Why one judge’s decision could change the fate of U.S. media

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The U.S. media industry waits on one man: Richard Leon.

A senior judge at the U.S. District court for the District of Columbia, Leon will decide on Tuesday whether to approve AT&T’s $85 billion acquisition of Time Warner.

AT&T’s argument for the merger is focused on the looming threat from tech companies that have used the internet to sidestep the traditional media distribution methods of movie studios and cable systems. Media companies are now trying to stockpile the most sought after content and develop their own internet-based distribution in hopes of attracting enough subscribers to compete with globally established tech companies.

Jonathan Knee, a senior advisor at investment bank Evercore, said the growing power of tech companies has forced media companies to start teaming up out of fear that they’ll be left behind.

“The disruption in the media industry has promoted an unprecedented wave of combinations,” Knee said. “The disruption has created uncertainty and that creates fear, and fear is the lifeblood of investment bankers.”

If Leon sides with the Justice Department, which has challenged the deal by arguing it will be bad for consumers, media companies will have little choice but to take the decision as a signal that the government will block other major media mergers. Just as AT&T and Time Warner are trying to merge, both Disney and Comcast, owner of NBCUniversal, are pursuing 21st Century Fox. T-Mobile and Sprint are also looking to combine.

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Media’s loss could also be tech’s gain. If AT&T loses, Time Warner could become the target of a big tech company. Apple reportedly considered buying Time Warner in 2016.

So far, Facebook, Google and Apple have each moved slowly into making original content by funding smaller projects. Netflix and Amazon, however now rival most major media players in terms of their overall programming budgets.

Tech companies have also begun moving into live sports, once considered one of the reasons that traditional TV could endure the shift to on-demand viewing. Amazon on Thursday announced that it had purchased the U.K. streaming rights for 20 English Premier League soccer games, adding to its U.S. streaming rights for Thursday night NFL games. Facebook and Google have also struck small deals with professional sports leagues.

J.C. Uva, managing director and head of investor strategy at consultancy MediaLink, said that big media companies are still viable — but that a move by a tech company to buy a company like Time Warner could shift the power balance.

“I don’t think the FANG (Facebook, Amazon, Netflix, Google) companies have won just yet,” Uva said. “If any of them were to make an acquisitions in the media space, that would shake things up.”

The digital playbook has been laid out by numerous executives, including most recently by AT&T CEO Randall Stephenson. Speaking at the Code Conference last week, Stephenson said it is necessary to combine content and distribution — what’s known in the industry as vertical integration — to compete with the likes of Netflix, Amazon, Google, Facebook and Apple.

Those companies, Stephenson noted, had added $1 trillion in market value since AT&T announced its Time Warner deal in October 2016.

“You better figure out how to vertically integrate here if you want to compete with those players,” he said.

For now, uncertainty reigns. The big four broadcast network owners — Disney, CBS, 21st Century Fox and Comcast — are all in some state of legal suspension as they wait to see what Leon decides.

“You have a lot of announced transactions that are pending for one reason or another,” said Bart Spiegel, an expert on media mergers and acquisitions for PricewaterCoopers. “Once that comes to a resolution, we could be looking at a much different landscape next year, but there’s lots that we won’t know until then.”

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There’s also some skepticism that big mergers will help media companies compete with tech companies. Rich Greenfield, an analyst for BTIG Research who has emerged as one of the loudest skeptics of traditional media companies, recently said that he sees “no fundamental investment thesis in legacy media.”

Knee, who is also the author of “The Curse of the Mogul,” a book about the history of media mergers, said that some of the deals in the works also point to skepticism about the future of media from within the industry.

Rupert Murdoch, who built his media businesses from a handful of newspapers into a global multimedia empire, tried to buy Time Warner in 2014 to combine with 21st Century Fox. Now, Murdoch is in the process of selling Fox’s entertainment assets.

“When you are thinking about whether or not to do a deal, you should ask who is on the other side of the table?” said Knee. “When Rupert [Murdoch] is selling, you need to think long and hard about why he’s selling.”



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