Yahoo Finance Discovery-WarnerMedia deal set to reshape the streaming wars
AT&T could be accused of dabbling in the art of misdirection. While the media's gaze was focused on the reunion of sitcom Friends, the $237bn (£167bn) telecoms giant was busy plotting a break-up.
On Monday, AT&T confirmed a swirl of media reports that just three years after a $85bn deal for HBO owner Time Warner, it is now poised to jettison its media business.
WarnerMedia would be spun off into a new entertainment company with Discovery, the Animal Planet owner and GB News backer that is partly controlled by the billionaire cable cowboy John Malone.
The combined company, which could be called Warner Discovery, will have an enterprise value of about $132bn, and bosses expect to save about $3bn a year by combining back office operations - with the money to be spent on new shows and improving digital systems.
It was a tacit admission that AT&T's huge bet on media had failed. But out of the ashes has arisen a deal that could reshape the entertainment world.
By bringing together WarnerMedia's CNN and Friends: The Reunion broadcaster HBO, with Discovery's eponymous channel and Eurosport, they have the combined might to take on streaming giants Netflix and Disney+.
Yet such an offensive may cause pay TV broadcasters such as Sky to be caught in the cross-fire as their content distribution deals are put under threat.
The journey to this point has already been far from smooth. AT&T claimed to be heading towards "the next wave of innovation" when it sealed an $85bn deal for Time Warner in 2018.
Among the tie-up's biggest threats was Donald Trump. The former US President reportedly tried to block the deal, with his dislike for Time Warner's news network CNN among the speculative reasons for his opposition.
In the end, it was unwound by market forces within the telecoms industry.
Momentum has now switched towards reversing the huge plays on content to focus on the cost of rolling out 5G mobile connectivity and full-fibre broadband across America.
For Malone, it marks the latest in a series of shrewd deals as he is poised to become a key shareholder in the new business.
The billionaire, who controls Virgin Media owner Liberty Global, will sit on the board alongside Discovery boss David Zaslav, who will lead the new business.
Together, they must strike a balance between mounting a bold offensive in streaming while maintaining so-called carriage deals within the existing broadcasting world.
While streaming may be the future, the combined company will still have to rely on its old financial model of collecting fees from pay-TV broadcasters by selling them the rights to shows.
Over time, however, the allegiance will shift towards funnelling more original programming into their own streaming services to meet investor demand for subscriber growth.
Charlie Ergen, the billionaire chairman of US satellite TV company Dish, understands the threat.
He gave a bullish response to Discovery's streaming service — Discovery+ — earlier this year, saying: "A lot of our customers don’t watch Discovery. Should we burden every customer with Discovery if they can get it somewhere else? … It’s just economics. It’s not rocket science."
For Sky's new chief executive Dana Strong, the move also poses a serious threat.
The defensive walls Sky has been erecting to keep the deep-pocketed streaming services at bay have been working up until now.
Rather than risk losing customers to Netflix, Amazon Prime and Disney+ it has brought the services onto its UK TV platform and offered bundled deals to customers.
The Gangs of London broadcaster has also pinched strategies from the streamers playbook by sinking capital into creating original dramas that will attract new customers.
Amid a choppy year caused by the pandemic, Sky added an extra 244,000 customers in the final three months of 2020.
Yet the Discovery deal poses questions about the next steps for a prize Sky asset that is a big draw for subscribers: Sky Atlantic.
The channel is home to acclaimed American dramas such as Succession and Westworld, with around 40pc of its programmes coming from HBO.
Sky sealed an output deal to 2025 with the American pay TV network two years ago, only for WarnerMedia to launch the streaming service HBO Max in March.
While the HBO Max will not launch in the UK, Germany or Italy until the Sky agreement runs out, there is little sign of it getting renewed under the current arrangement.
In March, WarnerMedia boss Jason Kilar lauded the "tremendous opportunity" of bringing HBO Max to the UK, admitting he had spent "a lot of time thinking about what happens" when the Sky deal ends.
The focus will now be on how Discovery+ - launched in November through Sky - will sit alongside HBO Max in the UK.
Sky might have to get comfortable with more on-demand partnerships rather than the content distribution deals that have kept customers watching shows within the confines of its platform.
More worryingly for Sky, however, is how its American owner Comcast will react to the WarnerMedia/Discovery deal.
Earlier this month, the US mobile titan Verizon reversed its bet on the online advertising market by offloading Yahoo and AOL to the American buy-out fund Apollo for $5bn.
AT&T boss John Stankey has also been under pressure from activist investor Elliott Management to take drastic action on his media assets.
After taking a $3.2bn stake two years ago, the hedge fund slammed AT&T's Time Warner takeover and demanded it focus on the core - yet costly - business of upgrading mobile connectivity.
A similar story is also playing out on home soil. BT is looking to sell its TV arm BT Sport — or bring in a financial partner — to help shoulder the financial burden of sports TV rights so it can focus on full-fibre broadband.
Such moves leave Comcast with a decision to make. Some investors believe its huge broadband network should be split from its media assets, which include not only Sky but NBCUniversal in America.
Activist investor Trian Fund Management took a stake in Comcast last year and branded it "undervalued". If it started agitating for such a change, how long could chief executive Brian Roberts ignore it?
Ahead of the Discovery deal, Enders Analysis defended Sky's ability to keep the wolves from the door.
"At crucial moments, the company was able to mobilise resources and invest to conquer new customers and fend off competitors," the media research firm wrote.
Yet without Comcast's backing, Sky's ability to fight back would be less certain.
With Netflix's subscriber growth slowing and the streaming market becoming increasingly crowded, the industry's leaders are still to be decided.
Few would have put their money on WarnerMedia and Discovery to reach the top perch a few years ago, but this deal changes the outlook.
AT&T's bet may have been ill-judged three years ago, but this tie-up could prove to be a strong contender for the streaming crown.
