Media consolidation continues: AT&T to buy Time Warner
AT&T is to buy Time Warner for $85.4bn in a deal that aims to combine Time Warner’s content offering and AT&T’s distribution network across the US, Mexico and Latin America. Under the part cash, part stock deal, Time Warner shareholders will receive $107.50 per share, split equally in cash and AT&T stock. The transaction, which is expected to close by the end of 2017, is still subject to approval by Time Warner shareholders and review by the US Department of Justice. A review by the Federal Communications Commission may also be required to transfer licences to AT&T. Republican presidential candidate Donald Trump has criticised the deal.

AT&T's deal to purchase Time Warner for more than $85 billion has one motivation largely overlooked so far: The telecommunications company may be making a play to become a cross-screen advertising powerhouse.

Some experts say Time Warner strengthen AT&T's position in the advertising industry, similar to what Verizon hopes to be after it finishes integrating AOL and Yahoo and Comcast's purchase of NBCUniversal. The hope is that this deal could give AT&T content that could, when combined with its ad tech and its data on users, could allow it to advertise to people on TV, mobile and online.



AT&T and Time Warner jointly said on Saturday the telecommunications company would pay more than $85 billion, or about $107.50 per share in a cash and stock transaction for the media giant. The deal was unanimously approved by both boards, but still has to pass U.S. regulators. Sources had previously told CNBC that AT&T was in the market for a media company.

AT&T has service called AT&T AdWorks, one of the largest so-called addressable advertising products — a next-generation advertising model that allows advertisers to potentially reach you on every device you use. AT&T can serve ads on TV through DirecTV, which it bought in July 2015, in addition to its cable and internet service U-verse. It can also potentially retarget those same consumers on mobile on behalf of brands if they use AT&Ts cell service.

What AT&T lacks, however, is content to draw those viewers. It's been rolling out original content like DirecTV's "Kingdom," as well as "The Dan Patrick Show" and "The Rich Eisen Show." It's also made digital focused media plays through Otter Media, a joint venture with former Fox executive Peter Chernin's Chernin Group. The subsidiary owns digital entertainment companies, including Crunchyroll and Fullscreen. It also co-owns Viacom executive Van Toffler's digital production studio Gunpowder and Sky, which just recently acquired indie film distributor FilmBuff.

Buying Time Warner — which includes HBO, Turner (CNN, Cartoon Network and TBS, among others), and Warner Bros.— would immediately make them a content powerhouse. In addition, Turner is one of the leaders selling its shows programmatically or through automated ad tech, said Forrester senior analyst Susan Bidel. HBO knows how to run a business on a subscription model, and is one of the leading networks in the over-the-top space with its online-only service HBOGo, and CNN has one of the largest digital news presences, she adds.

"They want to have content to monetize over their pipes," said Bidel.

As more consumers, particularly younger ones, forgo cable subscriptions, media companies will need new ways to reach them. A December 2015 Pew Research Center study found one out of seven Americans were cord cutters. And cable and telecommunication companies need diversified sources of revenue.Verizon's interest in Yahoo and AOL, and Comcast's purchase of NBC Universal, are earlier examples of this trend, which analysts expect to intensify.

"I don't think you're really going to see the telecommunications companies running the media industry," said Greg Portell, A.T.Kearney's lead partner in the consumer industries and retail practice. "I think you'll see the telecommunications companies becoming more like the media set… The revenue potential is much more diverse as a media company than as it is as a pipes and wires company. And,face it, everyone wants to become a media mogul."

But right now, the demand for addressable advertising is very small and it's very expensive, according to Pivotal Research Group senior analyst Brian Wieser. Television is mostly seen as a way to reach mass audiences, not a way to target niche consumers, he said.

And a Time Warner-AT&T tie up doesn't necessarily mean that advertising deals between the two companies will be any easier than they would be if they were separate companies. Wiser likened the deal to Comcast and NBCUniversal, which still operate separately for the most part. (However, Comcast has been heavily touting its addressable advertising product to brands, which is highly reliant on NBCUniversal's entertainment portfolio.)

Instead, Wieser believes the purchase is more about "sustaining the empire," he said.

"They have the wireless business and at least video, broadly speaking, is a business that has growth," he said. "It's not too far field that they couldn't explain it to their investors, and they probably think they can manage it too."

Barry Lowenthal, president of media agency The Media Kitchen, points out that Time Warner is primarily video-based media, rooted in traditional TV and movies save a few properties. It doesn't have ad tech to help boost AT&T advertising offerings, like AOL and Yahoo could do for Verizon. Verizon seems to be focusing on the operational side of building a digital advertising business, where AT&T seems to be looking for content to fill the airways, he said.

"You have to wonder if incurring all that debt is worth it in the long run," Lowenthal said.

Note: CNBC is owned by NBCUniversal.