A grueling 18 months after AT&T first expressed its intent to acquire Time Warner in an $85 billion mega-merger, Judge Richard Leon today ruled that the deal could go through–with no conditions, which was surprising to most of those who’ve been following the drama. The government had sought to prevent the merger on antitrust grounds, saying that the combination of a wireless data giant with one of the world’ biggest producers of entertainment would be anti-competitive and hurt consumers.
Judge Leon announced his decision at a hearing at the federal courthouse, the dramatic culmination to a day that had the media collectively holding their breath.
What’s been dubbed “the trial of the century” has been closely watched not just because of what the outcome would mean for AT&T and Time Warner–the parent company of HBO, CNN, and the Warner Bros. film and TV studio–but for what it means for the rest of the entertainment industry. Hollywood currently is in the midst of its biggest reorganization in decades, as studios and networks race to acquire content and build their own distribution pipelines as a way to fend off the metastasizing threat of Netflix (and to a lesser degree, Amazon).
The rise of Netflix has caused entertainment companies to scramble both to acquire more content and build up their own streaming services in a new world that is defined by a combination of scale and direct access to consumers. The Darwinian showdown that’s playing out threatens to create an industry dominated by a mere handful of conglomerates that have enough resources and content to go it alone. The current conventional wisdom: Everyone else will either be absorbed by these conglomerates, or perish.
The result is widespread M&A fever in Hollywood, a gold rush mentality that is expected to kick into even higher gear with Tuesday’s ruling. This year has already witnesses Discovery Communications acquire Scripps Networks Interactive for $14.6 billion, creating a digital and TV empire that combines brands such as the Food Network, HGTV, Thrillist, and The Dodo.
The question is, will any of this consolidation lead to any real innovation in the way content is created and consumed? Will AT&T use its data technology to target, say, sports fans and give them mobile access to sports programing from the Bleacher Report without costing them extra data? It could similarly hone in on film buffs and offer them content from FilmStruck, another Turner property.
For now, the focus is on more seismic shifts. With today’s ruling, “A whole bunch of companies are all of a sudden going to get active,” says Hal Vogel, CEO of Vogel Capital Management. “The bankers have been romping around trying to figure out what they should do, if and when. Now that the decision is here, they’re going to move pretty quickly.”
Herewith is a breakdown of what’s likely to come:
1. Comcast will officially bid for Fox, challenging Disney
Last December, when Disney announced its purchase of Fox for $52 billion, it seemed like a done deal. Disney chairman and CEO Bob Iger and Fox founder Rupert Murdoch both wanted the marriage, which would combine Fox’s more adult-skewing entertainment franchises (X-Men, The Simpsons) with Disney’s family-friendly content, all of which would be delivered to audiences through Disney’s forthcoming streaming services. Buying Fox would also give Disney new international arms such as Sky, Europe’s biggest pay-TV company, which Fox owns a stake in.
Then Comcast showed up and spoiled the party. Comcast had already made a bid for Fox last year, but was rejected by Fox’s board because directors believed there would be too many issues with regulators. Since then, Comcast has been laying the groundwork for its case as to why it should be able to acquire Fox, and has let it be known that it will beat Disney’s offer with an all-cash offering of $60 billion.
Until recently, the thinking was that Murdoch would ultimately remain true to Disney so he could become Disney’s largest shareholder and avoid taxes. But last week BTIG analyst Rich Greenfield (a vocal Disney critic) stirred things up when he told the digital news network Cheddar that Murdoch would ultimately go with the highest bidder, swaying the outcome in Comcast’s favor. “Rupert, like his shareholders, [is] now fully aligned and simply [wants] the best possible outcome, meaning the most dollars, whether that’s cash or cash and stock.” Murdoch, Greenfield went on, “is not set on selling to Disney. This is a real opening for Comcast to come in with a very significant premium bid to where Disney is now.”
Comcast has been waiting to see how the AT&T/Time Warner case played out before it made its move. Expect Comcast to formalize its bid and an all-out war to commence between it and Disney.
2. Viacom and CBS will merge
A long, acrimonious drama has been playing out between Viacom and CBS, which Shari Redstone—whose National Amusements company controls both companies—desperately wants to re-merge (the companies were separated in 2006). And sell. The problem is that CBS CEO Les Moonves is resisting the move on the grounds that high-flying CBS would be dragged down by ailing Viacom. Moonves also wants to be completely in charge of the new, combined company; Redstone has other ideas.
The parties are currently in court over all of this, but with a new behemoth on the scene in AT&T/Time Warner, there is more incentive to overcome differences and settle the controversy.
A few outcomes are possible: Viacom and CBS could merge and then go shopping for more assets to make it even more of a competitor to Netflix, Disney, and Comcast, all of which would still dwarf Viacom-CBS in market value. For example, the company could buy Lionsgate and leverage its content—The Hunger Games, Twilight—on CBS All Access, CBS’s streaming service. Lionsgate’s top brass has been actively courting deals and vice chairman Michael Burns has mentioned everyone from Comcast to Amazon to Verizon and, yes, CBS, as possible buyers.
Verizon, which recently kicked the tires at CBS, could also re-emerge as a buyer, as the company looks to jump-start its content business to entice its mobile customers. Though observers feel this is unlikely given that Verizon’s CTO Hans Vestberg is set to become CEO of the company this summer and is known for being more tech-focused than content-focused.
Or: Viacom could divest itself of certain properties and CBS could wind up with Paramount Pictures, giving it access to more film and TV content.
3. Hollywood will divide itself into buyers and sellers
In the new digital-driven entertainment world, where you need both content and distribution to be king, small and medium-size players simply won’t be able to go it alone. Which means Lionsgate isn’t the only company that will likely get absorbed by a bigger media company looking to suck up more content. MGM—whose TV arm is on a roll as the producer of The Handmaid’s Tale—has also been discussed as a possible target, possibly from John Malone’s Liberty Media.
Another likely company in play is Sony Pictures, whose film studio has been struggling but whose chairman and CEO Tony Vinciquerra wrote a memo to his staff saying: “The entertainment industry is in a time of consolidation. In this climate, studios will either grow or become a target for acquisition . . . It is my goal to do the former, not the latter.”
Then factor in the cash-rich tech companies (Facebook, Amazon, Apple, Alphabet), all of which are spending more on content as a way to differentiate their services, and whose balance sheets would barely be affected by the acquisition of a media company.
In the new world order, companies will define themselves as either buyers or sellers. There won’t be any in-between.