HBO Max - A Potential Winner?

Yesterday, AT&T (WarnerMedia) announced its new streaming service HBO Max.  The service will launch in May of 2020 and will be offered for free or discounted to subscribers of AT&T’s premium unlimited wireless plans or one of its MVPD services (U-verse, DirecTV).  Entering a market using well-established platforms (wireless, MVPD), with millions of subscribers on each, and then adding the cherry-on-top of price incentives, gives AT&T a huge competitive advantage in the increasingly crowded market for streaming services.  It is not a winner-take-all market as households will subscribe to multiple services.  However, you certainly would expect that AT&T will be one of the winners.  Much like you would expect that Google, Amazon, and Facebook (BIG TECH) will succeed when they introduce applications and new services on their online platforms.

So, it begs the questions.  Does the vertical integration of platform and content, created with the 2018 merger of AT&T and Time Warner, give the media-telecom firm an unfair market advantage?  The DOJ was concerned about that and it is why it filed an antitrust suit to block the merger.  (The courts did not have the same concern and approved the merger.)  This summer, the DOJ opened a broad antitrust review into the BIG TECH firms’ business practices.  If harmful conduct is discovered, what action might regulators take?  Would it be right to extend review (and action) to other firms with similar vertical structures, like AT&T?

The review could start with the year-long carriage dispute between AT&T and its satellite competitor, Dish.  Since last November, Dish has not carried HBO, including during the spring release of the final season of Game of Thrones.  Dish believes that AT&T’s behavior in contract negotiations has been anticompetitive, using its leverage to foreclose access to the premium content favored by many. 

"No Sacred Cow"

On Monday, AT&T released its third quarter earnings and announced a settlement of sorts with activist investor, Elliott Management, that commits, over the near term, to reducing debt and avoiding major acquisitions among other things. 

Probably the most concerning part of the financial results was the continued hemorrhaging of TV subscribers.  In the quarter, AT&T’s Entertainment Group experienced declines of greater than a 5% (1.163 million) in premium TV subscribers and 17% (.195 million) in AT&T Now subscribers.  For “now” though, DirecTV is staying put as part of the firm’s assets and strategy “to meet growing demand for content and connectivity.” With Elliott and other participants on the earnings call, AT&T’s CEO, Randall Stephenson, said that “[DirectTV] will be an important part of our strategy over the next three years. But no portion of our business is exempt.”

https://www.hollywoodreporter.com/news/at-t-review-assets-board-changes-ceo-stay-1249872

https://about.att.com/story/2019/att_third_quarter_earnings_2019.html

The Tunney Act in "Action"

In July, the Department of Justice (DOJ) approved, with conditions, the $26 billion merger between the third and fourth largest wireless telecom carriers, T-Mobile and Sprint.  As required by the Tunney Act (a.k.a. the Antitrust Procedures and Penalties Act of 1974), a federal court must review the terms of the proposed final judgement (consent decree) in civil antitrust cases to ensure that the outcome is in the public interest.  The process begins with the proposed consent degree and the DOJ’s Competitive Impact Statement being published in the Federal Registry.  That happened on August 12^th.  Any person can then submit written comments about the proposed settlement to the DOJ’s Antitrust Division.  The 60-day window closed almost two-weeks ago.  Next, the DOJ submits the comments and a response to the court.  After that, the presiding judge, Timothy Kelly, will render his decision.  While the judge cannot block the merger, he could deem the remedies inadequate and seek modifications to the consent decree. If approved without changes, T-Mobile/Sprint could begin transferring assets to Dish, the new market entrant, ninety-days after the decision.

 

While most settlements are approved without much fanfare, there have been exceptions.  Most notable was the 1982 Modified Final Judgement in the United States v. AT&T monopoly case that laid-out the break-up of the Bell System.  Several parties in the T-Mobile-Sprint case have submitted comments to the DOJ.  On October 10^th, the states asked the court to hold-off making a decision until after the states’ lawsuit is resolved.  (Oral arguments in that case are expected to begin in December.)  On Thursday, the DOJ stated that the states’ efforts to delay the court’s decision raised “serious constitutional concerns”.  And, around and around we go!

On a positive note, T-Mobile and Sprint were able to strike a deal this week with Colorado’s AG concerning jobs and 5G deployment in the state.  As a result, Colorado is no longer a party to the multi-state lawsuit.  That means ONLY 15 states and the District of Columbia remain on the lawsuit.  Let’s see what next week brings!

