Videoage International October 2019

38 October 2019 V I D E O A G E Excerpt of a Letter to AT&T W e are writing to you on behalf of Elliott Associates. Elliott owns $3.2 billion of the common stock of AT&T Inc. The purpose of [this] letter is to share our thoughts on how AT&T can improve its business. In 2014, AT&T announced the $67 billion acquisition of DirecTV. Notwithstanding AT&T leadership’s assertions that “Pay TV is a very good, durable business,”when the transactionwas announced, the pay TV ecosystem has been under pressure since the deal closed. In 2016, AT&T announced the $109 billion acquisition of Time Warner. Time Warner is a spectacular company, however, despite nearly 600 days passing between signing and closing, AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner. While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination. We aren’t alone in our cautious outlook – Jeff Bewkes, the CEO who sold Time Warner to AT&T, recently referred to the vertical integration of content and distribution as a “fairly suspect premise.” When Bewkes took over Time Warner as CEO, he inherited a sprawling company with numerous related but non-core assets. He then spent the following decade divesting the non-core assets in order to focus on Time Warner’s leading content franchises. This strategy paid off: Time Warner became both a flourishing media enterprise and a strong investment. AT&T has been an outlier in terms of its M&A strategy: Most companies today no longer seek to assemble conglomerates. This approach is more characteristic of a prior era, calling to mind the Conglomerate Boom of the 1960s. DirecTV NOW (renamed AT&T TV Now), has been poorly executed with de- lays, technical mishaps, weak customer service and usability issues. Despite describing DirecTV NOW as a replacement for DirecTV, the natural-substi- tution narrative has not played out. While unsustainably low prices and ag- gressive promotion did initially help the product scale, the benefits turned out to be very short term in nature. As AT&T raised prices to normalized levels, results rapidly deteriorated. After just two years of existence amidst an other- wise-booming OTTmarket, DirecTVNOW’s subscriber count is nowdeclining. WarnerMedia possesses a leading library of content, and the potential for a direct-to-consumer offering has long been one of the most highly anticipated opportunities. Nonetheless, more than three years after the deal was announced, there is still confusion over strategy and a growing sense that AT&T doesn’t have a plan. Last November, AT&T laid out a detailed, three-tiered offering with an emphasis on Warner Brothers (not HBO). Then, just six months later, AT&T scrapped that plan and instead promoted a single new product, HBO Max, with radically different pricing and an already delayed launch. This quick reversal has intensified the skepticism around WarnerMedia, its OTT strategy and the management of the business itself. AT&T has also struggled with human capital issues. For exam- ple, almost immediately after AT&T completed its DirecTV acquisition, the entire DirecTV management team departed. WarnerMedia has similarly suffered from alarming exec- utive turnover, a particularly troubling pattern given the very different nature of its busines- ses compared to those in which AT&T has historically operated. AT&T rightfully praised Time Warner’s leadership and cited its creative talent as one of the primary reasons to pursue the transaction. Yet just over a year after closing the transaction, almost all of Time Warner’s for- mer leadership has left. Instead of conducting a tho- rough search for the most qualified executives available, AT&Tdecided towait aweek and then announce that the recently installed CEO of WarnerMedia — itself a massive and very different business that clearly requires a full-time manager — would now also be responsible for an additional $145 billion of revenue as the President and COO of the entire Company. AT&T has numerous valuable- yet-non-core franchises that would be potential candidates for divestment. AT&T has taken some early steps in this direction, but more needs to be done.