AT&T is unloading its Warner Media properties but why did it buy Time Warner in the first place? For the same reason Time Warner (Cable) bought AOL, and Verizon bought Yahoo, and Vivendi bought Universal. Call it margin envy.
Since the birth of the commercial internet in the 1990s, the big network operators have complained that while they carry all the traffic, someone else always seems to reap the rewards. As you read this, AT&T’s market capitalization ($210 billion) is only a smidgen lower than Netflix ’s ($221 billion). And don’t even mention the market caps (or margins) of the web giants—you might send a telecom executive into apoplexy.
Richard Parsons, the Time Warner CEO who helped negotiate the AOL deal, liked to say that his cable company couldn’t afford to be a “dumb pipe.” To this day, the network operators—wireless, fiber, cable—fear being dumb pipes because the other guys seem to make all the money. They’re not wrong about that. The error is in thinking that because you own the pipes, you can improve your pipe business by owning the content too.
A glance at postmerger AT&T illustrates the problem. AT&T buys Time Warner, and now it owns “Game of Thrones” and all the rest of it. It can differentiate itself from its competitors by giving content away to its wireless and wireline subscribers—but that undercuts the margins of the entertainment business. And for the consumer, it’s a marginal benefit. They probably pay for Netflix, too, and T-Mobile subsidizes Netflix subscriptions for its customers (without, you’ll notice, having to own Netflix). So, do you want a “free” HBO Max subscription with AT&T, or a Netflix subscription with T-Mobile, or Disney+ with Verizon? Pick your poison.
AT&T hasn’t improved its position by owning Time Warner. It has simply exported its eroding margins to the entertainment business from the network business.