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  2. October 2016

October 2016

AT&T CEO: Can't 'prejudge' role of free data programs in Time Warner review

AT&T’s chief executive said that he couldn't "prejudge" whether the issue of so-called zero-rating, or providing customers with free data when they view certain content, would hold up the company’s acquisition of Time Warner. Randall Stephenson said that he “can’t prejudge any of this” when asked whether the use of zero-rating could be a problem in getting the deal approved by regulators. “I really don’t know — just going to have to get into the process, put the data out with regulators, and begin that effort, and the sausage will come out the way the sausage comes out,” he said on the company’s third-quarter earnings call.

Zero-rating programs have become controversial in recent years. They allow a carrier to provide free data usage to customers when they’re using a certain application or viewing specific content. The most prominent of these programs is T-Mobile’s Binge On, which allows customers to stream video from major services without it counting against their monthly allotment of data. But other companies, including AT&T, have tested offerings where companies can “sponsor” data usage. Some have speculated that zero-rating could become an issue as regulators consider whether to approve AT&T’s purchase of content giant Time Warner.

Time Warner Would Pay $1.75 Billion Break-Up Fee If AT&T Fails

Time Warner has agreed to pay a $1.75 billion break-up fee to AT&T if it accepts a competing offer from the telecommunication company’s mega-deal, while the phone company is on the hook for $500 million if it can’t obtain the necessary regulatory approvals for the $108.7 billion merger.

According to an 8-K document filed with the Securities and Exchange Commission Oct 24, Time Warner will have to pay the break-up fee if the AT&T deal is terminated if the programmer enters into an “alternative acquisition agreement” that did not result in a material breach of the original deal with AT&T. AT&T is on the hook to pay Time Warner $500 million if the deal is terminated for circumstances “relating to the failure to obtain approvals, or there is a final, non-appealable order preventing the transaction, in each case, relating to antitrust laws, communications laws or utilities laws.” Either party can cancel the deal if it does not close by Oct 22, 2017, or in the case of special extensions, April 22, 2018.

AT&T-Time Warner Expect to Grow Ad Platform

With its huge distribution footprint and data about its consumers, AT&T and Time Warner expect to be able to create innovative advertising products, in addition to new forms of content that would appeal to an increasingly mobile viewership for video. “We can make the advertising more interesting for your house, versus somebody next door,” said Time Warner CEO Jeff Bewkes.

With AT&T offering addressable advertising across new TV and mobile platforms, viewers would see products they’re interesting in. “That means more consumers get a better experience viewing. They get less interruptions, and it means that more of the cost of programming can then be borne by advertisers and consumers get a break,” Bewkes said. “So the benefit for consumers is pretty good, very good, and the benefit for advertisers is terrific because if you look at what’s happening in that world, advertisers need more competition and this will give another outlet, not just Google and Facebook, which have been gaining all of the traction. Now you have yet another advertising choice that’s equally efficient,” he said. AT&T CEO Randall Stephenson also said that the feedback the company gets is directly from its millions of customers to fuel innovation.

What the AT&T and Time Warner Deal Could Mean for Advertising

As more people watch content across a variety of platforms and devices, and on an increasingly delayed basis, AT&T and Time Warner believe they can better tackle the changes in viewership behavior together. When it comes to advertising, the thinking is that combining the vast troves of data from a telecommunications giant and the TV programmer behind shows including HBO's "Game of Thrones" and TBS's "Full Frontal with Samantha Bee" will allow for greater audience targeting and ad relevance.

Time Warner CEO Jeff Bewkes said the deal would allow for "more innovation in advertising" where the ads will become "more effective and of interest to you in one house versus someone else in a different house." Bewkes went on to say that people like advertising so long as it is relevant to them. Time Warner's Turner division has been helping to lead the TV industry when it comes to audience targeting. Its portfolio of data products, while still in its infancy, allow advertisers to buy inventory based on specific consumer targets rather than on the traditional Nielsen age and gender demographics. Still, the combination of the two isn't expected to meaningfully advance addressable advertising, said Brian Wieser, senior analyst at Pivotal Research. "I think there aren't many implications on the ad sales angle in any practical way, as AT&T AdWorks is pretty small, but I can imagine they would try to establish some ad products that are similar to some that NBCU/Comcast has announced, which include some bundling of VOD and addressable units into AT&T/DirecTV inventory," he said. "Again, as a practical matter, that's not going to be very meaningful."

AT&T—Time Warner and the Mixed Results in Vertical Integration by Bellheads

[Commentary] AT&T has a business plan to integrate vertically throughout the information, communications and entertainment (“ICE”) ecosystem. Acquisitions provide the fastest way for the company to move up and down the ICE “food chain” of content creation, syndication, distribution and delivery to consumers. Vertical integration can achieve operational efficiencies as a single company can achieve savings through scale and a wide footprint of related business ventures. On the other hand, it takes remarkably talented and nimble management to handle different components in the food chain.

Depending on how your rate AT&T senior management, the company has wisely invested in the convergence of content and conduit, or it has unwisely deviated from its true competency. Bear in mind that at divestiture from AT&T, companies like Verizon (then Bell Atlantic) invested heavily in content creation. Verizon failed, because it did not ascend the content creation learning curve quickly enough. Can you teach old dogs new tricks? Bellhead telephone company senior management have to acquire the skills and understand the culture of Netheads and Contentheads. Companies like Verizon and AT&T have made the transition into the Nethead world through acquisitions of companies such as MCI and UUNet. Now comes an even harder challenge to embrace the Contenthead culture of Hollywood. Good luck with that!

[Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law, Penn State University]

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