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Nicklaus: Culture clash foiled AT&T's big bet on media convergence

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WarnerMedia to offer $10 ad-supported tier of HBO Max

In this July 29, 2019 photo an AT&T logo sits above an entrance to a building, in Boston. WarnerMedia is rolling out a $10-a-month ad supported version of its HBO Max streaming service starting in June 2021. AT&T said Monday it will combine its massive WarnerMedia media assets, which includes HBO and CNN, with Discovery Inc. to create a new media company in a $43 billion deal. (AP Photo/Steven Senne, File)

David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

When you lose $40 billion in three years, you’ve made a big mistake.

In round numbers, that’s what AT&T’s ill-fated foray into Hollywood cost its shareholders. The big phone company bought Time Warner in 2018 for $85 billion, and now it’s unloading the renamed WarnerMedia in a $43 billion deal with Discovery, owner of such channels as Food Network and HGTV.

AT&T’s former chief executive, Randall Stephenson, had big plans for the Warner assets, which include CNN, HBO and the Warner Bros. studio. He reckoned there was big money to be made by owning both the media content Americans are consuming and the connections they use to access it.

Stephenson talked optimistically about convergence, a buzzword that was also used to sell the disastrous AOL-Time Warner merger two decades ago. He envisioned a powerhouse with enough data about its customers to serve up customized content with targeted ads.

What went wrong? In two words, culture clash.

AT&T is an infrastructure company. It runs complex networks at an enormous scale, which requires keeping a close eye on costs. WarnerMedia’s strength is creativity. It spends freely to dream up TV series like “The Wire” and movies like “Godzilla vs. Kong.”

“On paper, there was the promise of synergies, but the nature of the businesses was entirely different,” said Radhakrishnan Gopalan, a professor of finance at Washington University’s Olin Business School. “In research on mergers, culture differences come up as the biggest impediment to value creation.”

Timing was another problem. The purchase combined two businesses with ravenous appetites for capital, at a moment when AT&T already had more debt than any other non-financial company.

WarnerMedia had to spend billions to make its streaming service, HBO Max, compelling enough to compete with Netflix and Disney Plus. The telecom business had to build out a 5G wireless network and run fiber connections to customers’ homes.

“To make the kind of investments needed in both businesses, they may have been stretched too thin,” said David Heger, a telecommunications analyst at Edward Jones.

John Stankey, who succeeded Stephenson as CEO last July, apparently wasn’t wedded to his predecessor’s vision of convergence. “Stankey seemed to talk about the core business a lot more, and it may have been that the WarnerMedia business was kind of a distraction,” Heger said.

AT&T investors paid dearly for Stephenson’s Hollywood fixation. The company’s shares are down 7% since the Time Warner deal closed in June 2018, while the Standard & Poor’s 500 has climbed nearly 50%.

Telecom rival Verizon is up 19%. Verizon unwound its own star-crossed media bet this month by selling AOL and Yahoo, but Verizon’s losses were just $4 billion, a tenth of what AT&T squandered.

Heger sees better days ahead for long-suffering AT&T shareholders. He has a “buy” rating on the company and thinks the market is undervaluing the Discovery stock that shareholders will get in exchange for WarnerMedia.

AT&T is slashing its dividend, which is why the shares have been weak since the Discovery deal was announced. Shareholders, though, will own two focused companies instead of one unfocused one, and that ought to be worth something.

Plus, media magnate John Malone sits on Discovery’s board, and he’s known as a shrewd dealmaker. “For AT&T shareholders, the dividend cut is disappointing, but being teamed up with John Malone may help you out over time,” Heger said.

If investors ever see the words “convergence” and “Warner” in the same sentence again, however, they probably should run away as fast as they can.

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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

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