Wireless Giants AT&T, Verizon May Seek Content Crown: Real M&A

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Which is king -- content or distribution? In time, it may not matter.

The decades-old conflict pitting news, sports and entertainment against the infrastructure needed to view it may become less relevant with the two poised to join forces under the same umbrella.

Already, AT&T Inc.’s pending deal for DirecTV and Dish Network Corp.’s flirtation with T-Mobile US Inc. illustrate the latest industry trend toward bringing together mobile networks with traditional pay-television companies. The next logical step is for the wireless companies, with hundreds of millions of users and tremendous borrowing power, to acquire content.

Spending billions on marquee content would give AT&T and its larger rival Verizon Communications Inc. a way of differentiating their service as price wars squeeze revenue from customer-data usage, said Leo Hindery, managing parter at Intermedia Partners and the former chief executive at Tele-Communications Inc., once the largest U.S. cable company.

“When you begin to lose pricing power over your pipes and you’re national, how do you distinguish yourself?” Hindery said. “With proprietary content.”

Opposite Directions

While data usage has surged 14-fold since 2009, average revenue per user has fallen by 6.6 percent over the same period according to CTIA-The Wireless Association, an industry trade group. Part of the trend can be attributed to aggressive price cutting by T-Mobile and Sprint Corp., which have used promotions to entice customers to ditch Verizon and AT&T.

This strategy is ultimately “a race to the bottom,” and is unsustainable, said Craig Moffett, an analyst at MoffettNathanson LLC.

Verizon and AT&T can use exclusive content to convince customers to pay higher prices and keep their service, according to Hindery. If Verizon bought a company such as Time Warner Inc., giving it sports and entertainment content to bundle with its wireless network, it would have a better value proposition for customers, he said. Verizon, the largest wireless carrier, has a market value of $194 billion.

The concept of convergence isn’t lost on content providers.

When Twenty-First Century Fox Inc. made a hostile $75 billion offer to buy Time Warner last year, Time Warner management rejected the overture in part because they viewed AT&T and Verizon as logical alternative buyers that weren’t yet in a position to make offers, people familiar with the matter said at the time. AT&T had agreed to buy DirecTV months earlier, and Verizon had recently completed its $130 billion debt-financed purchase of Vodafone Group Plc’s minority stake in Verizon Wireless.

Following Europe

Convergence is already happening in Europe. BT Group Plc, the U.K.’s largest broadband Internet provider, acquired exclusive rights to the Champions League and Europa League as a way of promoting its TV service over rival pay-TV operator Sky Plc. BT also acquired U.K. wireless venture EE Ltd.

In the U.S., DirecTV’s ownership of NFL Sunday Ticket rights, which gives the satellite-TV provider exclusive access to broadcast out-of-market Sunday football games, were crucial to AT&T’s interest in buying the company. The second-largest U.S. wireless provider actually hinged its $49 billion deal to the renewal of the rights.

AT&T, with a market value of $188 billion, also announced last year it was partnering with former News Corp. President Peter Chernin’s The Chernin Group to invest $500 million in mobile-video content.

‘Vertical Integration’

Putting content and distribution under the same roof, known in the industry as “vertical integration,” isn’t a new phenomenon. It just didn’t work the first time around.

Throughout the 1980s and 1990s, cable providers owned both content and the “pipes” needed to broadcast the networks. Cablevision Systems Corp. owned cable networks and Madison Square Garden. Time Warner Inc. owned Time Warner Cable Inc., Time Inc., and cable channels such as TBS and TNT. Tele-Communications Inc. also owned interests in cable networks such as Starz, Discovery Channel and Court TV.

But owning content for cable operators provided few synergies because the distributors are regional, not national. It didn’t make financial sense for a cable operator to sell its content exclusively to its subscribers, limiting eyeballs, affiliate fees and advertising revenue.

So instead, these media conglomerates eventually broke apart.

“It’s highly unlikely that the cable companies, with their regional and non-national footprints, will materially re-vertically integrate,” Hindery said.

Comcast Exception

Only Comcast Corp. has bucked the trend, acquiring NBC Universal in two parts from General Electric Co. Still, Comcast can’t strategically withhold NBC programming to its subscribers -- for instance offering certain programming to Comcast customers sooner than non-customers -- because of a consent decree it signed to appease regulators when it acquired NBC in 2011.

Comcast attempted to make itself a quasi-national company when it tried to buy Time Warner Cable. That plan died earlier this year when regulators made it clear they would nix a deal.

Verizon, AT&T and Dish all have national platforms to show programming. This makes offering exclusive content tenable, because you’re not drastically limiting audience, Hindery said.

Verizon-AOL

Verizon’s recent acquisition of AOL Inc. is a clear indication it’s planning to buy or license more content, said Jason Hirschhorn, chief executive officer of media newsletter REDEF. AOL brings Verizon programmatic advertising technology -- the automated buying and selling of ads online -- that it can attach to mobile content. Verizon will debut a mobile video service later this year, the company has said.

Companies such as Verizon may look to acquire digital media rather than legacy cable channels because they’re not shackled by existing contracts that prohibit exclusivity, Hirschhorn said.

Verizon acquired Huffington Post, TechCrunch and Engadget as part of its deal for AOL. Huffington Post announced last week it planned to start a 24-hour online video network, part of its goal to have half of the website’s content be comprised of video.

Because licensing or buying exclusive content offers wireless carriers a way to stand out and drive revenue higher, it’s more a question of when -- and not if -- they do so, said Brandon Ross, an analyst at BTIG in New York.

“This is a way of differentiating,” Ross said.

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