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WarnerMedia tie-up with Discovery to target streaming big shots

·4-min read

AT&T said Monday it was spinning off its WarnerMedia unit and combining it with Discovery, creating an independent firm that could take on industry leaders such as Netflix in the fast-growing streaming sector.

The deal, which signals the telecom giant's retreat from ambitions to be a player in the entertainment world, carves out the AT&T division which includes HBO, Warner Bros studios and CNN.

AT&T will receive $43 billion and AT&T's shareholders will own 71 percent of the new company, with Discovery -- which operates Discovery Channel, Food Network, Animal Planet and others -- holding 29 percent.

The spinoff creates a "pure play" media company which can ramp up its streaming efforts against rivals such as Netflix, Disney+ and Amazon Prime Video, while allowing AT&T to focus on its mobile phone and broadband operations.

Discovery president chief executive David Zaslav will lead the new company, which will include HBO's "Games of Thrones" franchise, the Warner Bros library of "Batman" films, and TV channels such as Discovery, Cartoon Network, HGTV, TNT, TBS and Eurosport.

"This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms," AT&T CEO John Stankey said.

"It will support the fantastic growth and international launch of HBO Max with Discovery's global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want."

Zaslav said he was excited that the combination would "combine such historic brands, world class journalism and iconic franchises under one roof and unlock so much value and opportunity."

- Changing media landscape -

The deal however marks a reversal after the blockbuster acquisition announced in 2016 in which AT&T agreed to buy Warner for $85 billion as part of a move to combine content and distribution and compete with the likes of Comcast, owner of NBCUniversal.

The slump in WarnerMedia's value highlights the changing landscape in media as traditional Hollywood giants lose ground to new streaming players.

Analyst Richard Greenfield at Lightshed Partners said AT&T never achieved the "synergies" from tieing its broadband and telecom operations with vast content available from Warner Bros, Turner Media and other operations.

"In today’s media world, focused scale is the only way to be both large enough and nimble enough to embrace technological change and carve a meaningful space in a tech platform dominated landscape," Greenfield said in a blog post.

"Merging Discovery and WarnerMedia clearly increases overall scale, but it is not the type of transformative merger we were hoping for from WarnerMedia."

AT&T's main streaming platform HBO Max has struggled to gain subscribers, with some 61 million compared with 204 million for Netflix and 164 million for Disney's platforms which include Hulu, ESPN+ and Disney+.

Analyst Alan Wolk of the consultancy TVRev said AT&T's exit results from realization that its acquisition was a "terrible strategy" that was never able to live up to its promise of combining the mobile, internet and TV operations for marketing.

But Wolk said the new tie-up is "a really smart move" which can be attractive to streaming consumers by offering news, sports and the unique content of Discovery's channels.

"Nobody else does the type of programming that Discovery does," Wolk said. "And with CNN people may feel a little better about giving up their cable bundle."

The spinoff comes amid a rapidly changing media sector increasingly dominated by streaming platforms, which have become even more utilized during the global pandemic.

Disney, after acquiring the media-entertainment operations of 21st Century Fox, has been pushing its streaming operations as it seeks to catch sector leader Netflix amid jockeying by new platforms such as Apple's TV+, Viacom/CBS's Paramount+ and NBCU's Peacock.

These services are gaining as many consumers drop cable and satellite "bundles," pressuring legacy pay TV operators.

But WarnerMedia still relies heavily on its cable channels, according to Greenfield, who noted that "the pessimist would say it is awfully hard to lean into the future when you are weighed down that heavily by the past."

The latest deal marks a fresh chapter for the storied Warner Bros studios, which in recent decades had been part of Warner Communications, Time Warner and AOL Time Warner before it was acquired by AT&T, which overcame a US Justice Department antitrust lawsuit before finalizing its purchase in 2018.

Discovery has channels in 220 countries, according to its website. WarnerMedia had net sales of $30.4 billion in 2020, and Discovery $10.7 billion.

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