U.S. operator AT&T has announced a deal to combine the entertainment, sports and news assets of its WarnerMedia division with the international entertainment and sports businesses of Discovery Inc. The new, yet-unnamed company will be spun off as a separate, publicly traded entity, with AT&T shareholders receiving 71 percent of the shares and Discovery shareholders 29 percent. AT&T will receive US $43 billion worth of cash, debt securities and WarnerMedia’s retention of certain debt, freeing up cash to invest in its 5G and fixed broadband services.

The boards of directors of both companies have approved the transaction. Before it can be completed, though, it requires approval from Discovery shareholders and U.S. regulators—a process that is expected to take around a year.

Tarifica’s Take

AT&T’s spinoff of its media properties—which include HBO, CNN, TNT, TBS and the Warner Bors. studio—in a merger with Discovery marks a radical about-face in the telecom operator’s strategy and amounts to an admission that its ambitious foray into the entertainment business was a mistake. AT&T CEO John Stankey told the Wall Street Journal, “I’m disappointed that the shift in the market that occurred caused us to have to step back and re-evaluate.” AT&T’s efforts to acquire Time Warner, in order to take possession of its media properties, was met with vigorous opposition from the U.S. Justice Department, and a court battle was required for the US $80 billion to go forward.

However, the risk was not rewarded with success, for various reasons, including that the market was moving toward streaming services and cord-cutting just as AT&T was taking a gamble on a more traditional conception of entertainment content. Also, it proved difficult for AT&T to compete with rivals that were able to concentrate entirely on entertainment while the operator had to split its energies between content creation and management on the one hand and content delivery on the other.

The spinoff deal demonstrates AT&T’s resolve to concentrate on its core business of telecommunications and to redouble its efforts to compete with rivals Verizon and T-Mobile in that space. The terms of the merger will also provide AT&T with capital to invest in its mobile and broadband infrastructure, at a time when development and implementation of 5G is of critical importance in terms of competition. The operator has said that it expects its 5G network to cover 200 million people by the end of 2023 and its fiber footprint to reach 30 million customers by the end of 2025.

AT&T’s change of direction with regard to the entertainment business give occasion to reflect that telecom operators would probably do best to focus on what they do best and to meet their subscribers’ demand for content via exclusive distribution partnerships and other cooperative arrangements rather than by having their own content-creation arms. Ironically, one of the reasons AT&T decided to pursue the media-property acquisition strategy so aggressively was in order to give its subscribers a reason to stay rather than switch to rival operators in an extremely competitive environment. At this point, it seems as if the best competitive strategy for operators is to focus on their core area of competence, especially during a period in which a major new development in mobile telecom—5G—comes to fruition.