   

https://www.federalregister.gov/documents/2019/08/12/2019-17153/united-states-et-al-v-deutsche-telekom-ag-et-al-proposed-final-judgment-and-competitive-impact

Disney's Entry into Streaming -- Watch Out Netflix!

In a little over 3 weeks, Disney will launch its streaming service Disney+ for $6.99/month (or $69.99/year).  Subscribers will get access to movies and TV series from Disney, Pixar, National Geographic, Marvel, and Star Wars.  In a brilliant move, Disney is releasing the weekly Star Wars universe TV series, Mandalorian, at the launch of the streaming service.  Other brilliant moves include the offer to pre-order the service prior to November 12th, and the bundle for $13/month for Disney+ with Hulu and ESPN+.  The bundle, a combination of kids’ shows and movies (including the library of classics), entertainment for adults, and sports programming, seems an ideal package for many households.  Disney will need about 2 million subscribers to just make up the $150 million per year in licensing fees from Netflix that goes away at the end of the year.  Expect that threshold will be met quickly because of the value proposition that Disney is offering out of the gate.  The question is how will Netflix fare?  Without Disney content and a monthly price points of 12.99 (standard) and $15.99 (premium) will there be a larger than expected drop in Netflix subscribers?  Expect there will be challenges ahead for Netflix as its dominance in streaming will be challenged by well-financed, well-known competitors.

The CBS-Viacom Merger: Does Size Matter?

On paper, it looks good.  With an expectation that the merger of CBS and Viacom will be completed by yearend, there should be excitement in the air for this new company with its breadth of content (140K premium TV episodes, 3.6K+ film titles, contracts for live sports programming) and multiple distribution channels (broadcast and streaming).  The firm also anticipates a minimum of $500 million in cost savings.

Yet, because ViacomCBS’s annual content spend of $13 billion pales in comparison to Disney’s $27 billion; the value of its sports contracts with the NFL, NBA, NCAA basketball, and PGA golf (The Master’s) pales in comparison to the other broadcast networks; its direct-to-consumer subscriber counts for Showtime and CBS All Access pales in comparison to those for Netflix and HBO; and its share of box office receipts (approx. 5% in 2019 YTD) pales in comparison to the other major studios of Buena Vista (Disney), Warner Brothers (AT&T), NBCUniversal, and Sony/Columbia, there is little excitement for this deal.  It was seen as a must happen deal.  It was not seen as a WOW deal as its scale is not as large as the others.  But, how big does an entertainment company have to be?  Might a firm that is at a sufficient size in a market be big enough to be price competitive and profitable?  Afterall, when a firm becomes too large, inefficiencies can occur by trying to manage too many projects/units and too many people.  A firm focused on consistently delivering in a cost-effective way a product in the market that consumers value will be around for the long run.  Size is not everything!

https://www.hollywoodreporter.com/news/viacomcbs-boasts-13-billion-annual-content-spending-1229565

https://www.vanityfair.com/news/2019/09/cbs-viacom-marriage-concerns-about-synergies-and-size

Timing is Everything for a Merger: DirecTV and Dish?

In October of 2002, the FCC ruled that the combination of Dish (formerly Echostar Communications Corp.) and DirecTV (formerly owned by Hughes Electronics, a subsidiary of GM) in the multichannel video program distribution (“MVPD”) market would likely “harm consumers by: (1) eliminating an existing viable competitor in every market; (2) creating the potential for higher prices and lower service quality; and (3) negatively impacting future innovation.”  At the time, most markets had three competitors – the two satellite providers and a cable company (e.g. Comcast).  At the national level with 87.6 million MVPDs subscribers, the combined market share of the satellite firms summed to about 20 percent.  On a per market basis, the market shares were much higher and therefore a hypothetical merger would have increased the market power of both the satellite firm and its cable competitor.  At a time, when annual MVPD price increases were significantly outpacing inflation, the market needed more competition, not less.

Today, Dish and DirecTV account for about a third of the MVPD market. Today, the cable providers face increasing competition from the “fringe” – media and technology firms going direct to consumer with streamed content over the internet.  Today, an increasing number of households are cutting the cord and not subscribing at all to an MVPD service.  So, would today be the right time for a merger between the 2 satellite providers?  Would a merger be approved by regulators?  Market analysts suggest that, if the 2 firms combined, they would realize $2 billion in cost savings annually.  The synergies would help the firms, with their own skinny bundles (DirecTV Now and Dish Sling), compete in an increasingly crowded and fragmented market.  But, with Dish on the hook to buy Sprint’s assets to be a new entrant in the wireless telecom market, today may not be the right time.

