Mega-Mergers Lay the Groundwork for a Media Arms Race

While President Donald Trump was diffusing an arms race in North Korea this week, his Justice Department at home was laying the groundwork for a media arms race.

On Tuesday afternoon, the U.S. District Court in Washington, D.C., approved AT&T’s purchase of Time Warner for $85 billion. The companies successfully argued that the deal was necessary to compete with rapidly growing streaming-video giants like Netflix and Amazon.

Mega-Mergers

This rarely challenged vertical merger, comprised of two companies in related industries that do not produce competing products, pairs the world’s largest telecom with the world’s third-largest entertainment company.

AT&T, a distribution giant of internet, wireless phone service and satellite TV will now own a major stake in subsidiaries such as HBO, CNN and Warner Bros. movie studios.

It also ushers in a new paradigm of content distribution that has implications for every company in the media space.

While the ink was still dry on the judge’s AT&T decision, U.S. media conglomerate Comcast submitted another offer to buy Twenty-First Century Fox’s film and television studios for $65 billion. The company’s media assets include the original Star Wars movies and the X-Men franchise.

Comcast’s bid raises Disney’s previous $52.4 billion stock-based proposal for Fox by 19%, kicking off a bidding war. Under both deals, Fox would create a new company to hold onto its news and sports businesses, which include cable giant Fox News. Rest assured that Sean Hannity will not be broadcasting from the Magic Kingdom anytime soon.

Previously, in 2009, Comcast purchased a majority stake in NBCUniversal, giving it stakes in NBC, Telemundo, Universal Pictures and DreamWorks Animation.

Telecom giant Verizon dipped its toe in the content creation waters, buying internet-pioneer/dinosaur AOL for $4.4 billion in 2015.

Why now?

Fighting to Survive

Interest rates are historically low, lowering the cost of capital for acquisitions.

Furthermore, with the Federal Reserve planning on hiking rates to dampen inflation concerns, money might not always be cheap.

According to Thomson Reuters, $816 billion of deals were announced this year across every industry. This number amounts to a 71% increase from the same time last year.

What’s more, traditional telecom companies view these acquisitions as vital to their survival. Silicon Valley upstarts such as Netflix, Google and Amazon are now a competitive threat. Customers are increasingly “cutting their cords” — canceling their cable, and streaming content via the internet.

Just a few years ago, news of established media companies combining content with distribution would have been a disaster for streaming services like Netflix and Amazon Prime, which rely on Hollywood studios for content. However, it looks like they’ve been anticipating it all along, as they’ve actively developed original content.

Netflix, a pure play on streaming services, has rallied about 10% since the judge’s ruling.

Streaming services are opening up their war chests. Netflix plans to spend $8 billion on content this year, a 35% increase over last year. Amazon Prime is close behind, with plans to spend $5 billion on its streaming content.

Disney is launching its long-planned streaming service next year, featuring Disney programming as well as Marvel and Star Wars movies.

Not All ISPs Are Neutral

A major concern for consumers is the recent gutting of net neutrality, which said that all data provided by internet service providers must be treated as equal. A violation of net neutrality would include throttling peer-to-peer file-sharing applications.

Under the new rules, this is now permissible.

Ending net neutrality would also allow content providers such as AT&T and Comcast to prioritize their own offerings at the expense of other streaming services. For instance, AT&T wireless customers are already permitted to stream DirecTV content to their mobile devices without hitting data caps.

Here comes the “quadruple plays”!

If you’re a consumer already purchasing internet, cable and phone service — a popular bundle known as “triple play” — it’s easy to see the pathway for media giants to bundle their own streaming services in with their offerings.

And then maybe consumers will be choosing their content providers not by the quality of service, but by the content they want to watch.

Regards,

Ian King

Editor, Crypto Profit Trader

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