United We Stand, Divided We Fall – the Future of Media

Last summer, the media industry faced a major shift when federal judge Richard Leon ruled in favour of AT&T in their case against the U.S. Department of Justice. The resolution of this historic antitrust case allowed AT&T to acquire content giant Time Warner Inc. for $85 billion, resulting  in a vertically integrated content creation and distribution giant that paired Time Warner’s extensive portfolio of brands (including Turner Networks, HBO and Warner Bros) with AT&T’s arsenal of distribution channels (such as U-verse TV, internet and cell phone data plans). When the courts gave AT&T/Time Warner the green light, media began to do what many had expected it to do for years prior: consolidate. 

Traditionally, media has been a relatively consolidated industry with many major players owning numerous geographically distributed regional stations. An example of this is CBS, which has a network of 28 stations that include local channels in major metropolitan areas across the United States such as New York, Los Angeles, Chicago, Philadelphia and more. However, this trend of consolidation has taken a turn as the parent companies of these regional networks are being purchased whole by other corporations. For example, just days after the approval of AT&T/Time Warner, Disney reached an agreement to buy 21st Century Fox for $71.3 billion. This deal was reached not long after Comcast (which owns NBC, one of Fox’s major rivals), bid $65 billion on Fox earlier in June to compete with a prior $52.4 billion offer from Disney.  

From there, the M&A train began to pick up steam as Comcast reached an agreement to acquire British media company, Sky, and U.S. telecoms, Sprint and T-Mobile announced a merger in an effort to compete with industry juggernauts AT&T and Verizon in the race to implement 5G technology. This flurry of action within media and telecom that has occurred over the course of the last year begs the question: what’s the rush? The answer lies in the fact that media seems to be the next frontier for the world’s biggest tech companies to explore and conquer. 

As far back as 2017, it was clear that America’s legacy media companies were up against some new competition. The most obvious threat was Netflix, which has found a way to disintermediate satellite and cable distribution to provide content to consumers through the internet. Netflix has enjoyed tremendous success as a first mover in this space and has created a paradigm shift in terms of the channels through which consumers entertain themselves. However, since then, it has been proven that Netflix is not alone as other non-traditional and non-conventional competitors have begun to position themselves as serious rivals. For example, Amazon, Apple and Facebook spent a combined $4.5 billion on non-sports programming in 2017 while Netflix and fellow streaming company Hulu spent a combined $7 billion. While neither of these figures exceed those of companies such as NBCUniversal, Fox, Disney and Time Warner, they illustrate that tech is starting to adopt a DIY mentality when it comes to content. 

One of the things that makes the media industry one of the most interesting businesses is that the demand for content is far from that of a commodity. Few industries are as heavily influences by differentiation, consumer tastes and trends, which have the power to shift the competitive dynamics of the industry. While content is far from the core business for the Apples and Amazons of the world, the more focused new entrants like Netflix appear to be bent on not just competing but making the best entertainment. Looking at companies like Disney, the intangible magic of their content lies at the heart of their competitive advantage. The success of Disney’s parks and consumer goods is driven by the popularity of portfolio franchises such as Star Wars, Marvel, Pixar, Mickey Mouse and the Disney princesses. As a core cog in Disney’s media and consumers empire, the company’s status as one of the best producers of content needs to be maintained in order to preserve their competitive advantage. As Netflix continues to build capabilities as a bona fide producer in their own right with titles such as House of Cards and Stranger Things in their portfolio, Disney and other traditional media companies cannot afford to become complacent. While Disney may have the portfolio to keep them afloat against Netflix, other media companies with weaker brands may need to seek other means to compete. This is where M&A becomes key. 

Netflix’s business model is driven by their ability to bring together a comprehensive library of TV shows, movies and documentaries in one place that customers can access for a relatively low monthly fee. As they continue to supplement said library with their own “Netflix Originals”, the response from many media companies has been to pull their content and bypass Netflix to go direct-to-consumer through their own “Over the Top (OTT)” internet streaming platforms. While Disney may have an extensive enough portfolio to entice consumers to switch from Netflix or also subscribe to their streaming platform, other competitors may not have what it takes to do the same. In order to achieve the necessary scale, companies look to M&A in order to bring together enough content in one place to build a standalone streaming library that consumers will pay to watch. 

While it may seem like the M&A trend is set to continue, some argue that there could be some friction in the next couple years. The primary reason is that much like a clinical trial, many companies are waiting to see the benefits and side effects of the deals completed in 2018. Everything from antitrust to capital structure issues are still under close watch as companies like AT&T and Time Warner begin to operate together as one. In addition, external factors such as major political events like the 2020 presidential election and the conditions in capital markets will determine the level of risk that companies will have to accept when choosing to make an acquisition or merge.  

While consolidating and pulling content from Netflix to self-distribute may help media companies stay afloat for now, this likely is not a sustainable solution. Netflix, Hulu, Amazon and Apple will continue to invest in building their own brands and may become top content developers in their own right (as some would argue Netflix already is). What is clear is that the tides are changing in media and complacency is not an option.