https://www.barrons.com/articles/dish-att-directv-merger-deal-51560186982

"Watching" Netflix

On Wednesday, Netflix released its third quarter 2018 financial results.  With better than expected earnings per share and growth in international subscribers, the market reacted positively to the numbers in after-hours trading.  Somewhat disappointing was slower than expected growth in the number of domestic subscribers.  A year-over-year comparison of subscriber numbers shows

Subscribers	3Q2018	3Q2019	% Change
Domestic	58.5M	60.6M	3.6
International	80.8M	97.7M	20.1
Total	139.3M	158.3M	13.6

In the domestic market, with a price increase from earlier this year that elevated churn, increased competition from major media and technology firms that are launching niche streaming platforms, and a maturing market, Netflix will need to continue to spend heavily on original content ($15 billion in 2019) to hold onto its dominant market position.  While Netflix feels that its breadth of content is its competitive advantage, others (e.g. Disney, WarnerMedia, and NBCU Peacock) could argue the same.  And, while competition for consumers’ time in watching entertainment is not a winner-take-all enterprise, there are pocket-book constraints and consumers may choice to subscribe to just a few options and may be more willing to unsubscribe at times if the “must-watch” content is not there. Hence, acquiring and retaining subscribers will be harder to do domestically.  Thankfully, Netflix has some room to run internationally.  And, its commitment to creating more programming in languages other than English will give it a leg-up on these other competitors.  

https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2019/q3/FINAL-Q3-19-Shareholder-Letter.pdf

A Step Closer But Not Done: The T-Mobile-Sprint Merger

Yesterday, the FCC, in a 3-2 vote along party-lines (R-D), stated that the $26.5 billion T-Mobile-Sprint merger was in the public interest with the negotiated concessions attached to the deal.  The thumbs-up comes 4-months after the other federal agency, the Department of Justice, approved the merger on antitrust grounds.  While the FCC’s Republican leadership (Pai, O’Rielly, and Carr) contend that the merger will allow for 3 strong competitors to duke it out in the race to deploy 5G nationwide, the 2 Democrats on the Commission feel that consumers will be worse off with fewer competitors (until Dish deploys).  In an article written for The Atlantic, Commissioner Rosenworsel argued that the market structure of the wireless telecom industry “will devolve into a cozy oligopoly”.  She describes her concerns with what happens in these types of market structures in a statement released by her office after the FCC’s decision.

“We’ve all seen what happens when markets become more concentrated after a merger like this one.  In the airline industry, it brought us baggage fees and smaller seats.  In the pharmaceutical industry, it led to a handful of drug companies raising the prices of lifesaving medications.  There’s no reason to think this time will be different.  Overwhelming evidence demonstrates that the T-Mobile-Sprint merger will reduce competition, raise prices, lower quality, and slow innovation.”

The other Democrat on the Commission, Starks, raised similar concerns with a focus on the weak concessions and associated enforcement of those concessions.

“In short, I believe that T-Mobile and Sprint have not proven that their merger will benefit the public interest.  Vague promises do not change what was true when this deal was first proposed and what remains true today – the harms from this merger are not overcome by any condition imposed in the majority’s order.  While I hope for the sake of consumers that I am wrong, I fear that we will one day look back at this decision and recognize it as a moment that forever changed the U.S. wireless industry, and not for the better.”

The last hurdle for T-Mobile-Sprint is the multi-state lawsuit filed by the Attorney Generals (AGs) of 16 states and the District of Columbia.   This is hardly a bi-partisan action as there is only one party to the lawsuit with a Republican AG and that is Texas, a state that employs a lot of AT&T workers.  Of the 8 states which have reached an agreement with the firm so far, only one is led by an AG who is a Democrat.  That state is Mississippi, a state that was part of the original lawsuit, but dropped out just recently when T-Mobile agreed to 5G coverage goals and to hold prices constant for 5 years.  How much more time and resources will it take for T-Mobile-Sprint to “win” everyone over?

https://www.multichannel.com/news/texas-joins-t-mobile-sprint-suit

https://www.fcc.gov/document/commissioner-starks-sprintt-mobile-transaction

https://www.fcc.gov/document/commissioner-jessica-rosenworcel-statement-t-mobilesprint-merger

https://www.theverge.com/2019/10/16/20917162/fcc-tmobile-sprint-merger-justice-department-ajit-pai-geoffrey-starks-jessica-rosenworel

https://www.theatlantic.com/ideas/archive/2019/10/t-mobile-and-sprints-merger-will-hurt-consumers/599245/