In Focus: AT&T, The First Streaming War Casualty
October 17, 2016, Netflix (NFLX) shares shoot up 20%. Investors are scrambling to get a piece of the best business in digital media. Netflix just reported its third quarter results, where it posted an EPS of $0.12, a 71% improvement from the year prior. The company also reported it gained 370,000 subscribers in the U.S. and 3.2 million international subscribers during the quarter. The subscriber count blows away the analysts' predictions of 2.3 million subs for the quarter.
Netflix's stock prior to the Q3 2016 earning's release was trading for a little under $100 a share. That earnings release kick started an almost two year bull run for the stock, which peaked in June of 2018 at over $400 per share, a roughly 300% for Netflix investors. In that same time span, Disney's (DIS) stock price gained ~15%, Time Warner's (TWX) stock price gained ~25%, and AT&T's (T) stock price would lose ~18% of its value.
That earnings report by Netflix set up the streaming wars. Companies like Disney and AT&T saw that investors were paying, and maybe over paying for companies with subscribers. Shortly after the Netflix earnings call AT&T announced their plans to acquire Time Warner. In 2017 Disney would notify shareholders of its plan to start its own streaming service, because subs were more valuable than theme park guests to investors.
Fast forward a few years and the AT&T - Time Warner deal was finally approved, and AT&T was prepared to enter the streaming wars. I saw it as a disaster in the making, and I was right.
In May 2021, three years after the acquisition was finalized, AT&T announced plans to merge its Warner Bros. assets it secured in the Time Warner acquisition with Discovery, making AT&T just a telephone company again.
How Did I Know That This was Going to Fail?
Oh there were so many reasons, really, so 👏 many 👏 reasons 👏. The first was the headline that AT&T wanted to make HBO more like Netflix. This should have been a red flag for anyone thinking an AT&T - Time Warner mashup was going to work.
When it comes to television content, HBO is like a museum of fine art. The Wire has been declared one of the greatest shows of all time. The Sopranos, another show that people have deemed to be among the greatest television shows ever created. Then there's Game of Thrones, and even if you weren't a die hard GoT watcher you understood how popular the show was. There's many more, shows like Sex and the City, Veep, Girls, and Six Feet Under are all critically acclaimed television shows.
In this Rolling Stones list, HBO has four shows in the top 20.
Netflix on the other hand throws spaghetti at the wall and hopes it sticks, and they throw a lot of spaghetti. This isn't to say Netflix doesn't have great programming, because they do, but they've had a lot of misses.
Understanding what HBO does and what Netflix does, it made no sense for anyone to want to make HBO more like Netflix. The notion that AT&T execs wanted to leverage the prestige of the HBO brand to compete with Netflix in the stock market was sad, and don't kid yourself, this was a stock market play from the start, and I'll touch on it later.
The other issue that pointed to the AT&T - Time Warner acquisition failing was Richard Plepler, the head of HBO leaving the company after the acquisition was completed. Those shows I named a few paragraphs up were all produced under Plepler's watch. My thinking is Plepler knew AT&T was going to muddy the HBO brand and he didn't want to be around for it.
What consumers got out of AT&T acquiring Time Warner is HBO Max, which isn't bad, but it isn't great. The platform has enough content to keep most people entertained. Again, The Wire, The Sopranos, Veep, Sex and The City can all be found on the platform. But it's roll out was terrible and the platform's user interface is terrible, but there's a reason for that.
The reason why consumers got the HBO Max that they did is because HBO Max was never about giving consumers a great streaming experience, or satisfying the consumer's thirst for good content. It was about boosting AT&T's stagnant stock price. Since 2010 AT&T's stock price has traded between $25 and $43 per share. For the unlucky investors who top ticked it at $43 in 2016, they've been down ever since. Seeing Netflix's stock price make that almost two year run upwards off the back of subscriber growth made AT&T believe they too could start a streaming service, secure millions of subscribers, and have their stock price sky-rocket too.
DC Comics, an entity under the Time Warner / Warner Bros umbrella that AT&T acquired, puts out animated content that AT&T still tries to sell digitally and on DVD first. Some of this content, like the recently released Justice Society: World War II animated movie isn't on HBO Max. It's moves like this that magnify how much the Time Warner acquisition for AT&T was more about impressing Wall Street and less about satisfying consumers, and in the end Wall Street investors were not impressed.
AT&T was doomed to fail because it was mesmerized by the story of the Netflix stock run that I started with. HBO Max was never about adding something new or refreshing to the streaming wars, it was just about trying to move the stock price.
The deal between AT&T and Discovery (DISCA) is what a streaming war casualty will look like going forward, content moving from a bad caretaker to a new caretaker. Now HBO Max will be a Discovery (DISCA) problem. Hopefully the people at Discovery can turn a problem into a profit.
If there's a lesson here for investors it's this. Beware of old companies attempting to get involved in new age media. It doesn't work, and the reason why it doesn't work is because the suits that run old companies like AT&T and Verizon don't understand, and don't care to understand the consumers that make companies like Netflix or YouTube successful.
This will happen again. Another old time enterprise will try to kick start their share price by merging or acquiring something that they feel will make them young and fresh. When you see it, STAY AWAY.