In 2000, the idea was that TimeWarner’s cable network could be combined with AOL’s network of users and content. In 2018, AT&T had all manner of ways to get Warner’s movies to customers. By putting the content under one roof with the pipes that carried it, executives hoped to create a veritable snowball of synergies, an avalanche that would crush all competitors in its path.

It sounds incredibly plausible. So why didn’t it work?

Well, for one thing, you don’t need a merger to get Warner content on someone else’s pipes. You could just … sign a distribution contract. That’s how most people got HBO for years, even though it was owned by the same company as TimeWarner Cable until 2009. As University of Chicago economics professor Austan Goolsbee asked my business-school class 20 years ago, why in heaven’s name would AOL go and buy the whole company instead?

He was right to ask. People often have a vague idea that once you own the company you can use its assets cheaply. But, of course, it’s not free if you forgo potentially profitable content in favor of whatever you happen to have lying around in-house.

Moreover, imagine you had something valuable such as a movie library or a cable network. What would you charge someone to buy it from you? Probably, you’d only sell if that price were higher than whatever you expected to earn off your asset. So, while it may feel like companies save on licensing fees by buying the company, it’s really more like prepaying. Or overpaying.

Then there’s the fantastic expense of merging two firms: bankers, consultants, legal fees, time and staff lost to corporate infighting. After which they had … two or more fundamentally different businesses jammed under one roof. The corporate culture required to take endless risky bets on original content is a wee bit different from what you’d want overseeing a vast network of physical wires and cell towers, not to mention a critical piece of the nation’s infrastructure.

When you smack two unlike firms together, the gap between them is hard to fill with synergies. Often, the less dominant firm simply languishes. It seems telling that the Wall Street Journal ran a long interview with WarnerMedia chief executive Jason Kilar about his strategic vision just three days before the sale was announced, and Kilar began negotiating his exit.

Of course, one could ask whether WarnerMedia’s premium content is any better a fit with Discovery’s legendary stable of cheap-and-cheerful reality series. Yet, unlike the AT&T deal, the acquisition at least arguably solves a problem for consumers and businesses.

You’ve probably never heard anyone complain that their streaming services weren’t well-integrated with their cable company or mobile provider. But people do complain that they have to subscribe to a bunch of streaming services because none of them individually has quite enough content. Users also complain that they don’t know where to find specific things they want to watch.

That’s changing, however, as the market evolves. If you want to watch a Disney movie, you know you’re going to Disney Plus. It seems likely that the market will shift further in that direction, toward fewer services with broader and more stable libraries.

Delivering that stability through licensing is challenging. Early on, Netflix’s streaming service had lots of premium movies, licensed from Starz; then, in 2011, Starz refused to renew the deal, and Netflix lost frustrated customers who had come to expect premium content on the cheap. Netflix now spends billions every year developing original properties it owns outright.

Unlike synergies, that’s a tangible reason to own rather than rent. So maybe for WarnerMedia acquisitions the third time will be the charm — and, eventually, charm streaming customers, too.

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