AT&T/TW, Disney/Fox Seen Spurring More Cable, Content M&A in 2018

AT&T's bid for Time Warner and Disney's quest for Fox likely will lead to even more video industry mergers and acquisitions in 2018, particularly as mid-sized programmers and distributors look to scale up or get assets that will let them compete in an increasingly direct-to-consumer (DTC) marketplace, experts said. "If you're a Viacom or a Discovery or an AMC, you have to look at [the consolidation trends] and say, 'Wow, we're becoming more fringe than core,'" said Andre James, head of Bain & Co.'s Americas media and entertainment practice.

Given the slowing of the pay-TV market in the U.S., plus the desire by content companies to get closer to customers and have more data about them for marketing, content investment and targeted advertising via DTC offerings, the choices are either vertically integrate like AT&T/TW or scale up like Disney/Fox, James said. That Verizon, Comcast and Sony all seemingly were interested in Fox shows there's sizable interest in M&A, and "a lot of assets on the block," he said.

Also driving such activity in the coming year is the expectation the regulatory environment is amenable, despite the DOJ challenge to AT&T/TW (see 1711210005), experts said. AT&T/TW and Disney/Fox were driven in part by that regulatory perception, plus that both are in maturing spaces that lead to players looking for increased scale via M&A, said S&P Global Market Intelligence Research Director-Media Ian Olgeirson. But whether the regulatory environment is friendlier "remains a question mark," Olgeirson said.

Some see the trend of MVPD consolidation losing steam. TV industry analyst Alan Wolk said the looming arrival of 5G and its potential for rivaling home broadband could make MVPDs less attractive as an investment. But as the broadband market continues maturing, there could be more willing cable ISP sellers as they see broadband start to face an uphill battle, Olgeirson said. He also said 5G's introduction "is a double-edged sword" for cable operators, with competing high-bandwidth high-throughput wireless service posing a competitive challenge to wireline operators, but 5G also requiring a dense last-mile infrastructure to serve small cells. Small and mid-sized cable ISPs are seeing "a lot of speculation" about whether it's a good time to combine, given 5G issues, said American Cable Association President Matt Polka.

AT&T/TW will likely be consummated next year with a settlement just before the March trial, while Disney/Fox "breeze[s]" through regulatory approval, said tech and media investor Eric Jackson, president of EMJ Capital, in a newsletter Wednesday. He predicted an "M&A bonanza" next year, with the market slightly sour on initial public offerings, saying that bonanza will include "more mega-mergers and ... some of the smaller media companies ... to be digested by their larger siblings." Other deals potentially in the wings include Verizon/CBS, since CBS has no partnership for its content and no way to distribute internationally, Wolk said. CBS and Verizon didn't comment.

Wolk also said 2018 will bring more virtual MVPD services, as they let providers introduce both targeted advertising and easier upgrades of interfaces than traditional MVPDs can accomplish.

The increased recognition in the past three to four years that viewers want more watching options led channels that once eschewed Internet distribution to jump to virtual MVPD lineups, said University of Michigan communications studies professor Amanda Lotz. That’s been an impetus for some deals, like Disney/Fox, but smaller programmers remain unlikely to go the DTC route since sticking with a streaming service partner “takes a whole lot of headaches off the table,” Lotz said. Given the technical difficulties of having a robust over-the-top (OTT) service, a more significant deal for Disney might have been its acquiring a majority of streaming tech company BAMTech (see 1708080065), she said.

The FCC’s rollback of Title II regulation of broadband could sizably affect media mergers, Lotz said, with distributor and programmer relationships in the future depending on the degree to which cable ISPs engage in paid prioritization and use exclusive content deals as a selling feature. The net neutrality rollback creates the new balance of power that cable ISPs have long wanted, but content companies are in a more precarious position and more prone to look for deals with distributors, Lotz said. The new net neutrality regulatory policy “has the potential to change everything in video distribution,” she said. James said it's not clear how the new net neutrality regime will affect the video industry, but ISPs like Comcast or AT&T likely won't want to be overly aggressive in favoring their own content or services, thus bringing scrutiny that could give cause for more regulation. “No one wants to poke the bear on this one," James said.

The OTT industry is still some time away from M&A deals, experts said. Streaming services are still figuring out their long-term viability, Wolk said. More likely than acquisitions are partnerships and bundles of complementary services, James said, citing Hulu and Spotify rolling out a combined offering for college students. For now, most of the existing streaming services have relatively small subscriber bases, meaning "there's not a lot to buy there," Olgeirson said.

The M&A thoughts of edge providers like Apple, Google and Facebook -- all of which undoubtedly will get deeper into video -- remain unclear, James said. The $1 billion Apple plans to spend on original content "is not that big" compared with what Netflix and Amazon Prime are spending, he said, saying shopping for an MVPD might be on hold until prices come down. The "perpetual buzz" of one of the tech companies getting into distribution has been "more noise than truth," and remains unlikely, Olgeirson said. Wolk said he sees the possibility of a major edge provider like Apple buying an MVPD or telco to get a last-mile distribution platform, plus more access to user data. Big tech companies “have more money than God,” he said, saying with Apple, the question of a major investment into content, such as through buying a programmer, is "when and what, rather than if." Apple didn't comment.