AT&T Disrupts Media Landscape with WarnerMedia Spin-Off

AT&T’s WarnerMedia will combine with Discovery

On Monday, AT&T announced that WarnerMedia would be spun off in a merger with rival media company Discovery, joining two of the largest media businesses in the country and fundamentally reshaping the media landscape as we know it. The deal, pending approval by Discovery shareholders and regulators, will result in a new, publicly-traded streaming-centric media company poised to compete against the likes of Amazon, Disney+, and Netflix. 

The deal will combine networks, studios and streamers from across the two companies, from WarnerMedia’s cable channels and media properties, including CNN, HBO and HBO Max, Warner Bros. Studios and Cartoon Network, Turner Sports, TruTV, TBS, and TNT to Discovery’s reality-based cable channels including TLC, The Food Network, HGTV, Animal Planet, Discovery Channel, Oprah Winfrey’s OWN, and Discovery+ into a new media business. The name of the company has not yet been revealed. 

Related: Chip and Joanna Gaines unveil Magnolia Network at this year’s upfronts. 

In the news conference via Zoom, executives from both AT&T and Discovery estimated that the merger would be finalized by the middle of 2022 and result in $3 billion in annual cost savings. The money from cost savings will reportedly be used to “increase [the company’s] investment in content and digital innovation, and to scale its global DTC business.” Combined, Discovery and WarnerMedia generated over $40 billion in sales last year with an operating profit of $10 billion, meaning the new company will be bigger than Netflix and NBCUniversal, becoming the second-largest media company in the U.S. (Walt Disney Company is the largest). Combined, WarnerMedia and Discovery currently spend $20 billion on content, a figure that tops Netflix’s most recently reported programming budget.

The deal represents a significant course correction for AT&T’s business strategy. Three years after acquiring Time Warner, later renamed WarnerMedia, for $85 billion, AT&T will be “getting out of content entirely” with this spin-off and doubling down on telecommunications, focusing its efforts on mobility and expanding its fiber connectivity business. 

Discovery President and CEO David Zaslav will lead the new company, saying on the call that he believes the newly combined company will differentiate from streaming giants like Disney+ and Netflix by “offering a combination of news and sports on top of its entertainment properties like ‘Game of Thrones’ and Harry Potter.” In an interview with CNBC, Zaslav said the goal is for the new company to “reach up to 400 million streaming subscribers across the world, up from the 100 million subscribers the two separate companies have today.” Management for the new company will be composed of top executives and operational and creative leadership from both WarnerMedia and Discovery. 

News of the merger between WarnerMedia and Discovery represents AT&T’s official exit from Hollywood and the media business and one of the most significant “about-faces in corporate deal history.” AT&T’s acquisition of WarnerMedia just three years ago was hard-fought and challenged by the U.S. Justice Department, which argued that the purchase would harm competition in the pay-TV market. At the time, AT&T owned America’s largest pay-TV distribution network via DirecTV before adding one of the biggest cable channel owners (WarnerMedia). 

Related: Amazon is in talks to buy MGM, according to The Information. MGM owns a massive film library and produces TV shows, including ‘The Handmaid’s Tale’ and ‘Fargo.’

As cable TV viewership continued to decline amid cord-cutting and the meteoric rise of streaming platforms, shareholders urged AT&T to audit and reevaluate its investments. Earlier this year, AT&T reached an agreement with the private equity firm TPG to sell a 30 percent stake in its DirecTV business for $1.8 billion. Before that, AT&T offloaded Crunchyroll and its wireless operations in Puerto Rico and the U.S. Virgin Islands. 

After acquiring WarnerMedia, AT&T was slow to launch a streaming service, struggling to keep up with rivals that were investing billions of dollars a year into content and surging ahead in subscriber acquisition. Though AT&T launched HBO Max a little less than a year ago, it has roughly 20 million subscribers, lacking a sizable enough audience and service offering to compete with Disney and Netflix. 

Looking ahead, WarnerMedia confirmed that the news of the merger would have no impact on the company’s upfront negotiations or 2021-2022 ad sales financial commitments. Both Discovery and WarnerMedia will likely address the news in their upfronts presentations this week, as the AT&T and Discovery executives shared that the new business will focus on news, sports, and lifestyle content with no immediate plans to spin off CNN. 

“As we currently understand the deal, the WarnerMedia Discovery merger is a good move and would benefit advertisers and viewers, as the content libraries of both companies are rather complementary, providing viewers a one-stop-shop viewing experience and advertisers with more opportunities to connect with those viewers via ad buys on one streaming platform. The deal packages so much diverse content and defines a point of differentiation among other streaming giants,” said Natalee Geldert, PMG’s brand media director.

As reported by The Wall Street Journal, “The two CEOs declined to detail their long-term plans for HBO Max and Discovery+, which could remain separate or be combined into an even larger online video library.” Once final, the deal will undoubtedly boost competition and ad options in the streaming marketplace and gives the new company access to a robust library of scripted and non-scripted TV content and classic shows.